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EXCEL - IDEA: XBRL DOCUMENT - ENDURANCE SPECIALTY HOLDINGS LTD | Financial_Report.xls |
EX-32 - EXHIBIT 32 - ENDURANCE SPECIALTY HOLDINGS LTD | c04225exv32.htm |
EX-31.2 - EXHIBIT 31.2 - ENDURANCE SPECIALTY HOLDINGS LTD | c04225exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - ENDURANCE SPECIALTY HOLDINGS LTD | c04225exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the period ended June 30, 2010,
or
o | 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) |
Wellesley House
90 Pitts Bay Road
Pembroke HM 08, Bermuda
(Address of principal executive offices, including postal code)
90 Pitts Bay Road
Pembroke HM 08, Bermuda
(Address of principal executive offices, including postal code)
Registrants Telephone Number, Including Area Code: (441) 278-0400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter periods that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of accelerated filer,
large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common Shares Outstanding | ||||
Description of Class | as of August 2, 2010 | |||
Ordinary Shares $1.00 par value |
51,896,314 |
INDEX
Page | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
31 | ||||||||
56 | ||||||||
57 | ||||||||
58 | ||||||||
58 | ||||||||
59 | ||||||||
59 | ||||||||
59 | ||||||||
59 | ||||||||
60 | ||||||||
61 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
1
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars except share amounts)
JUNE 30, | DECEMBER 31, | |||||||
2010 | 2009 | |||||||
(UNAUDITED) | ||||||||
ASSETS |
||||||||
Investments |
||||||||
Fixed maturity investments, available for
sale at fair value (amortized
cost: $4,794,670 and $4,535,121 at June 30,
2010 and December 31, 2009) |
$ | 4,908,774 | $ | 4,548,618 | ||||
Short-term investments, available for
sale at fair value (amortized
cost: $272,731 and $534,736 at June 30, 2010
and December 31, 2009) |
272,706 | 534,678 | ||||||
Preferred equity securities, available
for sale at fair value (amortized
cost: $7,192 and $6,182 at June 30, 2010 and
December 31, 2009) |
11,952 | 11,023 | ||||||
Other investments, under the equity method |
346,938 | 351,352 | ||||||
Total investments |
5,540,370 | 5,445,671 | ||||||
Cash and cash equivalents |
690,761 | 528,944 | ||||||
Premiums receivable, net |
1,086,818 | 565,348 | ||||||
Deferred acquisition costs |
175,479 | 146,979 | ||||||
Securities lending collateral |
281,391 | 66,913 | ||||||
Prepaid reinsurance premiums |
143,438 | 120,941 | ||||||
Losses recoverable |
247,888 | 467,664 | ||||||
Accrued investment income |
30,880 | 30,367 | ||||||
Goodwill and intangible assets |
186,657 | 191,450 | ||||||
Deferred tax asset |
25,941 | 17,252 | ||||||
Other assets |
80,815 | 85,165 | ||||||
Total assets |
$ | 8,490,438 | $ | 7,666,694 | ||||
LIABILITIES |
||||||||
Reserve for losses and loss expenses |
$ | 3,274,637 | $ | 3,157,026 | ||||
Reserve for unearned premiums |
1,186,857 | 832,561 | ||||||
Deposit liabilities |
39,641 | 42,638 | ||||||
Reinsurance balances payable |
209,533 | 220,435 | ||||||
Securities lending payable |
281,391 | 66,968 | ||||||
Debt |
528,363 | 447,664 | ||||||
Other liabilities |
125,911 | 112,119 | ||||||
Total liabilities |
5,646,333 | 4,879,411 | ||||||
Commitments and contingent liabilities |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred shares |
||||||||
Series A, non-cumulative Par value
$1.00 8,000,000 issued and outstanding
(2009 8,000,000); aggregate liquidation
preference $200,000 (2009 $200,000) |
8,000 | 8,000 | ||||||
Common shares |
||||||||
Ordinary $1.00 par value, 52,663,877
issued and outstanding (2009
55,115,702) |
52,664 | 55,116 | ||||||
Additional paid-in capital |
822,572 | 929,577 | ||||||
Accumulated other comprehensive income |
138,605 | 52,148 | ||||||
Retained earnings |
1,822,264 | 1,742,442 | ||||||
Total shareholders equity |
2,844,105 | 2,787,283 | ||||||
Total liabilities and shareholders equity |
$ | 8,490,438 | $ | 7,666,694 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands of United States dollars, except share and per share amounts)
THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
JUNE 30, | JUNE 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
||||||||||||||||
Gross premiums written |
$ | 489,568 | $ | 559,155 | $ | 1,308,437 | $ | 1,342,461 | ||||||||
Ceded premiums written |
(38,765 | ) | (79,128 | ) | (154,692 | ) | (279,519 | ) | ||||||||
Net premiums written |
450,803 | 480,027 | 1,153,745 | 1,062,942 | ||||||||||||
Change in unearned premiums |
5,592 | (45,807 | ) | (332,161 | ) | (250,447 | ) | |||||||||
Net premiums earned |
456,395 | 434,220 | 821,584 | 812,495 | ||||||||||||
Net investment income |
33,351 | 88,834 | 89,830 | 153,384 | ||||||||||||
Net realized gains (losses) on investment sales |
2,657 | (1,500 | ) | 6,201 | 1,741 | |||||||||||
Total other-than-temporary impairment losses |
(738 | ) | (37,809 | ) | (1,507 | ) | (49,935 | ) | ||||||||
Portion of loss recognized in other comprehensive income |
(254 | ) | 31,165 | (346 | ) | 31,165 | ||||||||||
Net impairment losses recognized in earnings |
(992 | ) | (6,644 | ) | (1,853 | ) | (18,770 | ) | ||||||||
Other underwriting (loss) income |
(2,663 | ) | 596 | (2,368 | ) | 4,193 | ||||||||||
Total revenues |
488,748 | 515,506 | 913,394 | 953,043 | ||||||||||||
Expenses |
||||||||||||||||
Net losses and loss expenses |
292,947 | 270,816 | 525,544 | 490,952 | ||||||||||||
Acquisition expenses |
66,708 | 63,850 | 130,652 | 132,124 | ||||||||||||
General and administrative expenses |
55,676 | 54,529 | 114,641 | 114,786 | ||||||||||||
Amortization of intangibles |
2,588 | 2,588 | 5,176 | 5,176 | ||||||||||||
Net foreign exchange losses (gains) |
129 | (27,723 | ) | 6,100 | (27,785 | ) | ||||||||||
Interest expense |
9,050 | 7,538 | 16,658 | 15,093 | ||||||||||||
Total expenses |
427,098 | 371,598 | 798,771 | 730,346 | ||||||||||||
Income before income taxes |
61,650 | 143,908 | 114,623 | 222,697 | ||||||||||||
Income tax (expense) benefit |
(3,057 | ) | 5,232 | (241 | ) | 4,740 | ||||||||||
Net income |
58,593 | 149,140 | 114,382 | 227,437 | ||||||||||||
Preferred dividends |
(3,875 | ) | (3,875 | ) | (7,750 | ) | (7,750 | ) | ||||||||
Net income available to common and participating common
shareholders |
$ | 54,718 | $ | 145,265 | $ | 106,632 | $ | 219,687 | ||||||||
Comprehensive income |
||||||||||||||||
Net income |
$ | 58,593 | $ | 149,140 | $ | 114,382 | $ | 227,437 | ||||||||
Other comprehensive income |
||||||||||||||||
Net unrealized holding gains on investments arising
during the period (net of applicable deferred income
taxes of ($6,168) and ($2,504) for the six months ended
June 30, 2010 and 2009, respectively) |
46,540 | 112,326 | 100,808 | 99,780 | ||||||||||||
Portion of other-than-temporary impairment losses
recognized in other comprehensive income (net of
applicable deferred taxes of Nil and $1,266 for the six
months ended June 30, 2010 and 2009) |
254 | (29,899 | ) | 346 | (29,899 | ) | ||||||||||
Foreign currency translation adjustments |
(1,959 | ) | 15,298 | (10,393 | ) | 11,463 | ||||||||||
Reclassification adjustment for net realized gains
included in net income |
(1,665 | ) | 8,144 | (4,348 | ) | 17,029 | ||||||||||
Reclassification adjustment for net losses on
derivative designated as cash flow hedge included in
net income |
22 | 22 | 44 | 44 | ||||||||||||
Other comprehensive income |
43,192 | 105,891 | 86,457 | 98,417 | ||||||||||||
Comprehensive income |
$ | 101,785 | $ | 255,031 | $ | 200,839 | $ | 325,854 | ||||||||
Per share data |
||||||||||||||||
Basic earnings per common share |
$ | 1.02 | $ | 2.53 | $ | 1.97 | $ | 3.83 | ||||||||
Diluted earnings per common share |
$ | 0.97 | $ | 2.42 | $ | 1.88 | $ | 3.65 | ||||||||
Dividend per common share |
$ | 0.25 | $ | 0.25 | $ | 0.50 | $ | 0.50 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
(In thousands of United States dollars)
SIX MONTHS ENDED | ||||||||
JUNE 30, | ||||||||
2010 | 2009 | |||||||
Preferred shares |
||||||||
Balance, beginning and end of period |
$ | 8,000 | $ | 8,000 | ||||
Common shares |
||||||||
Balance, beginning of period |
55,116 | 57,203 | ||||||
Issuance of common shares |
753 | 456 | ||||||
Repurchase of common shares |
(3,205 | ) | (568 | ) | ||||
Balance, end of period |
52,664 | 57,091 | ||||||
Additional paid-in capital |
||||||||
Balance, beginning of period |
929,577 | 1,029,363 | ||||||
Issuance of common shares |
5,452 | 63 | ||||||
Repurchase of common shares and share equivalents |
(114,590 | ) | (25,222 | ) | ||||
Public offering and registration costs |
63 | (47 | ) | |||||
Settlement of equity awards |
(4,996 | ) | (2,692 | ) | ||||
Stock-based compensation expense |
7,066 | 6,909 | ||||||
Balance, end of period |
822,572 | 1,008,374 | ||||||
Accumulated other comprehensive income (loss) |
||||||||
Cumulative foreign currency translation adjustments: |
||||||||
Balance, beginning of period |
16,109 | 4,363 | ||||||
Foreign currency translation adjustments |
(10,393 | ) | 11,463 | |||||
Balance, end of period |
5,716 | 15,826 | ||||||
Unrealized holding gains (losses) on investments, net of deferred taxes: |
||||||||
Balance, beginning of period |
38,247 | (134,732 | ) | |||||
Cumulative effect of a change in accounting principle |
| (33,247 | ) | |||||
Net unrealized holding gains arising during the period, net of
reclassification adjustment |
96,460 | 116,809 | ||||||
Other-than-temporary impairment losses during the period |
346 | (29,899 | ) | |||||
Balance, end of period |
135,053 | (81,069 | ) | |||||
Accumulated derivative loss on cash flow hedging instruments: |
||||||||
Balance, beginning of period |
(2,208 | ) | (2,296 | ) | ||||
Net change from current period hedging transactions, net of
reclassification adjustment |
44 | 44 | ||||||
Balance, end of period |
(2,164 | ) | (2,252 | ) | ||||
Total accumulated other comprehensive income (loss) |
138,605 | (67,495 | ) | |||||
Retained earnings |
||||||||
Balance, beginning of period |
1,742,442 | 1,245,382 | ||||||
Cumulative effect of a change in accounting principle, net of deferred tax |
| 33,247 | ||||||
Net income |
114,382 | 227,437 | ||||||
Dividends on preferred shares |
(7,750 | ) | (7,750 | ) | ||||
Dividends on common shares |
(26,810 | ) | (28,689 | ) | ||||
Balance, end of period |
1,822,264 | 1,469,627 | ||||||
Total shareholders equity |
$ | 2,844,105 | $ | 2,475,597 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States dollars)
(In thousands of United States dollars)
SIX MONTHS ENDED | ||||||||
JUNE 30, | ||||||||
2010 | 2009 | |||||||
Cash flows provided by operating activities: |
||||||||
Net income |
$ | 114,382 | $ | 227,437 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Amortization of net premium (discount) on investments |
3,640 | (966 | ) | |||||
Amortization of other intangibles and depreciation |
10,528 | 10,591 | ||||||
Net realized gains on investment sales |
(6,201 | ) | (1,741 | ) | ||||
Net impairment losses recognized in earnings |
1,853 | 18,770 | ||||||
Deferred taxes |
(14,896 | ) | (6,533 | ) | ||||
Stock-based compensation expense |
7,066 | 6,909 | ||||||
Equity in earnings of other investments |
(10,018 | ) | (50,961 | ) | ||||
Premiums receivable, net |
(521,470 | ) | (443,275 | ) | ||||
Deferred acquisition costs |
(28,500 | ) | (11,044 | ) | ||||
Prepaid reinsurance premiums |
(22,497 | ) | (73,676 | ) | ||||
Losses recoverable |
219,776 | 196,229 | ||||||
Other assets |
2,980 | 265 | ||||||
Reserve for losses and loss expenses |
117,611 | 28,986 | ||||||
Reserve for unearned premiums |
354,296 | 326,986 | ||||||
Deposit liabilities |
(2,997 | ) | (6,835 | ) | ||||
Reinsurance balances payable |
(10,902 | ) | 37,687 | |||||
Other liabilities |
1,523 | (33,050 | ) | |||||
Net cash provided by operating activities |
216,174 | 225,779 | ||||||
Cash flows used in investing activities: |
||||||||
Proceeds from sales of fixed maturity investments |
1,289,946 | 1,430,643 | ||||||
Proceeds from sales of short term investments |
393,825 | 10,354 | ||||||
Proceeds from sales of preferred equity securities |
956 | 11,477 | ||||||
Proceeds from maturities and calls on fixed maturity investments |
301,114 | 275,142 | ||||||
Proceeds from maturities and calls on short term investments |
512,550 | 110,335 | ||||||
Proceeds from the redemption of other investments |
14,633 | 16,495 | ||||||
Purchases of fixed maturity investments |
(1,829,080 | ) | (1,730,835 | ) | ||||
Purchases of short term investments |
(645,679 | ) | (114,094 | ) | ||||
Purchase of preferred equity securities |
(448 | ) | | |||||
Purchases of other investments |
(202 | ) | | |||||
Purchases of fixed assets |
(1,677 | ) | (5,693 | ) | ||||
Change in investment of securities lending collateral |
(214,478 | ) | (61,906 | ) | ||||
Net cash paid in acquisition |
(384 | ) | (259 | ) | ||||
Net cash used in investing activities |
(178,924 | ) | (58,341 | ) | ||||
Cash flows provided by (used in) financing activities: |
||||||||
Issuance of common shares |
6,115 | 434 | ||||||
Repurchase of common shares |
(121,706 | ) | (25,790 | ) | ||||
Offering and registration costs paid |
(2,064 | ) | (750 | ) | ||||
Change in securities lending collateral |
214,423 | 59,828 | ||||||
Settlement of equity awards |
(4,996 | ) | (2,692 | ) | ||||
Proceeds from issuance of debt |
81,401 | 260 | ||||||
Repayments of bank debt |
(769 | ) | (242 | ) | ||||
Dividends on preferred shares |
(7,750 | ) | (7,750 | ) | ||||
Dividends on common shares |
(26,807 | ) | (28,801 | ) | ||||
Net cash provided by (used in) financing activities |
137,847 | (5,503 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(13,280 | ) | 10,971 | |||||
Net increase in cash and cash equivalents |
161,817 | 172,906 | ||||||
Cash and cash equivalents, beginning of period |
528,944 | 1,061,994 | ||||||
Cash and cash equivalents, end of period |
$ | 690,761 | $ | 1,234,900 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, 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 wholly-owned operating subsidiaries:
Operating Subsidiary | Domicile | |
Endurance Specialty Insurance Ltd. |
Bermuda | |
Endurance Worldwide Insurance Limited |
England | |
Endurance Reinsurance Corporation of America |
Delaware | |
Endurance American Insurance Company |
Delaware | |
Endurance American Specialty Insurance Company |
Delaware | |
Endurance Risk Solutions Assurance Co. |
Delaware | |
American Agri-Business Insurance Company & ARMtech Insurance
Services, Inc. |
Texas |
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 months and six
months ended June 30, 2010 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2010. The unaudited condensed consolidated financial
statements include the accounts of Endurance Holdings and its wholly-owned subsidiaries
(collectively, the Company). All inter-company 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,
reserves for losses and loss expenses, other-than-temporary impairments within the investment
portfolio, fair value measurements of certain portions of the investment portfolio 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, 2009 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, 2009 contained in Endurance Holdings Annual Report on Form 10-K for the fiscal
year ended December 31, 2009 (the 2009 Annual Report on Form 10-K).
6
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
2. | Summary of significant accounting policies |
On January 21, 2010, the Financial Accounting Standards Board issued Accounting Standards
Update No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-6). ASU
2010-6 amends ASC 820 to require a number of additional disclosures regarding fair value
measurements. Specifically, the ASU requires entities to disclose the following:
| The amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers. Transfers into each level are to be disclosed separately from transfers out of each level. |
| The reasons for transfers in or out of Level 3. If significant, the transfers into Level 3 are disclosed separately from transfers out of Level 3. |
| Information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. |
In addition, ASU 2010-6 also amends ASC 820 to clarify certain existing disclosure requirements
as follows:
| Reporting entities are required to provide fair values for each class of assets and liabilities. The previous guidance required separate fair value for each major category of assets and liabilities. |
| Reporting entities are required to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. |
ASU 2010-6 was effective for the first quarter of 2010, except for the requirement to provide
Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is
effective beginning the first quarter of 2011. Since this standard impacts disclosure
requirements only, its adoption did not have a material impact on the Companys consolidated
results of operations or financial condition.
In June 2009, the FASB issued updated guidance on the accounting for variable interest entities
that eliminates the concept of a qualifying special-purpose entity and the quantitative-based
risks and rewards calculation for determining which company, if any, has a controlling
financial interest in a variable interest entity. The updated guidance requires an analysis of
whether a company has the following:
| the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance; and |
| the obligation to absorb the losses that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. |
Additional disclosures are required about a companys involvement in variable interest entities
and an ongoing assessment of whether a company is the primary beneficiary. An entity is
required to be re-evaluated as a variable interest entity when the holders of the equity
investment at risk, as a group, lose the power from voting rights or similar rights to direct
the activities that most significantly impact the entitys economic performance.
The updated guidance is effective for all variable interest entities owned on or formed after
January 1, 2010. The adoption of this guidance did not have a material impact on the Companys
consolidated results of operations or financial condition.
7
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
2. | Summary of significant accounting policies, contd. |
For a detailed discussion of the Companys other significant accounting and reporting policies,
please refer to the 2009 Annual Report on Form 10-K.
3. | Investments |
Composition of Net Investment Income and Invested Assets
The components of net investment income for the three and six months ended June 30, 2010 and
2009 are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Available for sale investments |
$ | 43,837 | $ | 50,471 | $ | 87,327 | $ | 106,924 | ||||||||
Other investments |
(6,951 | ) | 40,506 | 10,018 | 50,961 | |||||||||||
Cash and cash equivalents |
100 | 825 | 192 | 1,222 | ||||||||||||
$ | 36,986 | $ | 91,802 | $ | 97,537 | $ | 159,107 | |||||||||
Investment expenses |
(3,635 | ) | (2,968 | ) | (7,707 | ) | (5,723 | ) | ||||||||
Net investment income |
$ | 33,351 | $ | 88,834 | $ | 89,830 | $ | 153,384 | ||||||||
The following tables summarize the composition of the available for sale portfolio by
investment ratings assigned by rating agencies at June 30, 2010 and December 31, 2009. In some
cases, where bonds are unrated, the rating of the issuer has been applied.
June 30, 2010 | December 31, 2009 | |||||||||||||||
Ratings | Fair Value | Percentage | Fair Value | Percentage | ||||||||||||
U.S. government and agencies securities |
$ | 901,390 | 17.4 | % | $ | 774,996 | 15.2 | % | ||||||||
AAA / Aaa |
2,943,085 | 56.6 | % | 3,388,723 | 66.5 | % | ||||||||||
AA / Aa |
424,618 | 8.2 | % | 219,746 | 4.3 | % | ||||||||||
A / A |
656,295 | 12.6 | % | 473,779 | 9.3 | % | ||||||||||
BBB |
55,748 | 1.1 | % | 46,646 | 1.0 | % | ||||||||||
Below BBB |
207,438 | 4.0 | % | 189,188 | 3.7 | % | ||||||||||
Not rated |
4,858 | 0.1 | % | 1,241 | 0.0 | % | ||||||||||
Total |
$ | 5,193,432 | 100.0 | % | $ | 5,094,319 | 100.0 | % | ||||||||
Contractual maturities of available for sale securities are shown below as of June 30, 2010 and
December 31, 2009. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
8
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
3. | Investments, contd. |
June 30, 2010 | December 31, 2009 | |||||||||||||||
Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | |||||||||||||
Due within one year |
$ | 575,992 | $ | 578,629 | $ | 683,505 | $ | 684,381 | ||||||||
Due after one year through five years |
2,091,261 | 2,139,478 | 1,762,035 | 1,788,265 | ||||||||||||
Due after five years through ten years |
343,160 | 357,337 | 448,728 | 448,026 | ||||||||||||
Due after ten years |
77,441 | 87,480 | 143,634 | 153,247 | ||||||||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency mortgage-backed securities |
766,703 | 805,045 | 896,179 | 923,422 | ||||||||||||
Non-agency mortgage-backed
securities |
277,868 | 256,861 | 292,359 | 256,748 | ||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||
Agency mortgage-backed securities |
29,246 | 30,486 | 31,628 | 32,851 | ||||||||||||
Non-agency mortgage-backed
securities |
584,382 | 605,581 | 543,406 | 529,911 | ||||||||||||
Asset-backed securities |
328,540 | 332,535 | 274,565 | 277,468 | ||||||||||||
Total |
$ | 5,074,593 | $ | 5,193,432 | $ | 5,076,039 | $ | 5,094,319 | ||||||||
At June 30, 2010 and December 31, 2009, the Company held insurance enhanced bonds (corporate,
asset-backed and municipal securities), in the amount of $30.5 million and $35.7 million,
respectively, which represented 0.6% and 0.7% of our available for sale portfolio,
respectively. At June 30, 2010, the overall credit quality of the insurance enhanced bond
portfolio was an average rating of Baa from Moodys and BBB from Standard & Poors. The
overall credit quality of the financial guarantors had an average rating of Caa by Moodys
and C by Standard & Poors. The financial guarantors of the Companys insurance enhanced
bonds at June 30, 2010 include Financial Guaranty Insurance Company ($14.3 million), Ambac
Financial Group, Inc. ($5.8 million), Assured Guaranty Municipal Corp. (formerly Financial
Security Assurance Inc.) ($6.6 million), National Public Finance Guarantee Corp. (formerly MBIA
Insurance Corporation) ($3.4 million) and Syncora Holdings Ltd. ($0.4 million).
In addition to the Companys available for sale portfolio, the Company invests in a portfolio
of alternative investments and high yield loan funds (the Funds). The Funds invest largely
in senior secured distressed debt, derivatives, long and short equity positions, senior secured
bank debt and high yield securities and are included in the Companys balance sheet under
other investments. At June 30, 2010 and December 31, 2009, the Company had invested, net of
capital returned, a total of $280.2 million and $295.5 million, respectively, in the Funds. At
June 30, 2010 and December 31, 2009, the carrying value of the Funds was $346.9 million and
$351.4 million, respectively. Certain of the Funds are subject to redemption restriction
provisions (see Footnote 9).
Net Realized Gains (Losses) on Investment Sales
Realized gains and losses on investment sales are recognized in earnings using the first in and
first out method. The analysis of net realized gains (losses) on investment sales for the
three and six months ended June 30, 2010 and 2009 are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Gross realized gains on investment sales |
$ | 4,645 | $ | 14,120 | $ | 14,167 | $ | 35,019 | ||||||||
Gross realized losses on investment sales |
(1,988 | ) | (15,620 | ) | (7,966 | ) | (33,278 | ) | ||||||||
Net realized gains (losses) on
investment sales |
$ | 2,657 | $ | (1,500 | ) | $ | 6,201 | $ | 1,741 | |||||||
9
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
3. | Investments, contd. |
Unrealized Gains and Losses and Other-than-Temporary Impairments
The amortized cost, fair value and related gross unrealized gains and losses and
other-than-temporary impairment (OTTI) losses on the Companys securities classified as
available for sale at June 30, 2010 and December 31, 2009 are as follows:
Gross | Gross | |||||||||||||||||||
Amortized | Unrealized | Unrealized | Non-Credit | |||||||||||||||||
June 30, 2010 | Cost | Gains | Losses | Fair Value | OTTI (2) | |||||||||||||||
U.S. government and agencies securities |
$ | 872,437 | $ | 29,339 | $ | (386 | ) | $ | 901,390 | $ | | |||||||||
U.S. state and municipal securities |
24,044 | 939 | (96 | ) | 24,887 | | ||||||||||||||
Foreign government securities |
140,943 | 3,361 | (46 | ) | 144,258 | | ||||||||||||||
Government guaranteed corporate securities |
767,419 | 10,166 | (161 | ) | 777,424 | | ||||||||||||||
Corporate securities |
1,003,088 | 29,947 | (2,728 | ) | 1,030,307 | | ||||||||||||||
Residential mortgage-backed securities
|
||||||||||||||||||||
Agency mortgage-backed securities |
766,703 | 38,402 | (60 | ) | 805,045 | | ||||||||||||||
Non-agency mortgage-backed securities |
277,868 | 2,862 | (23,869 | ) | 256,861 | (41,256 | ) | |||||||||||||
Commercial mortgage-backed securities
|
||||||||||||||||||||
Agency mortgage-backed securities |
29,246 | 1,244 | (4 | ) | 30,486 | | ||||||||||||||
Non-agency mortgage-backed securities(1) |
584,382 | 24,724 | (3,525 | ) | 605,581 | (109 | ) | |||||||||||||
Asset-backed securities |
328,540 | 7,396 | (3,401 | ) | 332,535 | | ||||||||||||||
Total fixed maturity investments |
$ | 4,794,670 | $ | 148,380 | $ | (34,276 | ) | $ | 4,908,774 | $ | (41,365 | ) | ||||||||
Short term investments |
272,731 | 5 | (30 | ) | 272,706 | | ||||||||||||||
Preferred equity securities |
7,192 | 4,829 | (69 | ) | 11,952 | | ||||||||||||||
Total |
$ | 5,074,593 | $ | 153,214 | $ | (34,375 | ) | $ | 5,193,432 | $ | (41,365 | ) | ||||||||
(1) | Balances include amounts related to collateralized debt obligations held with total fair values of $10.8 million. | |
(2) | Represents total OTTI recognized in accumulated other comprehensive income (loss) and does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2010, the gross unrealized loss related to securities for which a non-credit OTTI was recognized in accumulated other comprehensive income (loss) was $13.7 million. |
10
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
3. | Investments, contd. |
Gross | Gross | |||||||||||||||||||
Amortized | Unrealized | Unrealized | Non-Credit | |||||||||||||||||
December 31, 2009 | Cost | Gains | Losses | Fair Value | OTTI (2) | |||||||||||||||
U.S. government and agencies securities |
$ | 773,454 | $ | 12,113 | $ | (10,571 | ) | $ | 774,996 | $ | | |||||||||
U.S. state and municipal securities |
83,947 | 5,697 | | 89,644 | | |||||||||||||||
Foreign government securities |
142,134 | 4,179 | (42 | ) | 146,271 | | ||||||||||||||
Government guaranteed corporate securities |
909,341 | 4,901 | (673 | ) | 913,569 | | ||||||||||||||
Corporate securities |
588,108 | 18,384 | (2,754 | ) | 603,738 | | ||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||
Agency mortgage-backed securities |
896,179 | 29,133 | (1,890 | ) | 923,422 | | ||||||||||||||
Non-agency mortgage-backed securities |
292,359 | 2,019 | (37,630 | ) | 256,748 | (41,811 | ) | |||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||
Agency mortgage-backed securities |
31,628 | 1,223 | | 32,851 | | |||||||||||||||
Non-agency mortgage-backed securities(1) |
543,406 | 7,194 | (20,689 | ) | 529,911 | (109 | ) | |||||||||||||
Asset-backed securities |
274,565 | 5,866 | (2,963 | ) | 277,468 | | ||||||||||||||
Total fixed maturity investments |
$ | 4,535,121 | $ | 90,709 | $ | (77,212 | ) | $ | 4,548,618 | $ | (41,920 | ) | ||||||||
Short-term investments |
534,736 | 7 | (65 | ) | 534,678 | | ||||||||||||||
Preferred equity securities |
6,182 | 4,841 | | 11,023 | | |||||||||||||||
Total |
$ | 5,076,039 | $ | 95,557 | $ | (77,277 | ) | $ | 5,094,319 | $ | (41,920 | ) | ||||||||
(1) | Balances include amounts related to collateralized debt obligations held with total fair values of $6.7 million. | |
(2) | Represents total OTTI recognized in accumulated other comprehensive income (loss) and does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2009, the gross unrealized loss related to securities for which a non-credit OTTI was recognized in accumulated other comprehensive income (loss) was $22.0 million. |
11
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
3. | Investments, contd. |
The following tables summarize, for all available for sale securities in an unrealized loss
position at June 30, 2010 and December 31, 2009, the aggregate fair value and gross unrealized
loss by length of time the security has continuously been in an unrealized loss position.
Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
June 30, 2010 | Losses (1) | Value | Losses (1) | Value | Losses (1) | Value | ||||||||||||||||||
U.S. government and agencies
securities |
$ | (177 | ) | $ | 45,957 | $ | (209 | ) | $ | 23,725 | $ | (386 | ) | $ | 69,682 | |||||||||
U.S. state and municipal
securities |
(96 | ) | 7,253 | | | (96 | ) | 7,253 | ||||||||||||||||
Foreign government securities |
(46 | ) | 27,506 | | | (46 | ) | 27,506 | ||||||||||||||||
Government guaranteed
corporate securities |
(161 | ) | 77,836 | | | (161 | ) | 77,836 | ||||||||||||||||
Corporate securities |
(2,007 | ) | 140,101 | (721 | ) | 9,417 | (2,728 | ) | 149,518 | |||||||||||||||
Residential mortgage-backed
securities |
||||||||||||||||||||||||
Agency mortgage-backed
securities |
(60 | ) | 29,182 | | | (60 | ) | 29,182 | ||||||||||||||||
Non-agency
mortgage-backed
securities |
(1,140 | ) | 18,148 | (22,729 | ) | 193,963 | (23,869 | ) | 212,111 | |||||||||||||||
Commercial mortgage-backed
securities |
||||||||||||||||||||||||
Agency mortgage-backed
securities |
(4 | ) | 233 | | | (4 | ) | 233 | ||||||||||||||||
Non-agency
mortgage-backed
securities |
(1,205 | ) | 54,427 | (2,320 | ) | 30,172 | (3,525 | ) | 84,599 | |||||||||||||||
Asset-backed securities |
(1,993 | ) | 86,375 | (1,408 | ) | 24,462 | (3,401 | ) | 110,837 | |||||||||||||||
Total fixed maturity
investments |
$ | (6,889 | ) | $ | 487,018 | $ | (27,387 | ) | $ | 281,739 | $ | (34,276 | ) | $ | 768,757 | |||||||||
Short term investments |
(30 | ) | 19,603 | | | (30 | ) | 19,603 | ||||||||||||||||
Preferred equity securities |
(69 | ) | 1,640 | | | (69 | ) | 1,640 | ||||||||||||||||
Total |
$ | (6,988 | ) | $ | 508,261 | $ | (27,387 | ) | $ | 281,739 | $ | (34,375 | ) | $ | 790,000 | |||||||||
(1) | Gross unrealized losses include unrealized losses on non-OTTI and OTTI securities recognized in accumulated other comprehensive income at June 30, 2010. |
As of June 30, 2010, 404 available for sale securities were in an unrealized loss position. Of
those, 167 securities had been in a continuous unrealized loss position for twelve months or
greater.
12
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
3. | Investments, contd. |
Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
December 31, 2009 | Losses (1) | Value | Losses (1) | Value | Losses (1) | Value | ||||||||||||||||||
U.S. government and agencies
securities |
$ | (10,571 | ) | $ | 311,829 | $ | | $ | | $ | (10,571 | ) | $ | 311,829 | ||||||||||
U.S. state and municipal securities |
| | | | | | ||||||||||||||||||
Foreign government securities |
(42 | ) | 22,939 | | | (42 | ) | 22,939 | ||||||||||||||||
Government guaranteed corporate
securities |
(673 | ) | 244,473 | | | (673 | ) | 244,473 | ||||||||||||||||
Corporate securities |
(1,948 | ) | 200,145 | (806 | ) | 18,649 | (2,754 | ) | 218,794 | |||||||||||||||
Residential mortgage-backed
securities |
||||||||||||||||||||||||
Agency mortgage-backed
securities |
(1,871 | ) | 177,585 | (19 | ) | 4,162 | (1,890 | ) | 181,747 | |||||||||||||||
Non-agency mortgage-backed
securities |
(6,928 | ) | 57,310 | (30,702 | ) | 181,356 | (37,630 | ) | 238,666 | |||||||||||||||
Commercial mortgage-backed
securities |
||||||||||||||||||||||||
Agency mortgage-backed
securities |
| | | | | | ||||||||||||||||||
Non-agency mortgage-backed
securities |
(2,069 | ) | 69,136 | (18,620 | ) | 204,273 | (20,689 | ) | 273,409 | |||||||||||||||
Asset-backed securities |
(522 | ) | 34,481 | (2,441 | ) | 28,282 | (2,963 | ) | 62,763 | |||||||||||||||
Total fixed maturity investments |
$ | (24,624 | ) | $ | 1,117,898 | $ | (52,588 | ) | $ | 436,722 | $ | (77,212 | ) | $ | 1,554,620 | |||||||||
Short term investments |
(65 | ) | 14,770 | | | (65 | ) | 14,770 | ||||||||||||||||
Preferred equity securities |
| | | | | | ||||||||||||||||||
Total |
$ | (24,689 | ) | $ | 1,132,668 | $ | (52,588 | ) | $ | 436,722 | $ | (77,277 | ) | $ | 1,569,390 | |||||||||
(1) | Gross unrealized losses include unrealized losses on non-OTTI and OTTI securities recognized in accumulated other comprehensive income at December 31, 2009. |
As at December 31, 2009, 410 available for sale securities were in an unrealized loss position.
Of those, 210 securities had been in a continuous unrealized loss position for twelve months
or greater.
The analysis of OTTI for the three and six months ended June 30, 2010 and 2009 are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total
other-than-temporary
impairment losses |
$ | (738 | ) | $ | (37,809 | ) | $ | (1,507 | ) | $ | (49,935 | ) | ||||
Portion of loss
recognized in other
comprehensive income
(loss) |
(254 | ) | 31,165 | (346 | ) | 31,165 | ||||||||||
Net impairment losses
recognized in
earnings |
$ | (992 | ) | $ | (6,644 | ) | $ | (1,853 | ) | $ | (18,770 | ) | ||||
13
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
3. | Investments, contd. |
The $1.0 million of OTTI losses recognized by the Company in the second quarter of 2010
relating to specific credit events occurred primarily due to reductions in expected recovery
values on mortgage-backed securities during the period, along with certain credit related
downgrades in corporate securities. At June 30, 2010, the Company had not made any decisions
to sell securities in an unrealized loss position and determined that it was unlikely that the
Company would be required to sell securities in an unrealized loss position.
The following table provides a roll-forward of the amount related to credit losses recognized
in earnings for which a portion of OTTI losses were recognized in accumulated other
comprehensive income (loss) for the three and six months ended June 30, 2010:
Three months | Six months | |||||||
ended June 30, | ended June 30, | |||||||
2010 | 2010 | |||||||
Beginning balance at January 1, 2010 |
$ | (13,173 | ) | $ | (13,122 | ) | ||
Addition for the amount related to the credit
loss for which an other-than-temporary
impairment was previously recognized |
(254 | ) | (346 | ) | ||||
Reduction for securities sold during the period |
| 41 | ||||||
Ending balance at June 30, 2010 |
$ | (13,427 | ) | $ | (13,427 | ) | ||
For the three months ended June 30, 2009, the Company recorded $6.6 million of OTTI losses due
to credit related factors, and for the six months ended June 30, 2009, the Company recorded
$18.8 million of OTTI losses, including losses related to both credit and non-credit related
factors.
Securities Lending
The Company participates in a securities lending program whereby fixed maturity investments are
loaned by the Company to third parties, primarily major brokerage firms and commercial banks.
The borrowers of the Companys securities provide the Company with collateral, typically cash,
which the Company separately maintains. The Company invests such cash collateral in other
securities. In the first quarter of 2008, the Company restricted future investment of cash
collateral in its securities lending program to overnight repurchase agreements. Previously,
the Company allowed investments in U.S. Treasuries, U.S. government agencies securities,
mortgage-backed securities, asset-backed securities and corporate fixed maturity securities. At
June 30, 2010, the cash collateral was invested in senior credit card and auto asset-backed
securities, bank notes, debentures and overnight repurchase agreements. Securities with an
estimated fair value of $227.7 million and $65.7 million were on loan under the program at June
30, 2010 and December 31, 2009, respectively. The Company was liable for collateral under the
Companys control of $281.4 million and $67.0 million at June 30, 2010 and December 31, 2009,
respectively. Non-cash collateral in the form of U.S. government and agency securities of $4.2
million was held at June 30, 2010 (Nil December 31, 2009). As of June 30, 2010 and December
31, 2009, the fair value of the investments purchased with the cash collateral and non-cash
collateral received from the borrower was $281.4 million and $66.9 million. The investments
purchased and the non-cash collateral held had an average credit quality rating of Aaa by
Moodys and AAA by Standard & Poors at June 30, 2010. All securities on loan are issued on
a term or overnight basis and are subject to daily recall at the Companys discretion.
14
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
3. | Investments, contd. |
Variable Interest Entities
Entities that do not have sufficient equity at risk to allow the entity to finance its
activities without additional financial support or in which the equity investors, as a group,
do not have the characteristic of a controlling financial interest are referred to as variable
interest entities (VIE). A VIE is consolidated by the variable interest holder that is
determined to have the controlling financial interest (primary beneficiary) as a result of
having both the power to direct the activities of a VIE that most significantly impact the
VIEs economic performance and the obligation to absorb losses or right to receive benefits
from the VIE that could potentially be significant to the VIE. The Company determines whether
it is the primary beneficiary of an entity subject to consolidation based on a qualitative
assessment of the VIEs capital structure, contractual terms, nature of the VIEs operations
and purpose and the Companys relative exposure to the related risks of the VIE on the date it
becomes initially involved in the VIE. The Company reassesses its VIE determination with
respect to an entity on an ongoing basis.
The Company is involved in the normal course of business with VIEs primarily as a passive
senior investor in residential and commercial mortgage-backed securities and through its
interests in other investments in alternative and high yield loan funds that are structured as
limited partnerships considered to be third party VIEs. The Company determined that it was not
the primary beneficiary for any of these investments as of June 30, 2010. The Company believes
its exposure to loss with respect to these investments is generally limited to the investment
carrying amounts reported in the Companys consolidated balance sheet and any unfunded
partnership commitments.
4. | Fair value measurement |
The Company determines the fair value of its fixed income investments in accordance with
current accounting guidance, which defines fair value and establishes a fair value hierarchy
based on inputs to the various valuation techniques used for each fair value measurement. The
use of valuation techniques for any given investment requires a significant amount of judgment
and consideration of factors specific to the underlying investment. Fair value measurements
determined by the Company seek to maximize observable inputs and minimize the use of
unobservable inputs. Current accounting guidance establishes three levels as follows:
| Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2: Quoted prices for similar assets in markets that are active, quoted prices for identical or similar assets in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Companys own view about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
15
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
4. | Fair value measurement, contd. |
The Company determines the estimated fair value of each individual security utilizing the
highest level inputs available. Valuation inputs by security type may include the following:
| Government and agencies securities These securities are generally priced by pricing services or index providers. The pricing services or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate option adjusted spreads, daily interest rate data and market/sector news. The Company generally classifies the fair values of government and agencies securities in Level 2. |
| Government guaranteed corporate securities These securities are generally priced by pricing services or index providers. The pricing service or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical spread models which may incorporate inputs from the U.S treasury curve or LIBOR. The Company generally classifies the fair values of its government guaranteed corporate securities in Level 2. |
| Corporate securities These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its corporate securities in Level 2. |
| Preferred equity securities These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its preferred equity securities in Level 2. |
| Structured securities including agency and non-agency, residential and commercial, mortgage and asset-backed securities These securities are generally priced by broker/dealers. Broker/dealers may use current market trades for securities with similar qualities. If no such trades are available, inputs such as bid and offer, prepayment speeds, the U.S. treasury curve, swap curve and cash settlement may be used in a discounted cash flow model to determine the fair value of a security. The Company generally classifies the fair values of its structured securities in Level 2. |
16
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
4. | Fair value measurement, contd. |
The following tables set forth the Companys available for sale investments categorized by the
level within the hierarchy in which the fair value measurements fall, on a recurring basis at
June 30, 2010 and December 31, 2009:
Fair Value Measurements at June 30, 2010 | ||||||||||||||||
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | ||||||||||||||||
Markets | Significant | |||||||||||||||
for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Total at | Assets | Inputs | Inputs | |||||||||||||
June 30, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
U.S. government and agencies securities |
$ | 901,390 | $ | 5,232 | $ | 896,158 | $ | | ||||||||
U.S. state and municipal securities |
24,887 | | 24,887 | | ||||||||||||
Foreign government securities |
144,258 | | 144,258 | | ||||||||||||
Government guaranteed corporate
securities |
777,424 | | 777,424 | | ||||||||||||
Corporate securities |
1,030,307 | | 1,028,038 | 2,269 | ||||||||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency mortgage-backed
securities |
805,045 | | 805,045 | | ||||||||||||
Non-agency mortgage-backed
securities |
256,861 | | 256,634 | 227 | ||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||
Agency mortgage-backed
securities |
30,486 | | 30,486 | | ||||||||||||
Non-agency mortgage-backed
securities |
605,581 | | 594,966 | 10,615 | ||||||||||||
Asset-backed securities |
332,535 | | 332,535 | | ||||||||||||
Total fixed maturity investments |
$ | 4,908,774 | $ | 5,232 | $ | 4,890,431 | $ | 13,111 | ||||||||
Short term investments |
272,706 | | 270,332 | 2,374 | ||||||||||||
Preferred equity securities |
11,952 | | 11,952 | | ||||||||||||
Total |
$ | 5,193,432 | $ | 5,232 | $ | 5,172,715 | $ | 15,485 | ||||||||
During the three months ended June 30, 2010, $5.2 million of fixed maturity and short-term
investments were acquired and classified within Level 1 as they represented current issue or on
the run U.S. treasury securities. As a result of the new U.S. treasury securities issued, the
$45.3 million of Level 1 securities at March 31, 2010 were transferred out of Level 1 to Level
2 as they no longer qualified as on the run securities.
During the three months ended June 30, 2010, $10.4 million of fixed maturity investments were
transferred from Level 2 to Level 3. The reclassifications were largely related to high yield
commercial mortgage-backed securities for which observable inputs were no longer available at
June 30, 2010.
17
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
4. | Fair value measurement, contd. |
During the period ended June 30, 2010, $4.8 million of certain fixed maturities were
transferred into Level 2 from Level 3. The reclassifications were largely related to high yield
commercial mortgage-backed securities for which observable inputs became available.
Fair Value Measurements at December 31, 2009 | ||||||||||||||||
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | ||||||||||||||||
Markets for | Significant | Significant | ||||||||||||||
Total at | Identical | Other | Unobservable | |||||||||||||
December 31, | Assets | Observable | Inputs | |||||||||||||
2009 | (Level 1) | Inputs (Level 2) | (Level 3) | |||||||||||||
U.S. government and agencies
securities |
$ | 774,996 | $ | | $ | 774,996 | $ | | ||||||||
U.S. state and municipal securities |
89,644 | | 89,644 | | ||||||||||||
Foreign government securities |
146,271 | | 146,271 | | ||||||||||||
Government guaranteed corporate
securities |
913,569 | | 913,569 | | ||||||||||||
Corporate securities |
603,738 | | 603,621 | 117 | ||||||||||||
Residential mortgage-backed
securities |
||||||||||||||||
Agency mortgage-backed securities |
923,422 | | 923,422 | | ||||||||||||
Non-agency mortgage-backed
securities |
256,748 | | 256,741 | 7 | ||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||
Agency mortgage-backed securities |
32,851 | | 32,851 | | ||||||||||||
Non-agency mortgage-backed
securities |
529,911 | | 524,481 | 5,430 | ||||||||||||
Asset-backed securities |
277,468 | | 277,468 | | ||||||||||||
Total fixed maturity investments |
$ | 4,548,618 | $ | | $ | 4,543,064 | $ | 5,554 | ||||||||
Short term investments |
534,678 | 18,442 | 516,236 | | ||||||||||||
Preferred equity securities |
11,023 | | 11,023 | | ||||||||||||
Total |
$ | 5,094,319 | $ | 18,442 | $ | 5,070,323 | $ | 5,554 | ||||||||
18
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
4. | Fair value measurement, contd. |
Level 3 assets represented less than 0.30% and 0.11% of the Companys total available for sale
assets at June 30, 2010 and December 31, 2009, respectively.
There have been no material changes in the Companys valuation techniques for the six months
ended June 30, 2010.
The following tables present the securities lending collateral reinvested by the Company in
connection with its securities lending program, categorized by the level within the hierarchy
in which the fair value measurements fall at June 30, 2010 and December 31, 2009, respectively:
Fair Value Measurements at June 30, 2010 | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Total at | Identical Assets | Inputs | Inputs | |||||||||||||
June 30, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Securities lending collateral |
$ | 281,391 | $ | | $ | 281,391 | $ | | ||||||||
Fair Value Measurements at December 31, 2009 | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Total at | Identical Assets | Inputs | Inputs | |||||||||||||
December 31, 2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Securities lending collateral |
$ | 66,913 | $ | | $ | 66,913 | $ | | ||||||||
The following tables present a reconciliation of the beginning and ending balances for all
available for sale investments measured at fair value on a recurring basis using Level 3 inputs
during the three and six months ended June 30, 2010:
Three months ended | Six months ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Level 3, beginning of period |
$ | 6,718 | $ | 5,554 | ||||
Total net realized gains included in earnings |
8 | 9 | ||||||
Total net realized and unrealized losses
included in earnings |
(399 | ) | (871 | ) | ||||
Change in unrealized gains included in other
comprehensive income (loss) |
1,030 | 2,069 | ||||||
Change in unrealized losses included in
other comprehensive income (loss) |
(184 | ) | (337 | ) | ||||
Purchases |
2,790 | 2,831 | ||||||
Sales |
(99 | ) | (168 | ) | ||||
Transfers in to Level 3 |
10,448 | 11,559 | ||||||
Transfers out of Level 3 |
(4,827 | ) | (5,161 | ) | ||||
Level 3, end of period |
$ | 15,485 | $ | 15,485 | ||||
19
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
4. | Fair value measurement, contd. |
Level 3 securities are primarily comprised of non-agency commercial mortgaged-backed
securities. Net impairment losses recognized in earnings included losses on Level 3 securities
amounting to $0.4 million and $0.9 million, respectively, for the three and six months ended
June 30, 2010 representing realized losses due to other-than-temporary impairments. The losses
were attributable to the change in unrealized gains or losses related to fixed income
investments still held at June 30, 2010.
At June 30, 2010 and December 31, 2009, the carrying value of the Companys other investments
was $346.9 million and $351.4 million, respectively, which approximates fair value.
At June 30, 2010 and December 31, 2009, the carrying value of the Companys senior notes was
$528.4 million and $447.7 million and the fair value was $539.5 million and $439.1 million,
respectively.
5. | Earnings per share |
The two-class method utilized by the Company is an earnings allocation formula that determines
earnings per share for the holders of Endurance Holdings ordinary and class A shares (also
referred to as common shares) and participating common shares, which includes unvested
restricted shares which receive cash dividends, according to dividends declared (or
accumulated) and participation rights in undistributed earnings. Net income available to
common and participating common shareholders is reduced by the amount of dividends declared in
the current period and by the contractual amount of dividends that must be paid for the current
period related to the Companys common and participating common shares. The remaining
undistributed earnings are allocated to the common and participating common shareholders to the
extent that each security may share in earnings as if all of the earnings for the period had
been distributed. The Companys unvested restricted shares, which receive cash dividends, are
considered participating common shares.
Basic earnings per common share are calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding. The weighted average
number of common shares includes the fully vested, unreleased or unsettled restricted shares
and restricted share units.
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
two-class method.
20
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
5. | Earnings per share, contd. |
The following table sets forth the computation of basic and diluted earnings per share for the
three and the six months ended June 30, 2010 and 2009:
THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
JUNE 30, | JUNE 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net Income |
$ | 58,593 | $ | 149,140 | $ | 114,382 | $ | 227,437 | ||||||||
Less preferred dividends |
(3,875 | ) | (3,875 | ) | (7,750 | ) | (7,750 | ) | ||||||||
Net Income available to common and
participating common shareholders |
54,718 | 145,265 | 106,632 | 219,687 | ||||||||||||
Less amount allocated to
participating common
shareholders(1) |
(1,120 | ) | (2,733 | ) | (2,051 | ) | (4,106 | ) | ||||||||
Net income allocated to common
shareholders |
$ | 53,598 | $ | 142,532 | $ | 104,581 | $ | 215,581 | ||||||||
Denominator: |
||||||||||||||||
Weighted average shares basic
|
||||||||||||||||
Outstanding |
52,509 | 56,264 | 52,954 | 56,261 | ||||||||||||
Vested restricted share units |
| 13 | 4 | 28 | ||||||||||||
Weighted average shares basic |
52,509 | 56,277 | 52,958 | 56,289 | ||||||||||||
Share equivalents: |
||||||||||||||||
Warrants |
1,924 | 1,888 | 1,921 | 1,990 | ||||||||||||
Options |
773 | 730 | 877 | 705 | ||||||||||||
Restricted share units |
4 | | 9 | | ||||||||||||
Weighted average shares diluted |
55,210 | 58,895 | 55,765 | 58,984 | ||||||||||||
Basic earnings per common share |
$ | 1.02 | $ | 2.53 | $ | 1.97 | $ | 3.83 | ||||||||
Diluted earnings per common share |
$ | 0.97 | $ | 2.42 | $ | 1.88 | $ | 3.65 | ||||||||
(1) | Represents earnings attributable to holders of unvested restricted shares issued under the Companys stock compensation plans that are considered participating. |
21
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
5. | Earnings per share contd. |
Endurance Holdings declared a dividend of $0.484375 per Series A preferred share on May 13,
2010 (2009 $0.484375). The preferred share dividend was paid on June 15, 2010 to
shareholders of record on June 1, 2010. Endurance Holdings also declared a dividend of $0.25
per common share on May 13, 2010 (2009 $0.25). The dividend was paid on June 30, 2010 to
shareholders of record on June 16, 2010.
THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
JUNE 30, | JUNE 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Dividends declared per preferred share |
$ | 0.484375 | $ | 0.484375 | $ | 0.96875 | $ | 0.96875 | ||||||||
Dividends declared per common share |
$ | 0.25 | $ | 0.25 | $ | 0.50 | $ | 0.50 | ||||||||
6. | Debt |
On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior
Notes due July 15, 2034, which were initially issued on July 15, 2004. On the closing of this
additional issuance, the Company had a total par value of $335.0 million of the 7% Senior Notes
outstanding. The additional 7% Senior Notes issued have terms identical to the previously
issued notes in the series, other than their date of issue, their initial purchase price to the
public and their first interest payment date. The additional 7% Senior Notes trade
interchangeably with and vote together with the previously issued 7% Senior Notes. The Company
intends to use the proceeds from the additional 7% Senior Notes for general corporate purposes.
The 7% Senior Notes are senior unsecured obligations of the Company and rank equally with all
of the Companys existing and future unsecured and unsubordinated debt. The 7% Senior Notes are
also effectively junior to claims of creditors of the Companys subsidiaries, including
policyholders, trade creditors, debt holders and taxing authorities.
7. | Stock-based employee compensation and other stock plans |
The Company has a stock-based employee compensation plan, which provides the Company with the
ability to grant options to purchase the Companys ordinary shares, share appreciation rights,
restricted shares, share bonuses and other equity incentive awards to key employees.
No options were granted, expired or vested during the quarters ended June 30, 2010 and 2009.
The total intrinsic value of options exercised during the quarter ended June 30, 2010 was $9.3
million (2009 Nil). The Company received proceeds of $5.7 million (2009 $0.1 million) from
the exercise of options during the quarter ended June 30, 2010. The Company issued new
ordinary shares in connection with the exercise of the above options. There were no
unrecognized stock-based compensation expenses related to unvested stock options at June 30,
2010 and 2009.
No options were granted, expired or vested during the six months ended June 30, 2010 and 2009.
The total intrinsic value of options exercised during the six months ended June 30, 2010 was
$9.3 million (2009 Nil). The Company received proceeds of $5.7 million (2009 $0.1 million)
from the exercise of options during the six months ended June 30, 2010. The Company issued new
ordinary shares in connection with the exercise of the above options. There were no
unrecognized stock-based compensation expenses related to unvested stock options at June 30,
2010 and 2009.
22
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
7. | Stock-based employee compensation and other stock plans, contd. |
During the quarter ended June 30, 2010, the Company granted an aggregate of 20,634 (2009
29,900) restricted shares and restricted share units with weighted average grant date fair
values of $0.8 million (2009 $0.8 million). During the quarter ended June 30, 2010, the
aggregate fair value of restricted shares and restricted share units that vested was $5.7
million (2009 $6.0 million). For the quarter ended June 30, 2010, compensation costs
recognized in earnings for all restricted shares and restricted share units were $3.4 million
(2009 $2.9 million). At June 30, 2010, compensation costs not yet recognized related to
unvested restricted shares and restricted share units was $18.9 million (2009 $14.8 million).
During the six months ended June 30, 2010, the Company granted an aggregate of 527,088 (2009
313,500) restricted shares and restricted share units with weighted average grant date fair
values of $20.2 million (2009 $7.2 million). During the six months ended June 30, 2010, the
aggregate fair value of restricted shares and restricted share units that vested was $14.2
million (2009 $13.2 million). For the six months ended June 30, 2010, compensation costs
recognized in earnings for all restricted shares and restricted share units were $7.3 million
(2009 $6.9 million).
The Company also has an Employee Share Purchase Plan under which employees of Endurance
Holdings and certain of its subsidiaries may purchase Endurance Holdings ordinary shares. For
the quarter ended June 30, 2010, total expenses related to the Companys Employee Share
Purchase Plan were approximately $46,300 (2009 $53,800) and $90,100 (2009 $111,000) for the
six months ended June 30, 2010.
8. | Segment reporting |
The determination of the Companys business segments is based on how the Company monitors the
performance of its underwriting operations. The Company has two reportable business segments,
Insurance and Reinsurance, which are comprised of the following lines of business:
Insurance segment lines of business
| Agriculture |
| Professional Lines |
| Casualty |
| Property |
| Healthcare Liability |
| Workers Compensation |
Reinsurance segment lines of business
| Catastrophe |
| Casualty |
| Property |
| Aerospace and Marine |
| Surety and Other Specialty |
23
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
8. | Segment reporting, contd. |
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. When purchased within a single line of
business, ceded reinsurance and recoveries are accounted for within that line of business.
When purchased across multiple lines of business, ceded reinsurance and recoveries are
allocated to the lines of business in proportion to the related risks assumed. The Company
does not manage its assets by segment; accordingly, investment income and total assets are not
allocated to the individual business segments. General and administrative expenses incurred by
the segments are allocated directly. Remaining general and administrative expenses not
directly incurred by the segments are allocated primarily based on estimated consumption,
headcount and other variables deemed relevant to the allocation of such expenses.
The following table provides a summary of the segment revenues, results and reserve for losses
and loss expenses for the three months ended June 30, 2010:
Insurance | Reinsurance | Total | ||||||||||
Revenues |
||||||||||||
Gross premiums written |
$ | 231,626 | $ | 257,942 | $ | 489,568 | ||||||
Ceded premiums written |
(36,639 | ) | (2,126 | ) | (38,765 | ) | ||||||
Net premiums written |
194,987 | 255,816 | 450,803 | |||||||||
Net premiums earned |
227,858 | 228,537 | 456,395 | |||||||||
Other underwriting loss |
| (2,663 | ) | (2,663 | ) | |||||||
227,858 | 225,874 | 453,732 | ||||||||||
Expenses
|
||||||||||||
Net losses and loss expenses |
170,773 | 122,174 | 292,947 | |||||||||
Acquisition expenses |
16,554 | 50,154 | 66,708 | |||||||||
General and administrative expenses |
27,146 | 28,530 | 55,676 | |||||||||
214,473 | 200,858 | 415,331 | ||||||||||
Underwriting income |
$ | 13,385 | $ | 25,016 | $ | 38,401 | ||||||
Net loss ratio |
74.9 | % | 53.5 | % | 64.2 | % | ||||||
Acquisition expense ratio |
7.3 | % | 21.9 | % | 14.6 | % | ||||||
General and administrative expense ratio |
11.9 | % | 12.5 | % | 12.2 | % | ||||||
Combined ratio |
94.1 | % | 87.9 | % | 91.0 | % | ||||||
Reserve for losses and loss expenses |
$ | 1,711,918 | $ | 1,562,719 | $ | 3,274,637 | ||||||
24
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
8. | Segment reporting, contd. |
The following table provides a summary of the segment revenues, results and reserve for losses
and loss expenses for the three months ended June 30, 2009:
Insurance | Reinsurance | Total | ||||||||||
Revenues |
||||||||||||
Gross premiums written |
$ | 230,792 | $ | 328,363 | $ | 559,155 | ||||||
Ceded premiums written |
(77,030 | ) | (2,098 | ) | (79,128 | ) | ||||||
Net premiums written |
153,762 | 326,265 | 480,027 | |||||||||
Net premiums earned |
223,588 | 210,632 | 434,220 | |||||||||
Other underwriting income |
103 | 493 | 596 | |||||||||
223,691 | 211,125 | 434,816 | ||||||||||
Expenses |
||||||||||||
Net losses and loss expenses |
166,046 | 104,770 | 270,816 | |||||||||
Acquisition expenses |
20,855 | 42,995 | 63,850 | |||||||||
General and administrative expenses |
25,179 | 29,350 | 54,529 | |||||||||
212,080 | 177,115 | 389,195 | ||||||||||
Underwriting income |
$ | 11,611 | $ | 34,010 | $ | 45,621 | ||||||
Net loss ratio |
74.3 | % | 49.8 | % | 62.4 | % | ||||||
Acquisition expense ratio |
9.3 | % | 20.4 | % | 14.7 | % | ||||||
General and administrative expense ratio |
11.3 | % | 13.9 | % | 12.5 | % | ||||||
Combined ratio |
94.9 | % | 84.1 | % | 89.6 | % | ||||||
Reserve for losses and loss expenses |
$ | 1,689,106 | $ | 1,575,336 | $ | 3,264,442 | ||||||
The following table reconciles total segment results to income before income taxes for the
three months ended June 30, 2010 and 2009, respectively:
2010 | 2009 | |||||||
Total underwriting income |
$ | 38,401 | $ | 45,621 | ||||
Net investment income |
33,351 | 88,834 | ||||||
Net foreign exchange (losses) gains |
(129 | ) | 27,723 | |||||
Net realized gains (losses) on investments sales |
2,657 | (1,500 | ) | |||||
Net impairment losses recognized in earnings |
(992 | ) | (6,644 | ) | ||||
Amortization of intangibles |
(2,588 | ) | (2,588 | ) | ||||
Interest expense |
(9,050 | ) | (7,538 | ) | ||||
Income before income taxes |
$ | 61,650 | $ | 143,908 | ||||
25
Table of Contents
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
8. | Segment reporting, contd. |
The following table provides gross and net premiums written by line of business for the three
months ended June 30, 2010 and 2009:
Gross | Net | Gross | Net | |||||||||||||
premiums | premiums | premiums | premiums | |||||||||||||
written | written | written | written | |||||||||||||
Business Segment | 2010 | 2010 | 2009 | 2009 | ||||||||||||
Insurance |
||||||||||||||||
Agriculture |
$ | 54,170 | $ | 45,169 | $ | 56,235 | $ | 28,713 | ||||||||
Professional lines |
56,567 | 49,422 | 62,079 | 54,370 | ||||||||||||
Casualty |
55,406 | 37,527 | 50,605 | 28,291 | ||||||||||||
Property |
43,158 | 40,950 | 40,084 | 22,125 | ||||||||||||
Healthcare liability |
22,442 | 22,031 | 23,202 | 22,871 | ||||||||||||
Workers compensation |
(117 | ) | (112 | ) | (1,413 | ) | (2,608 | ) | ||||||||
Total Insurance |
231,626 | 194,987 | 230,792 | 153,762 | ||||||||||||
Reinsurance |
||||||||||||||||
Catastrophe |
123,808 | 123,808 | 148,380 | 148,380 | ||||||||||||
Casualty |
56,919 | 56,831 | 83,813 | 83,805 | ||||||||||||
Property |
39,999 | 39,999 | 55,245 | 55,245 | ||||||||||||
Aerospace and marine |
24,131 | 22,101 | 23,568 | 21,540 | ||||||||||||
Surety and other specialty |
13,085 | 13,077 | 17,357 | 17,295 | ||||||||||||
Total Reinsurance |
257,942 | 255,816 | 328,363 | 326,265 | ||||||||||||
Total |
$ | 489,568 | $ | 450,803 | $ | 559,155 | $ | 480,027 | ||||||||
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
8. | Segment reporting, contd. |
The following table provides a summary of the segment revenues and results for the six months
ended June 30, 2010:
Insurance | Reinsurance | Total | ||||||||||
Revenues |
||||||||||||
Gross premiums written |
$ | 695,967 | $ | 612,470 | $ | 1,308,437 | ||||||
Ceded premiums written |
(152,039 | ) | (2,653 | ) | (154,692 | ) | ||||||
Net premiums written |
543,928 | 609,817 | 1,153,745 | |||||||||
Net premiums earned |
373,534 | 448,050 | 821,584 | |||||||||
Other underwriting loss |
(2 | ) | (2,366 | ) | (2,368 | ) | ||||||
373,532 | 445,684 | 819,216 | ||||||||||
Expenses |
||||||||||||
Net losses and loss expenses |
256,857 | 268,687 | 525,544 | |||||||||
Acquisition expenses |
33,980 | 96,672 | 130,652 | |||||||||
General and administrative expenses |
57,267 | 57,374 | 114,641 | |||||||||
348,104 | 422,733 | 770,837 | ||||||||||
Underwriting income |
$ | 25,428 | $ | 22,951 | $ | 48,379 | ||||||
Net loss ratio |
68.8 | % | 59.9 | % | 64.0 | % | ||||||
Acquisition expense ratio |
9.1 | % | 21.6 | % | 15.9 | % | ||||||
General and administrative expense ratio |
15.3 | % | 12.8 | % | 13.9 | % | ||||||
Combined ratio |
93.2 | % | 94.3 | % | 93.8 | % | ||||||
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
8. | Segment reporting, contd. |
The following table provides a summary of the segment revenues and results for the six months
ended June 30, 2009:
Insurance | Reinsurance | Total | ||||||||||
Revenues |
||||||||||||
Gross premiums written |
$ | 753,006 | $ | 589,455 | $ | 1,342,461 | ||||||
Ceded premiums written |
(276,813 | ) | (2,706 | ) | (279,519 | ) | ||||||
Net premiums written |
476,193 | 586,749 | 1,062,942 | |||||||||
Net premiums earned |
404,262 | 408,233 | 812,495 | |||||||||
Other underwriting income |
3,062 | 1,131 | 4,193 | |||||||||
407,324 | 409,364 | 816,688 | ||||||||||
Expenses |
||||||||||||
Net losses and loss expenses |
264,850 | 226,102 | 490,952 | |||||||||
Acquisition expenses |
45,696 | 86,428 | 132,124 | |||||||||
General and administrative expenses |
54,938 | 59,848 | 114,786 | |||||||||
365,484 | 372,378 | 737,862 | ||||||||||
Underwriting income |
$ | 41,840 | $ | 36,986 | $ | 78,826 | ||||||
Net loss ratio |
65.5 | % | 55.4 | % | 60.4 | % | ||||||
Acquisition expense ratio |
11.3 | % | 21.2 | % | 16.3 | % | ||||||
General and administrative expense ratio |
13.6 | % | 14.6 | % | 14.1 | % | ||||||
Combined ratio |
90.4 | % | 91.2 | % | 90.8 | % | ||||||
The following table reconciles total segment results to income before income taxes for the six
months ended June 30, 2010 and 2009, respectively:
2010 | 2009 | |||||||
Total underwriting income |
$ | 48,379 | $ | 78,826 | ||||
Net investment income |
89,830 | 153,384 | ||||||
Net foreign exchange (losses) gains |
(6,100 | ) | 27,785 | |||||
Net realized gains on investments sales |
6,201 | 1,741 | ||||||
Net impairment losses recognized in earnings |
(1,853 | ) | (18,770 | ) | ||||
Amortization of intangibles |
(5,176 | ) | (5,176 | ) | ||||
Interest expense |
(16,658 | ) | (15,093 | ) | ||||
Income before income taxes |
$ | 114,623 | $ | 222,697 | ||||
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
8. | Segment reporting, contd. |
The following table provides gross and net premiums written by line of business for the six
months ended June 30, 2010 and 2009:
Gross | Net | Gross | Net | |||||||||||||
premiums | premiums | premiums | premiums | |||||||||||||
written | written | written | written | |||||||||||||
Business Segment | 2010 | 2010 | 2009 | 2009 | ||||||||||||
Insurance |
||||||||||||||||
Agriculture |
$ | 404,369 | $ | 313,276 | $ | 434,645 | $ | 252,017 | ||||||||
Professional lines |
90,075 | 77,024 | 97,216 | 83,992 | ||||||||||||
Casualty |
89,634 | 58,565 | 81,229 | 46,171 | ||||||||||||
Property |
69,681 | 55,038 | 67,835 | 39,612 | ||||||||||||
Healthcare liability |
42,758 | 40,554 | 42,915 | 40,080 | ||||||||||||
Workers compensation |
(550 | ) | (529 | ) | 29,166 | 14,321 | ||||||||||
Total Insurance |
695,967 | 543,928 | 753,006 | 476,193 | ||||||||||||
Reinsurance |
||||||||||||||||
Catastrophe |
246,477 | 246,567 | 257,828 | 257,828 | ||||||||||||
Casualty |
164,893 | 164,094 | 159,205 | 158,974 | ||||||||||||
Property |
104,521 | 104,521 | 90,033 | 90,032 | ||||||||||||
Aerospace and marine |
42,197 | 40,132 | 35,795 | 33,670 | ||||||||||||
Surety and other specialty |
54,382 | 54,503 | 46,594 | 46,245 | ||||||||||||
Total Reinsurance |
612,470 | 609,817 | 589,455 | 586,749 | ||||||||||||
Total |
$ | 1,308,437 | $ | 1,153,745 | $ | 1,342,461 | $ | 1,062,942 | ||||||||
9. | Commitments and contingencies |
Concentrations of credit risk. The Companys reinsurance recoverables at June 30, 2010 and
December 31, 2009 amounted to $247.9 million and $467.7 million, respectively. At June 30,
2010, substantially all reinsurance recoverables were due from the U.S. government or from
reinsurers rated A- or better by A.M. Best or Standard & Poors.
Major production sources. The following table shows the percentage of net premiums written
generated through the Companys largest brokers for the six months ended June 30, 2010 and June
30, 2009, respectively:
Broker | 2010 | 2009 | ||||||
Aon Benfield |
23.5 | % | 24.1 | % | ||||
Marsh & McLennan Companies, Inc. |
19.4 | % | 19.9 | % | ||||
Willis Companies |
7.2 | % | 9.5 | % | ||||
Total of largest brokers |
50.1 | % | 53.5 | % | ||||
Letters of credit. As of June 30, 2010, the Company had issued letters of credit of $407.9
million (December 31, 2009 $605.3 million) under its credit facility in favor of certain
ceding companies.
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ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
9. | Commitments and contingencies, contd. |
Investment commitments. As of June 30, 2010 and December 31, 2009, the Company had pledged
cash and cash equivalents and fixed maturity investments of $184.6 million and $158.5 million,
respectively, in favor of certain ceding companies to collateralize obligations. As of June
30, 2010 and December 31, 2009, the Company had also pledged $452.6 million and $664.0 million
of its fixed maturity investments as collateral for $407.9 million and $605.3 million in
letters of credit outstanding under its credit facility, respectively. In addition, at June
30, 2010 and December 31, 2009, cash and fixed maturity investments with fair values of $363.3
million and $361.6 million were on deposit with U.S. state regulators, respectively, and cash
and fixed maturity investments with fair values of $10.3 million and $12.4 million were on
deposit with Canadian regulators, respectively.
The Company was subject to certain commitments with respect to other investments at June 30,
2010 and December 31, 2009. The Company is generally subject to redemption restriction
provisions of between one to five years from the date of acquisition and rolling redemption
restrictions on a one or two year basis thereafter. Due to redemption restrictions, the
Company is prohibited from requesting redemptions during 2010 of $68.6 million (December 31,
2009 $72.1 million) of its other investments held at June 30, 2010. In addition, as of June
30, 2010, the Company was committed to investing a further $1.7 million (December 31, 2009
$1.7 million) in an investment fund classified within other investments.
Reinsurance commitments. In the ordinary course of business, the Company enters into
reinsurance agreements which may include terms which could require the Company to collateralize
certain of its obligations as a result of certain triggering events, as defined in such
agreements.
Employment agreements. The Company has entered into employment agreements with certain
officers that provide for awards of the Companys equity securities, executive benefits and
severance payments under certain circumstances.
Operating Leases. The Company leases office space and office equipment under operating leases.
Future minimum lease commitments at June 30, 2010 are as follows:
Twelve Months Ended June 30, | Amount | |||
2011 |
$ | 10,987 | ||
2012 |
11,283 | |||
2013 |
10,681 | |||
2014 |
6,340 | |||
2015 |
4,438 | |||
2016 and thereafter |
13,369 | |||
$ | 57,098 | |||
Total lease expense under operating leases for the six months ended June 30, 2010 was $5.2
million (2009 $5.6 million).
Legal Proceedings. The Company is party to various legal proceedings generally arising in the
normal course of its business. While any proceeding contains an element of uncertainty, the
Company does not believe that the eventual outcome of any litigation or arbitration proceeding
to which it is presently a party could have a material adverse effect on its financial
condition or business. Pursuant to the
Companys insurance and reinsurance agreements, disputes are generally required to be finally
settled by arbitration.
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Table of Contents
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is a discussion and analysis of the financial condition and results of
operations for the three and six months ended June 30, 2010 of Endurance Specialty Holdings Ltd.
(Endurance Holdings) and its wholly-owned subsidiaries (collectively, the Company). This
discussion and analysis should be read in conjunction with the unaudited condensed consolidated
financial statements and related notes contained in this Quarterly Report on Form 10-Q (this Form
10-Q) as well as the audited consolidated financial statements and related notes for the fiscal
year ended December 31, 2009, the discussions of critical accounting policies and the qualitative
and quantitative disclosure about market risk contained in Endurance Holdings Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 (the 2009 Annual Report on Form 10-K).
Some of the information contained in this discussion and analysis or set forth elsewhere in
this Form 10-Q, including information with respect to the Companys plans and strategy for its
business, includes forward-looking statements that involve risk and uncertainties. Please see the
section Cautionary Statement Regarding Forward-Looking Statements below 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. You should
review the Risk Factors set forth in the 2009 Annual Report on Form 10-K for a discussion of
important factors that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained herein.
Overview
Endurance Holdings was organized as a Bermuda holding company on June 27, 2002 and has seven
wholly-owned operating subsidiaries:
| Endurance Specialty Insurance Ltd. (Endurance Bermuda), domiciled in Bermuda with branch offices in Zurich and Singapore; |
| Endurance Worldwide Insurance Limited (Endurance U.K.), domiciled in England; |
| Endurance Reinsurance Corporation of America (Endurance U.S. Reinsurance), domiciled in Delaware; |
| Endurance American Insurance Company (Endurance American), domiciled in Delaware; |
| Endurance American Specialty Insurance Company (Endurance American Specialty), domiciled in Delaware; |
| Endurance Risk Solutions Assurance Co. (Endurance Risk Solutions), domiciled in Delaware; and |
| American Agri-Business Insurance Company, domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together ARMtech). |
The Company writes specialty lines of property and casualty insurance and reinsurance on a global
basis and seeks to create a portfolio of specialty lines of business that are profitable and have
limited correlation with one another. The Companys portfolio of specialty lines of business is
organized into two business segments, Insurance and Reinsurance.
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Table of Contents
In the Insurance segment, the Company writes agriculture, professional lines, casualty,
property, healthcare liability and workers compensation insurance. In the Reinsurance segment, the
Company writes catastrophe, casualty, property, aerospace and marine and surety and other
specialty reinsurance.
The Companys Insurance and Reinsurance segments both include property related coverages which
provide insurance or reinsurance of an insurable interest in tangible property for property loss,
damage or loss of use. In addition, the Companys Insurance and Reinsurance segments include
various casualty insurance and reinsurance coverages which are 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 from such injuries.
Application of Critical Accounting Estimates
The Companys 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. The Company believes that some of the more critical
judgments in the areas of accounting estimates and assumptions that affect its financial condition
and results of operations are related to the recognition of premiums written and ceded, reserves
for losses and loss expenses, other-than-temporary impairments within the investment portfolio,
fair value measurements of certain portions of the investment portfolio and contingencies. For a
detailed discussion of the Companys critical accounting estimates, please refer to the 2009 Annual
Report on Form 10-K. There were no material changes in the application of the Companys critical
accounting estimates subsequent to that report. Management has discussed the application of these
critical accounting estimates with the Companys Board of Directors and the Audit Committee of the
Board of Directors.
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Table of Contents
Consolidated results of operations for the three month periods ended June 30, 2010 and 2009
Results of operations for the three months ended June 30, 2010 and 2009 were as follows:
Three Months Ended | ||||||||||||
June 30, | June 30, | |||||||||||
2010 | 2009 | Change(1) | ||||||||||
(U.S. dollars in thousands, except for ratios) | ||||||||||||
Revenues |
||||||||||||
Gross premiums written |
$ | 489,568 | $ | 559,155 | (12.4 | %) | ||||||
Ceded premiums written |
(38,765 | ) | (79,128 | ) | (51.0 | %) | ||||||
Net premiums written |
450,803 | 480,027 | (6.1 | %) | ||||||||
Net premiums earned |
456,395 | 434,220 | 5.1 | % | ||||||||
Net investment income |
33,351 | 88,834 | (62.5 | %) | ||||||||
Net realized gains (losses) on investment sales |
2,657 | (1,500 | ) | NM | (2) | |||||||
Net impairment losses recognized in earnings |
(992 | ) | (6,644 | ) | (85.1 | %) | ||||||
Other underwriting (loss) income |
(2,663 | ) | 596 | NM | (2) | |||||||
Total revenues |
488,748 | 515,506 | (5.2 | %) | ||||||||
Expenses |
||||||||||||
Losses and loss expenses |
292,947 | 270,816 | 8.2 | % | ||||||||
Acquisition expenses |
66,708 | 63,850 | 4.5 | % | ||||||||
General and administrative expenses |
55,676 | 54,529 | 2.1 | % | ||||||||
Amortization of intangibles |
2,588 | 2,588 | 0.0 | % | ||||||||
Net foreign exchange losses (gains) |
129 | (27,723 | ) | NM | (2) | |||||||
Interest expense |
9,050 | 7,538 | 20.1 | % | ||||||||
Income tax expense (benefit) |
3,057 | (5,232 | ) | NM | (2) | |||||||
Net income |
$ | 58,593 | $ | 149,140 | (60.7 | %) | ||||||
Net loss ratio |
64.2 | % | 62.4 | % | 1.8 | |||||||
Acquisition expense ratio |
14.6 | % | 14.7 | % | (0.1 | ) | ||||||
General and administrative expense ratio |
12.2 | % | 12.5 | % | (0.3 | ) | ||||||
Combined ratio |
91.0 | % | 89.6 | % | 1.4 | |||||||
(1) | With respect to ratios, changes show increase or decrease in percentage points. | |
(2) | Not meaningful. |
Premiums
Gross premiums written in the three months ended June 30, 2010 were $489.6 million, a decrease
of $69.6 million, or 12.4%, compared to the same period in 2009. Net premiums written in the three
months ended June 30, 2010 were $450.8 million, a decrease of $29.2 million, or 6.1% compared to
the same period in 2009. The reduction in net premiums written was driven by the following
factors:
| A decrease in net written premium recorded in the catastrophe line of the Reinsurance segment due to price reductions and the Companys decision to reduce deployed U.S. property catastrophe limits; |
| The absence of net positive premium adjustments which contributed $19.8 million to the property line in the Reinsurance segment in the second quarter of 2009 when actual reported premiums from certain ceding companies exceeded the Companys original estimates; and |
| The shifting of the renewal of a major casualty program in the Reinsurance segment which was extended to the third quarter and contributed $16.8 million to net premiums written in the second quarter of 2009. |
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Table of Contents
Partially offsetting these declines were increased premium retentions in the agriculture and
U.S. based property businesses within the Insurance segment.
Net premiums earned for the three months ended June 30, 2010 were $456.4 million, an increase
of $22.2 million, or 5.1%, from the second quarter of 2009, principally driven by the increase in
net premiums written in the first quarter of 2010 in the Reinsurance segment.
Net Investment Income
The Companys net investment income of $33.4 million decreased 62.5% or $55.5 million for the
quarter ended June 30, 2010 as compared to the same period in 2009. Net investment income during
the second quarter of 2010 included net mark to market losses of $7.0 million on alternative
investments and high yield loan funds, included in other investments, as compared to mark to market
gains of $40.5 million in the second quarter of 2009. Investment income generated from the
Companys fixed income investments, which consist of fixed maturity investments, short term
investments and preferred equity securities, decreased by $6.6 million in comparison to the same
period in 2009 due to lower reinvestment rates during the current period. Investment expenses for
the second quarter of 2010, including investment management fees, were $3.6 million, up from $3.0
million during the same period in 2009, reflecting a changing external manager mix and increased
internal investment management expenses.
The annualized net earned yield and total return on the investment portfolio for the three
months ended June 30, 2010 and 2009 and market yield and portfolio duration as of June 30, 2010 and
2009 were as follows:
Three Months Ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
Annualized net earned yield(1) |
2.23 | % | 6.41 | % | ||||
Total return on investment portfolio(2) |
1.42 | % | 3.96 | % | ||||
Market yield(3) |
2.43 | % | 3.77 | % | ||||
Portfolio duration(4) |
2.19 | 2.07 |
(1) | The actual net earned income from the investment portfolio after adjusting for expenses and accretion and amortization from the purchase price divided by the average book value of assets. | |
(2) | Includes realized and unrealized gains and losses. | |
(3) | The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes other investments and operating cash. | |
(4) | Includes only cash and cash equivalents and fixed income investments managed by the Companys investment managers. |
During the second quarter of 2010, the yield on the benchmark five year U.S. Treasury bond
fluctuated within a 97 basis points range, with a high of 2.74% and a low of 1.77%. Trading
activity in the Companys portfolio included reductions in non-agency residential mortgage
exposures, cash and foreign government securities from prior periods and increased allocations to
both government-backed and non-government-backed corporate securities and asset-backed securities.
The duration of the Companys fixed income investments has increased slightly compared to June 30,
2009 primarily due to the decreased allocation to cash and cash equivalents and the purchase of
longer duration corporate securities.
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Table of Contents
Net Realized Gains (Losses) on Investment Sales
The Companys investment portfolio is managed to generate attractive economic returns and
income while providing the Company with liquidity. Movements in financial markets and interest
rates influence the timing and recognition of net realized investment gains and losses as the
portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available
for sale during the three months ended June 30, 2010 were $527.1 million compared to $748.6 million
during the three months ended June 30, 2009. Net realized investment gains (losses) on investment
sales for the three months ended June 30, 2010 and 2009 were as follows:
Three Months Ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(U.S. dollars in thousands) | ||||||||
Gross realized gains on investment sales |
$ | 4,645 | $ | 14,120 | ||||
Gross realized losses on investment sales |
(1,988 | ) | (15,620 | ) | ||||
Net realized gains (losses) on investment sales |
$ | 2,657 | $ | (1,500 | ) | |||
Net Impairment Losses Recognized in Earnings
During the three months ended June 30, 2010, the Company identified available for sale
securities that were considered to be other-than-temporarily impaired. The Company initially
considered whether it intended to sell or would be more likely than not required to sell the
securities in an unrealized loss position at June 30, 2010. The Company did not identify any such
securities meeting this criteria. As such, the Company performed various analyses and reviews,
which are described in Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Estimates in our 2009 Annual Report on Form 10-K, to determine
whether the investments in an unrealized loss position were other-than-temporarily impaired as a
result of credit factors or other factors. Net impairment losses recognized in earnings for the
three months ended June 30, 2010 and 2009 were as follows:
Three Months Ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(U.S. dollars in thousands) | ||||||||
Total other-than-temporary impairment losses |
$ | (738 | ) | $ | (37,809 | ) | ||
Portion of loss recognized in other
comprehensive income (loss) |
(254 | ) | 31,165 | |||||
Net impairment losses recognized in earnings |
$ | (992 | ) | $ | (6,644 | ) | ||
The $1.0 million of OTTI losses recognized by the Company in earnings during the second
quarter of 2010 relating to specific credit events occurred primarily due to reductions in expected
recovery values on structured securities (mortgage- and asset-backed) during the period, along with
certain credit related downgrades in corporate securities. Of this total, $0.3 million was shifted from a non-credit OTTI loss previously recognized in other comprehensive income (loss) to a loss recorded as a credit impairment.
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For the three months ended June 30, 2009, the Company recorded $6.6 million of OTTI losses in
earnings. The $31.2 million of OTTI recognized by the Company in the second quarter of 2009 as
relating to non-credit related factors resulted primarily from market and sector related factors,
including limited liquidity and credit spread widening.
Net Foreign Exchange Losses (Gains)
During the second quarter of 2010, the Company remeasured its monetary assets and liabilities
denominated in foreign currencies, which resulted in net foreign exchange loss of $0.1 million
compared to a $27.7 million gain for the same period of 2009. The small loss incurred in the
current period was due to offsetting exposures across the Company as the Euro weakened. In the
prior year period, the strengthening of the U.K. pound and weakening of the U.S. dollar compared to
other currencies resulted in the foreign exchange gain. The Company recorded net unrealized
foreign exchange losses of $3.1 million (2009 $15.0 million) from the revaluation of its foreign
currency invested assets included in the change in net unrealized holding gains (losses) on
investments within accumulated other comprehensive income (loss).
Net Losses and Loss Expenses
The Companys reported net losses and loss expenses are characterized by various factors and
are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss
emergence related to such events. For the three months ended June 30, 2010, there were no
significant catastrophic events that impacted the Companys net loss ratio.
Favorable prior year loss reserve development was $29.5 million for the second quarter of 2010
as compared to $36.0 million during the same period in 2009. In the second quarter of 2010, prior
year loss reserves emerged favorably in the short tail and other lines of the Insurance segment and
in the short and long tail lines of the Reinsurance segment, while in the second quarter of 2009,
prior year loss reserves emerged favorably across all Insurance business lines and the short tail
and other lines of the Reinsurance segment. Prior year favorable loss reserve development emerged
as claims have not materialized as originally estimated by the Company.
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. Ultimate losses and loss expenses may differ materially from the
amounts recorded in the Companys consolidated financial statements. These estimates are reviewed
regularly and, as experience develops and new information becomes known, the reserves are adjusted
as necessary. Reserve adjustments, if any, are recorded in earnings in the period in which they
are determined. The overall loss reserves were established by the Companys actuaries and reflect
managements best estimate of ultimate losses. See Reserve for Losses and Loss Expenses below for
further discussion.
Acquisition Expenses
The acquisition expense ratio for the three months ended June 30, 2010 was comparable to that
of the same period in 2009.
General and Administrative Expenses
Both the Companys general and administrative expenses and expense ratio for the second
quarter of 2010 were in line with those of the same period in 2009. At June 30, 2010, the Company
had a total of 783 employees as compared to 746 employees at June 30, 2009.
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Table of Contents
Net Income
The Company produced net income of $58.6 million in the three months ended June 30, 2010,
compared to net income of $149.1 million in the same period of 2009. The decrease in net income
for the current period compared to the same period in 2009 was primarily due to the reduction in
net investment income of $55.5 million caused by mark to market losses recorded in the current
period on the Companys alternative investments and high yield loan funds compared to mark to
market gains recorded in the same period of 2009. In addition, the Company incurred a negligible
net foreign exchange loss in the second quarter of 2010 compared to a foreign exchange gain of
$27.7 million in the second quarter of 2009 which was due to the strengthening of the U.K. pound in
relation to the U.S. dollar.
Consolidated results of operations for the six month periods ended June 30, 2010 and 2009
Results of operations for the six months ended June 30, 2010 and 2009 were as follows:
Six Months Ended | ||||||||||||
June 30, | June 30, | |||||||||||
2010 | 2009 | Change(1) | ||||||||||
(U.S. dollars in thousands, except for ratios) | ||||||||||||
Revenues |
||||||||||||
Gross premiums written |
$ | 1,308,437 | $ | 1,342,461 | (2.5 | %) | ||||||
Ceded premiums written |
(154,692 | ) | (279,519 | ) | (44.7 | %) | ||||||
Net premiums written |
1,153,745 | 1,062,942 | 8.5 | % | ||||||||
Net premiums earned |
821,584 | 812,495 | 1.1 | % | ||||||||
Net investment income |
89,830 | 153,384 | (41.4 | %) | ||||||||
Net realized gains on investment sales |
6,201 | 1,741 | 256.2 | % | ||||||||
Net impairment losses recognized in earnings |
(1,853 | ) | (18,770 | ) | (90.1 | %) | ||||||
Other underwriting (loss) income |
(2,368 | ) | 4,193 | NM | (2) | |||||||
Total revenues |
913,394 | 953,043 | (4.2 | %) | ||||||||
Expenses |
||||||||||||
Losses and loss expenses |
525,544 | 490,952 | 7.0 | % | ||||||||
Acquisition expenses |
130,652 | 132,124 | (1.1 | %) | ||||||||
General and administrative expenses |
114,641 | 114,786 | (0.1 | %) | ||||||||
Amortization of intangibles |
5,176 | 5,176 | 0.0 | % | ||||||||
Net foreign exchange losses (gains) |
6,100 | (27,785 | ) | NM | (2) | |||||||
Interest expense |
16,658 | 15,093 | 10.4 | % | ||||||||
Income tax expense (benefit) |
241 | (4,740 | ) | NM | (2) | |||||||
Net income |
$ | 114,382 | $ | 227,437 | (49.7 | %) | ||||||
Net loss ratio |
64.0 | % | 60.4 | % | 3.6 | |||||||
Acquisition expense ratio |
15.9 | % | 16.3 | % | (0.4 | ) | ||||||
General and administrative expense ratio |
13.9 | % | 14.1 | % | (0.2 | ) | ||||||
Combined ratio |
93.8 | % | 90.8 | % | 3.0 | |||||||
(1) | With respect to ratios, changes show increase or decrease in percentage points. | |
(2) | Not meaningful. |
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Premiums
Gross premiums written in the six months ended June 30, 2010 were $1,308.4 million, a decrease
of $34.0 million, or 2.5%, compared to the same period in 2009. Net premiums written in the six
months ended June 30, 2010 were $1,153.7 million, an increase of $90.8 million, or 8.5%, compared
to the same period in 2009. The increase in net premiums written was driven primarily by increased
premium retentions in the agriculture and U.S. based property businesses within the Insurance
segment. Net premiums written were also positively impacted by modest growth in the property line
of the Reinsurance segment as a result of new business written and increased shares on renewal
contracts. Offsetting these increases was a decline in the workers compensation line of the
Insurance segment as a result of the Companys exit from the workers compensation line in the
first quarter of 2009.
Net premiums earned for the six months ended June 30, 2010 were $821.6 million, an increase of
$9.1 million, or 1.1%, from the six months ended June 30, 2009 principally due to growth in net
premiums written experienced in the first half of 2010 compared to the same period in the prior
year. Partially offsetting this growth was the impact of reduced net written premiums recorded in
the second half of 2009 compared to the second half of 2008.
Net Investment Income
The Companys net investment income of $89.8 million decreased 41.4% or $63.6 million for the
six months ended June 30, 2010 as compared to the same period in 2009. Net investment income
during the first six months of 2010 included net mark to market gains of $10.0 million on
alternative investments and high yield loan funds, included in other investments, as compared to
mark to market gains of $51.0 million in the first six months of 2009. Investment income generated
by the Companys fixed income investments decreased by $19.6 million in the first six months of
2010 compared to 2009 due to lower reinvestment rates. Investment expenses for the six months
ended June 30, 2010, including investment management fees, were $7.7 million compared to $5.7
million for the same period in 2009 due to an overall increase in invested assets, changes in the
Companys external investment managers and increased internal investment management expenses.
The annualized net earned yield, total return on the investment portfolio for the six months
ended June 30, 2010 and 2009 and market yield and portfolio duration as of June 30, 2010 and 2009
were as follows:
Six Months Ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
Annualized net earned yield(1) |
3.03 | % | 5.53 | % | ||||
Total return on investment portfolio(2) |
3.18 | % | 4.94 | % | ||||
Market yield(3) |
2.43 | % | 3.77 | % | ||||
Portfolio duration(4) |
2.19 | 2.07 |
(1) | The actual net earned income from the investment portfolio after adjusting for expenses and accretion and amortization from the purchase price divided by the average book value of assets. | |
(2) | Includes realized and unrealized gains and losses. | |
(3) | The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates to a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes other investments and operating cash. | |
(4) | Includes only cash and cash equivalents and fixed income investments held by the Companys investment managers. |
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Table of Contents
During the six months ended June 30, 2010, the yield on the benchmark five year U.S. Treasury
bond fluctuated within a 97 basis points range, with a high of 2.74% and a low of 1.77%. Trading
activity in the Companys portfolio included reductions in non-agency residential mortgage
exposures, cash and foreign government securities from prior periods and increased allocations to
both government-backed and non-government-backed corporate securities and asset-backed securities.
The duration of the fixed income investments has increased compared to June 30, 2009 primarily due
to the decreased allocation to cash and cash equivalents and the purchase of longer duration
corporate securities.
Net Realized Gains on Investment Sales
The Companys investment portfolio is managed to generate attractive economic returns and
income while providing the Company with liquidity. Movements in financial markets and interest
rates influence the timing and recognition of net realized investment gains and losses as the
portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available
for sale during the six months ended June 30, 2010 were $1,684.7 million compared to $1,452.5
million during the six months ended June 30, 2009. Net realized investment gains on investment
sales for the six months ended June 30, 2010 and 2009 were as follows:
Six Months Ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(U.S. dollars in thousands) | ||||||||
Gross realized gains on investment sales |
$ | 14,167 | $ | 35,019 | ||||
Gross realized losses on investment sales |
(7,966 | ) | (33,278 | ) | ||||
Net realized gains on investment sales |
$ | 6,201 | $ | 1,741 | ||||
Net Impairment Losses Recognized in Earnings
During the six months ended June 30, 2010, the Company identified available for sale
securities that were considered to be other-than-temporarily impaired. The Company initially
considered whether it intended to sell or would be more likely than not required to sell the
securities in an unrealized loss position at June 30, 2010. The Company did not identify any such
securities meeting these criteria. As such, the Company performed various analyses and reviews,
which are described in Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Estimates in our 2009 Annual Report on Form 10-K, to determine
whether the investments in an unrealized loss position were other-than-temporarily impaired as a
result of credit factors or other factors. Net impairment losses recognized in earnings for the
six months ended June 30, 2010 and 2009 were as follows:
Six Months Ended | ||||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(U.S. dollars in thousands) | ||||||||
Other-than-temporary impairment losses |
$ | (1,507 | ) | $ | (49,935 | ) | ||
Portion of loss recognized in other
comprehensive income (loss) |
(346 | ) | 31,165 | |||||
Net impairment losses recognized in earnings |
$ | (1,853 | ) | $ | (18,770 | ) | ||
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Table of Contents
The $1.9 million of OTTI losses recognized by the Company in the six months ended June 30,
2010 relating to specific credit events occurred primarily due to reductions in expected recovery
values on structured securities (mortgage and asset-backed) during the period, along with certain
credit
related downgrades in corporate securities. Of this total, $0.3 million was shifted from a non-credit OTTI loss previously recognized in other comprehensive income (loss) to a loss recorded as a credit impairment.
For the six months ended June 30, 2009, the Company recorded $18.8 million of OTTI losses in
earnings. This amount included a portion related to credit losses and a portion related to
non-credit related factors. Non-credit related factors included market and sector related factors,
including limited liquidity and credit spread widening.
Net Foreign Exchange Losses (Gains)
During the first six months of 2010, the Company remeasured its monetary assets and
liabilities denominated in foreign currencies, which resulted in net foreign exchange losses of
$6.1 million compared to $27.8 million of gains for the same period of 2009. The current period
net foreign exchange losses resulted primarily from the strengthening of the U.S. dollar compared
to other currencies during the first quarter of 2010. The prior period net foreign exchange gains
resulted from the strengthening of the U.K. pound sterling and weakening of the U.S. dollar
compared to other currencies. The Company had offsetting net unrealized foreign exchange gains of
$1.9 million (2009 $14.9 million losses) from the revaluation of its foreign currency invested
assets included in the change in net unrealized holding gains on investments within accumulated
other comprehensive income (loss).
Net Losses and Loss Expenses
The Companys reported net losses and loss expenses are characterized by various factors and
are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss
emergence related to such events. For the six months ended June 30, 2010, the Chilean earthquake
and European Windstorm Xynthia adversely affected the Companys net loss ratio in the Reinsurance
segment. The Company recorded losses, net of reinstatement premiums and other loss sensitive
accruals, of $63.0 million in relation to the two events, which added 7.9 percentage points to the
Companys net loss ratio for the first half of 2010. In addition, the Company maintained reserves
for attritional losses to reflect a number of smaller catastrophes that occurred in the first six
months of 2010.
Favorable prior year loss reserve development was $68.1 million for the first six months of
2010 as compared to $75.3 million for the same period in 2009. For the six months ended June 30,
2010, prior year reserves emerged favorably across all business lines in both the Insurance and
Reinsurance segment. Favorable loss development for the six months ended June 30, 2009 resulted
from lower than expected reported claims in the Companys short and long tail lines within the
Insurance segment and across all business lines within the Reinsurance segment.
The Company participates in lines of business in which 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. Ultimate losses and loss expenses may differ materially from the
amounts recorded in the Companys consolidated financial statements. These estimates are reviewed
regularly and, as experience develops and new information becomes known, the reserves are adjusted
as necessary. Reserve adjustments, if any, are recorded in earnings in the period in which they
are determined. The overall loss reserves were established by the Companys actuaries and reflect
managements best estimate of ultimate losses. See Reserve for Losses and Loss Expenses below
for further discussion.
Acquisition Expenses
The acquisition expense ratio for the six months ended June 30, 2010 was comparable to that of
the same period in 2009.
40
Table of Contents
General and Administrative Expenses
Both the Companys general and administrative expenses and expense ratio for the first half of
2010 were in line with those of the same period in 2009.
Net Income
The Company earned net income of $114.4 million for the six months ended June 30, 2010,
compared to net income of $227.4 million in the same period of 2009. The decrease in net income in
2010 compared to 2009 was primarily due to a decrease in net investment income of $63.6 million
related to mark to market adjustments on the Companys alternative investments and high yield loan
funds. In addition, the Company experienced a net foreign exchange loss in the first six months of
2010 compared to a net foreign exchange gain in the same period in 2009 due to the lack of
significant exchange rate movements in 2010 compared to those that occurred in 2009, particularly
the strengthening of the U.K. pound sterling in relation to the U.S. dollar.
Reserve for losses and loss expenses
In order to capture the key dynamics of loss development and expected volatility that may
arise within the disclosed amounts for the reserve for losses and loss expenses, the key lines of
business within each business segment are aggregated based on their potential expected length of
loss emergence. The period over which loss emergence occurs is typically referred to as the tail.
The Company has classified its lines of business as either having a short, long or other tail
pattern. The Company views short tail business as that for which development typically emerges
within a period of several calendar quarters while long tail business would emerge over many years.
The Companys only short tail line of business in the Insurance segment is its property line. The
Companys long tail lines of business in the Insurance segment are casualty, healthcare liability,
workers compensation and professional lines. The Companys short tail lines of business in the
Reinsurance segment include catastrophe, property, aerospace and marine and surety. The Companys
long tail line of business in the Reinsurance segment is the casualty line of business. Within the
Companys Insurance and Reinsurance segments, the Company writes certain specialty lines of
business for which the loss emergence is considered unique in nature such as agriculture, personal
accident and other lines and thus, has been included as other in the tables below.
As of June 30, 2010, the Company had accrued losses and loss expenses reserves of $3.3 billion
(December 31, 2009 $3.2 billion). This amount represents managements best estimate of the
ultimate liability for payment of losses and loss expenses related to loss events. During the six
month ended June 30, 2010 and 2009, the Companys net paid losses and loss expenses were $163.7
million and $262.6 million, respectively.
As more fully described under Reserving Process in the Companys Managements Discussion and
Analysis of Financial Condition and Results of Operations in the 2009 Annual Report on Form 10-K,
the Company incorporates a variety of actuarial methods and judgments in its reserving process.
Two key inputs in the various actuarial methods employed by the Company are initial expected loss
ratios and expected loss reporting patterns. These key inputs impact the potential variability in
the estimate of the reserve for losses and loss expenses and are applicable to each of the
Companys business segments. The Companys loss and loss expense reserves consider and reflect, in
part, deviations resulting from differences between expected loss and actual loss reporting as well
as judgments relating to the weights applied to the reserve levels indicated by the actuarial
methods. Expected loss reporting patterns are based upon internal and external historical data and
assumptions regarding claims reporting trends over a period of time that extends beyond the
Companys own operating history.
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Table of Contents
Differences between actual reported losses and expected losses are anticipated to occur in any
individual period and such deviations may influence future initial expected loss ratios and/or
expected loss reporting patterns as the recent actual experience becomes part of the historical
data utilized as part of the ongoing reserve estimation process. The Company has demonstrated the
impact of changes in the speed of the loss reporting patterns, as well as changes in the expected
loss ratios, within the table under the heading Potential Variability in Reserves for Losses and
Loss Expenses in the Companys Managements Discussion and Analysis of Financial Condition and
Results of Operations in the 2009 Annual Report on Form 10-K.
Losses and loss expenses for the three and six months ended June 30, 2010 are summarized as
follows:
Incurred related to: | Total incurred | |||||||||||
Three months ended June 30, 2010 | Current year | Prior years | losses | |||||||||
(U.S. dollars in thousands) | ||||||||||||
Insurance: |
||||||||||||
Short tail |
$ | 6,786 | $ | (5,632 | ) | $ | 1,154 | |||||
Long tail |
75,673 | 347 | 76,020 | |||||||||
Other |
96,413 | (2,814 | ) | 93,599 | ||||||||
Total Insurance |
178,872 | (8,099 | ) | 170,773 | ||||||||
Reinsurance: |
||||||||||||
Short tail |
89,398 | (18,108 | ) | 71,290 | ||||||||
Long tail |
48,889 | (3,848 | ) | 45,041 | ||||||||
Other |
5,266 | 577 | 5,843 | |||||||||
Total Reinsurance |
143,553 | (21,379 | ) | 122,174 | ||||||||
Totals |
$ | 322,425 | $ | (29,478 | ) | $ | 292,947 | |||||
Incurred related to: | Total incurred | |||||||||||
Six months ended June 30, 2010 | Current year | Prior years | losses | |||||||||
(U.S. dollars in thousands) | ||||||||||||
Insurance: |
||||||||||||
Short tail |
$ | 13,362 | $ | (11,545 | ) | $ | 1,817 | |||||
Long tail |
136,588 | (1,094 | ) | 135,494 | ||||||||
Other |
132,685 | (13,139 | ) | 119,546 | ||||||||
Total Insurance |
282,635 | (25,778 | ) | 256,857 | ||||||||
Reinsurance: |
||||||||||||
Short tail |
212,984 | (37,654 | ) | 175,330 | ||||||||
Long tail |
90,757 | (2,472 | ) | 88,285 | ||||||||
Other |
7,240 | (2,168 | ) | 5,072 | ||||||||
Total Reinsurance |
310,981 | (42,294 | ) | 268,687 | ||||||||
Totals |
$ | 593,616 | $ | (68,072 | ) | $ | 525,544 | |||||
Losses and loss expenses for the three and six months ended June 30, 2010 included $29.5
million and $68.1 million in favorable development of reserves relating to prior accident years,
respectively. The favorable loss reserve development experienced during the three and six months
ended June 30, 2010 benefited the Companys reported loss ratio by approximately 6.5 and 8.3
percentage points, respectively. This net reduction in estimated losses for prior accident years
resulted primarily from lower than expected claims emergence across all reserving groups included
within the Insurance segment and all reserving groups in the Reinsurance segment.
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Table of Contents
For the three and six months ended June 30, 2010, the Company did not materially alter the two
key inputs utilized to establish reserve for losses and loss expenses (initial expected loss ratios
and loss reporting patterns) related to prior years for the insurance and reinsurance reserve
categories as the variances in reported losses for those reserve categories were within the range
of possible results anticipated by the Company.
Insurance
Short Tail Insurance. For the three and six months ended June 30, 2010, the favorable loss
emergence within the short tail insurance reserve category was primarily due to lower than expected
reported claims and favorable case reserve development related to the property line of business.
Long Tail Insurance. For the six months ended June 30, 2010, the Company recorded favorable
loss emergence within this reserve category primarily due to lower than expected claims activity
within the healthcare liability line of business. Favorable loss emergence was partially offset by
adverse loss emergence related to the workers compensation line of business which the Company
exited in 2009.
Other Insurance. Lower than anticipated agriculture claims settlements for the 2009 crop year
resulted in a reduction in prior years estimated loss and loss expenses within this reserve
category for the three and six months ended June 30, 2010.
Reinsurance
Short Tail Reinsurance. For the three and six months ended June 30, 2010, the Company
recorded favorable loss emergence within this reserve category primarily due to lower than expected
claims activity and favorable case reserve development within the catastrophe, property and surety
and other specialty lines of business.
Long Tail Reinsurance. For the three and six months ended June 30, 2010, the Company recorded
a modest amount of favorable loss emergence within this reserve category primarily due to lower
than expected reported claims within the U.S. professional liability line of business.
Other Reinsurance. For the three months ended June 30, 2010, the Company recorded a modest
amount of unfavorable loss emergence within this reserve category primarily due to higher than
expected claims reported within the Companys self insured risks business which is a part of the
surety and other specialty line of business within the Reinsurance segment. For the six months
ended June 30, 2010, the Company recorded a modest amount of overall favorable loss emergence
within this reserve category, primarily due to lower than expected claims reported within the
special accounts, agriculture and personal accident businesses included in the surety and other
specialty line of business.
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Table of Contents
Losses and loss expenses for the three and six months ended June 30, 2009 are summarized as
follows:
Incurred related to: | Total incurred | |||||||||||
Three months ended June 30, 2009 | Current year | Prior years | losses | |||||||||
(U.S. dollars in thousands) | ||||||||||||
Insurance: |
||||||||||||
Short tail |
$ | 16,473 | $ | (3,956 | ) | $ | 12,517 | |||||
Long tail |
83,843 | (12,778 | ) | 71,065 | ||||||||
Other |
85,572 | (3,108 | ) | 82,464 | ||||||||
Total Insurance |
185,888 | (19,842 | ) | 166,046 | ||||||||
Reinsurance: |
||||||||||||
Short tail |
80,899 | (13,827 | ) | 67,072 | ||||||||
Long tail |
35,413 | 302 | 35,715 | |||||||||
Other |
4,590 | (2,607 | ) | 1,983 | ||||||||
Total Reinsurance |
120,902 | (16,132 | ) | 104,770 | ||||||||
Totals |
$ | 306,790 | $ | (35,974 | ) | $ | 270,816 | |||||
Incurred related to: | Total incurred | |||||||||||
Six months ended June 30, 2009 | Current year | Prior years | losses | |||||||||
(U.S. dollars in thousands) | ||||||||||||
Insurance: |
||||||||||||
Short tail |
$ | 31,782 | $ | (17,375 | ) | $ | 14,407 | |||||
Long tail |
160,254 | (25,432 | ) | 134,822 | ||||||||
Other |
129,454 | (13,833 | ) | 115,621 | ||||||||
Total Insurance |
321,490 | (56,640 | ) | 264,850 | ||||||||
Reinsurance: |
||||||||||||
Short tail |
167,420 | (18,810 | ) | 148,610 | ||||||||
Long tail |
69,477 | 4,999 | 74,476 | |||||||||
Other |
7,857 | (4,841 | ) | 3,016 | ||||||||
Total Reinsurance |
244,754 | (18,652 | ) | 226,102 | ||||||||
Totals |
$ | 566,244 | $ | (75,292 | ) | $ | 490,952 | |||||
Losses and loss expenses for the three and six months ended June 30, 2009 included $36.0
million and $75.3 million in favorable development of reserves relating to prior accident years,
respectively. The favorable loss reserve development experienced during the three and six months
ended June 30, 2009 benefited the Companys reported loss ratio by approximately 8.3 and 9.3
percentage points, respectively. This net reduction in estimated losses for prior accident years
resulted primarily from lower than expected claims emergence across all reserving groups within the
Insurance segment and the short tail and other lines of the Reinsurance segment.
For the three and six months ended June 30, 2009, the Company did not materially alter the two
key inputs utilized to establish its reserve for losses and loss expenses (initial expected loss
ratios and loss reporting patterns) for business related to prior years for the insurance and
reinsurance reserve categories as the variances in reported losses for those reserve categories
were within the range of possible results anticipated by the Company.
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Table of Contents
Insurance
Short Tail Insurance. For the three and six months ended June 30, 2009, prior year favorable
loss reserve development for this tail was primarily a result of favorable claims emergence in the
property line of business.
Long Tail Insurance. For the three and six months ended June 30, 2009, the Company recorded
favorable claims emergence for this reserve category primarily due to lower than expected claims
activity and favorable case settlements in the healthcare liability line of business.
Other Insurance. Lower than anticipated agriculture claims settlements for the 2008 crop year
resulted in a reduction in prior years estimated loss and loss expenses within this reserve
category for the three and six months ended June 30, 2009.
Reinsurance
Short Tail Reinsurance. For the three and six months ended June 30, 2009, the favorable loss
emergence in the short tail reinsurance reserve category was primarily due to lower than expected
reported claims within the catastrophe, property and surety lines of business.
Long Tail Reinsurance. There was no material amount of prior year unfavorable loss reserve
development related to this reserve category for the three months ended June 30, 2009. For the six
months ended June 30, 2009, the Company recorded a modest amount of unfavorable loss emergence in
the long tail reinsurance reserve category due primarily to higher than expected claims reported
within the casualty line of business in the first quarter.
Other Reinsurance. Favorable prior year loss reserve development related to this reserve
category for the three months ended June 30, 2009 resulted primarily from better than expected
claims settlements in the agriculture line. For the six months ended June 30, 2009, favorable loss
settlement activity within agriculture and certain other specialty lines resulted in overall
favorable prior year loss reserve development for this reserve category.
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Table of Contents
Reserves for losses and loss expenses were comprised of the following at June 30, 2010:
Reserve for | ||||||||||||
Case | IBNR | losses and loss | ||||||||||
Reserves | Reserves | expenses | ||||||||||
(U.S. dollars in thousands) | ||||||||||||
Insurance: |
||||||||||||
Short tail |
$ | 21,529 | $ | 27,174 | $ | 48,703 | ||||||
Long tail |
305,802 | 1,174,481 | 1,480,283 | |||||||||
Other |
164,639 | 18,293 | 182,932 | |||||||||
Total Insurance |
491,970 | 1,219,948 | 1,711,918 | |||||||||
Reinsurance: |
||||||||||||
Short tail |
319,094 | 348,661 | 667,755 | |||||||||
Long tail |
243,640 | 596,341 | 839,981 | |||||||||
Other |
4,323 | 50,660 | 54,983 | |||||||||
Total Reinsurance |
567,057 | 995,662 | 1,562,719 | |||||||||
Totals |
$ | 1,059,027 | $ | 2,215,610 | $ | 3,274,637 | ||||||
Reserves for losses and loss expenses were comprised of the following at December 31, 2009:
Reserve for | ||||||||||||
Case | IBNR | losses and loss | ||||||||||
Reserves | Reserves | expenses | ||||||||||
(U.S. dollars in thousands) | ||||||||||||
Insurance: |
||||||||||||
Short tail |
$ | 30,371 | $ | 30,709 | $ | 61,080 | ||||||
Long tail |
277,148 | 1,141,658 | 1,418,806 | |||||||||
Other |
182,838 | 17,266 | 200,104 | |||||||||
Total Insurance |
490,357 | 1,189,633 | 1,679,990 | |||||||||
Reinsurance: |
||||||||||||
Short tail |
338,161 | 266,219 | 604,380 | |||||||||
Long tail |
256,668 | 551,622 | 808,290 | |||||||||
Other |
7,759 | 56,607 | 64,366 | |||||||||
Total Reinsurance |
602,588 | 874,448 | 1,477,036 | |||||||||
Totals |
$ | 1,092,945 | $ | 2,064,081 | $ | 3,157,026 | ||||||
Underwriting results by operating segments
The determination of the Companys business segments is based on the manner in which
management monitors the performance of the Companys underwriting operations. As a result, we
report two business segments Insurance and Reinsurance.
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. When purchased within a single line of business,
ceded reinsurance and recoveries are accounted for within that line of business. When purchased
across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of
business in proportion to the related risks assumed. The Company does not manage its assets by
segment; accordingly, investment income and total assets are not allocated to the individual
business segments. General and administrative expenses incurred by the segments are allocated
directly. Remaining general and administrative expenses not directly incurred by the segments are
allocated primarily based on estimated consumption, headcount and other variables deemed relevant
to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the
segment to which they apply.
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Insurance
The following table summarizes the underwriting results and associated ratios for the
Companys Insurance segment for the three and six months ended June 30, 2010 and 2009.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(U.S. dollars in thousands, except for ratios) | ||||||||||||||||
Revenues |
||||||||||||||||
Gross premiums written |
$ | 231,626 | $ | 230,792 | $ | 695,967 | $ | 753,006 | ||||||||
Ceded premiums written |
(36,639 | ) | (77,030 | ) | (152,039 | ) | (276,813 | ) | ||||||||
Net premiums written |
194,987 | 153,762 | 543,928 | 476,193 | ||||||||||||
Net premiums earned |
227,858 | 223,588 | 373,534 | 404,262 | ||||||||||||
Other underwriting income |
| 103 | (2 | ) | 3,062 | |||||||||||
227,858 | 223,691 | 373,532 | 407,324 | |||||||||||||
Expenses |
||||||||||||||||
Losses and loss expenses |
170,773 | 166,046 | 256,857 | 264,850 | ||||||||||||
Acquisition expenses |
16,554 | 20,855 | 33,980 | 45,696 | ||||||||||||
General and
administrative expenses |
27,146 | 25,179 | 57,267 | 54,938 | ||||||||||||
214,473 | 212,080 | 348,104 | 365,484 | |||||||||||||
Underwriting income |
$ | 13,385 | $ | 11,611 | $ | 25,428 | $ | 41,840 | ||||||||
Net loss ratio |
74.9 | % | 74.3 | % | 68.8 | % | 65.5 | % | ||||||||
Acquisition expense ratio |
7.3 | % | 9.3 | % | 9.1 | % | 11.3 | % | ||||||||
General and
administrative expense
ratio |
11.9 | % | 11.3 | % | 15.3 | % | 13.6 | % | ||||||||
Combined ratio |
94.1 | % | 94.9 | % | 93.2 | % | 90.4 | % | ||||||||
Premiums. Net premiums written for the three and six months ended June 30, 2010 in the
Insurance segment increased by 26.8% and 14.2% over the same periods in 2009, respectively. Gross
and net premiums written for each line of business in the Insurance segment were as follows:
Three Months Ended | ||||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Premiums | Premiums | Premiums | Premiums | |||||||||||||
Written | Written | Written | Written | |||||||||||||
(U.S. dollars in thousands) | ||||||||||||||||
Agriculture |
$ | 54,170 | $ | 45,169 | $ | 56,235 | $ | 28,713 | ||||||||
Professional Lines |
56,567 | 49,422 | 62,079 | 54,370 | ||||||||||||
Casualty |
55,406 | 37,527 | 50,605 | 28,291 | ||||||||||||
Property |
43,158 | 40,950 | 40,084 | 22,125 | ||||||||||||
Healthcare Liability |
22,442 | 22,031 | 23,202 | 22,871 | ||||||||||||
Workers Compensation |
(117 | ) | (112 | ) | (1,413 | ) | (2,608 | ) | ||||||||
Total |
$ | 231,626 | $ | 194,987 | $ | 230,792 | $ | 153,762 | ||||||||
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Six Months Ended | ||||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Premiums | Premiums | Premiums | Premiums | |||||||||||||
Written | Written | Written | Written | |||||||||||||
(U.S. dollars in thousands) | ||||||||||||||||
Agriculture |
$ | 404,369 | $ | 313,276 | $ | 434,645 | $ | 252,017 | ||||||||
Professional Lines |
90,075 | 77,024 | 97,216 | 83,992 | ||||||||||||
Casualty |
89,634 | 58,565 | 81,229 | 46,171 | ||||||||||||
Property |
69,681 | 55,038 | 67,835 | 39,612 | ||||||||||||
Healthcare Liability |
42,758 | 40,554 | 42,915 | 40,080 | ||||||||||||
Workers Compensation |
(550 | ) | (529 | ) | 29,166 | 14,321 | ||||||||||
Total |
$ | 695,967 | $ | 543,928 | $ | 753,006 | $ | 476,193 | ||||||||
The increase in the Insurance segment net premiums written for the three and six months ended
June 30, 2010 compared to the same periods in 2009 was driven by the following factors:
| Increased premium retentions in the agriculture line of business. The Company decreased its ceded premiums to the Federal Crop Insurance Corporation and reduced third party reinsurance purchases. The increase in net premiums written due to reduced cessions was partially offset by a decline in gross premiums recorded in the agriculture line compared to the prior year period as reduced commodity price volatility resulted in a decline in rates; |
| Increased premium retentions in the U.S. based property business; |
| Growth in the casualty line of business as a result of modest levels of new premium recorded in the Bermuda based business together with increased premium retentions generally; and |
| A decline in workers compensation premiums written as a result of the Companys exit from the workers compensation line of business in the first quarter of 2009. |
Net premiums earned by the Company in the Insurance segment were comparable in the three
months ended June 30, 2010 to the same period in 2009 but decreased in the six months ended June
30, 2010 compared to the same period in 2009. The decrease in the six month period was primarily
due to the Company exiting the workers compensation line early in 2009 offset partly by the impact
of the growth in net premiums written recorded in the agriculture and casualty lines in 2010.
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Losses and Loss Expenses. The increases in the net loss ratios in the Companys Insurance
segment for the three and six months ended June 30, 2010 compared to the same periods in 2009
reflected lower levels of favorable prior year loss reserve development in 2010. These increases
were partially offset by a reduction in the current accident year ratio compared to 2009 for the
six month period ended June 30, 2010, as the agriculture line and the international portion of the
property line experienced lower loss activity compared to the prior period. During the second
quarter and first six months of 2010 the Companys previously estimated loss and loss expense
reserves for the Insurance segment for prior accident years were reduced by $8.1 million and $25.8
million respectively, which decreased the net loss ratio by 3.6 and 6.9 percentage points, as
compared to reductions of $19.8 million and $56.6 million, which decreased the net loss ratio by
8.9 and 14.0 percentage points, for the three and six months ended June 30, 2009. The agriculture,
property and healthcare liability lines of business all experienced net reductions in estimated
losses for prior accident years in the six months ended June 30, 2010 as claims have not
materialized or were settled for lower amounts than were originally estimated.
Acquisition Expenses. The Companys acquisition expenses and acquisition expense ratios in
the Insurance segment decreased during the second quarter and first six months of 2010 compared to
2009 as a result of the Company exiting the workers compensation line in 2009, which had higher
associated commission expenses.
General and Administrative Expenses. The increases in the general and administrative expense
ratios in the Insurance segment for the second quarter and first six months of 2010 as compared to
2009 were due to the reduction in third party commission and expense reimbursement offsets,
primarily in the Insurance segments agriculture line and from a reduction in net premiums earned.
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Reinsurance
The following table summarizes the underwriting results and associated ratios for the
Companys Reinsurance business segment for the three and six months ended June 30, 2010 and 2009.
All amounts are presented applying reinsurance accounting to all reinsurance contracts written.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(U.S. dollars in thousands, except for ratios) | ||||||||||||||||
Revenues |
||||||||||||||||
Gross premiums written |
$ | 257,942 | $ | 328,363 | $ | 612,470 | $ | 589,455 | ||||||||
Ceded premiums written |
(2,126 | ) | (2,098 | ) | (2,653 | ) | (2,706 | ) | ||||||||
Net premiums written |
255,816 | 326,265 | 609,817 | 586,749 | ||||||||||||
Net premiums earned |
228,537 | 210,632 | 448,050 | 408,233 | ||||||||||||
Other underwriting
income (loss) |
(2,663 | ) | 493 | (2,366 | ) | 1,131 | ||||||||||
225,874 | 211,125 | 445,684 | 409,364 | |||||||||||||
Expenses |
||||||||||||||||
Losses and loss expenses |
122,174 | 104,770 | 268,687 | 226,102 | ||||||||||||
Acquisition expenses |
50,154 | 42,995 | 96,672 | 86,428 | ||||||||||||
General and
administrative expenses |
28,530 | 29,350 | 57,374 | 59,848 | ||||||||||||
200,858 | 177,115 | 422,733 | 372,378 | |||||||||||||
Underwriting income |
$ | 25,016 | $ | 34,010 | $ | 22,951 | $ | 36,986 | ||||||||
Net loss ratio |
53.5 | % | 49.8 | % | 59.9 | % | 55.4 | % | ||||||||
Acquisition expense ratio |
21.9 | % | 20.4 | % | 21.6 | % | 21.2 | % | ||||||||
General and
administrative expense
ratio |
12.5 | % | 13.9 | % | 12.8 | % | 14.6 | % | ||||||||
Combined ratio |
87.9 | % | 84.1 | % | 94.3 | % | 91.2 | % | ||||||||
Premiums. In the second quarter of 2010, net premiums written in the Reinsurance segment
decreased by 21.6% over the same period of 2009. In the first half of 2010, net premiums written
in the Reinsurance segment increased by 3.9% compared to the first half of 2009.
Gross and net premiums written for each line of business in the Reinsurance business segment
for the three and six months ended June 30, 2010 and 2009 were as follows:
Three Months Ended | ||||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Premiums | Premiums | Premiums | Premiums | |||||||||||||
Written | Written | Written | Written | |||||||||||||
(U.S. dollars in thousands) | ||||||||||||||||
Catastrophe |
$ | 123,808 | $ | 123,808 | $ | 148,380 | $ | 148,380 | ||||||||
Casualty |
56,919 | 56,831 | 83,813 | 83,805 | ||||||||||||
Property |
39,999 | 39,999 | 55,245 | 55,245 | ||||||||||||
Aerospace and marine |
24,131 | 22,101 | 23,568 | 21,540 | ||||||||||||
Surety and other specialty |
13,085 | 13,077 | 17,357 | 17,295 | ||||||||||||
Total |
$ | 257,942 | $ | 255,816 | $ | 328,363 | $ | 326,265 | ||||||||
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Six Months Ended | ||||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Premiums | Premiums | Premiums | Premiums | |||||||||||||
Written | Written | Written | Written | |||||||||||||
(U.S. dollars in thousands) | ||||||||||||||||
Catastrophe |
$ | 246,477 | $ | 246,567 | $ | 257,828 | $ | 257,828 | ||||||||
Casualty |
164,893 | 164,094 | 159,205 | 158,974 | ||||||||||||
Property |
104,521 | 104,521 | 90,033 | 90,032 | ||||||||||||
Aerospace and marine |
42,197 | 40,132 | 35,795 | 33,670 | ||||||||||||
Surety and other specialty |
54,382 | 54,503 | 46,594 | 46,245 | ||||||||||||
Total |
$ | 612,470 | $ | 609,817 | $ | 589,455 | $ | 586,749 | ||||||||
Net premiums written in the Reinsurance segment for the three and six months ended June 30,
2010 were $255.8 million and $609.8 million compared to $326.3 million and $586.8 million during
the same periods in 2009. The movements in net premiums written in the Reinsurance segment for the
second quarter and six months ended June 30, 2010 compared to the same periods in 2009 were
primarily due to the following factors:
| An overall decline in catastrophe line premiums over both the three and six month periods as the Company reduced deployed limits and non-renewed business which did not meet return expectations; |
| Growth in the property line in the first quarter of 2010 from the Companys international operations through new business and increased shares of renewals, offset in part by the absence of favorable premium adjustments, which contributed $19.8 million to net written premium in the second quarter of 2009; |
| A decline in the casualty line of business in the second quarter of 2010 due to the shifting of the renewal of a large program to the third quarter together with the non-renewal of certain business that no longer met our return requirements. This was offset by increased premiums recorded in the first quarter of 2010 from renewal business, a significant positive premium adjustment and new premiums generated from both new and existing client relationships; and |
| An increase in surety and other specialty premiums for the first half of 2010 attributable to an increase in marine business as a result of new business and increased shares on renewals generated by the Companys international operations. |
Net premiums earned by the Company in the Reinsurance segment for the second quarter and first
six months of 2010 increased compared to 2009 due to the growth in gross premiums written in more
recent periods.
Losses and Loss Expenses. The net loss ratio in the Companys Reinsurance segment for the
three and six months ended June 30, 2010 increased compared to the same periods in 2009 as a result
of an increase in losses incurred in the current periods and from reduced pricing, offset by higher
favorable prior year loss reserve development recognized for the second quarter and first six
months of 2010 as compared to the same period in 2009. During the three months ended June 30,
2010, the Company incurred losses in its international catastrophe line from European flooding, as
well as several small catastrophe events in the United States. The Companys Reinsurance segment
results for the first six months of 2010 were also impacted by net losses of $63.0 million in
relation to the Chilean earthquake and Windstorm Xynthia that occurred in the first quarter of
2010. These events helped to drive higher current year accident ratios in the second quarter and
first six months of 2010 compared to those periods in 2009. The Company recorded $21.4 million and
$42.3 million of favorable prior year loss reserve development in the three and six months ended
June 30, 2010 compared to $16.1 million and $18.7 million in the three and six months ended June
30, 2009. During the second quarter and first six months of 2010, the majority of the favorable
loss reserve development emanated from the short tail
catastrophe, property and surety and other specialty lines of business, as claims emergence in
these lines was less than originally estimated by the Company.
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Acquisition Expenses. The Companys acquisition expense ratios in the Reinsurance segment for
the three and six months ended June 30, 2010 were comparable to the same periods in 2009.
General and Administrative Expenses. The general and administrative expense ratio in the
Reinsurance segment during the three and six month periods ended June 30, 2010 decreased from the
same periods in 2009 primarily as a result of the growth in overall premiums earned.
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. 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 ordinary
shares and Series A Preferred Shares. There are restrictions on the payment of dividends by the
Companys insurance subsidiaries as 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 Bermudas assets would thereby be less than the aggregate of its
liabilities and its issued share capital and 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, 2010, Endurance Bermuda could pay a
dividend or return additional paid-in capital totaling approximately $523 million (December 31,
2009 $610 million) without prior regulatory approval based upon the Bermuda insurance and
corporate regulations.
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance
Risk Solutions are subject to regulation by the State of Delaware Department of Insurance and
ARMtech is subject to regulation by the Texas Department of Insurance. Dividends for each U.S.
operating subsidiary are limited to the greater of 10% of policyholders surplus or statutory net
income, excluding realized capital gains. In addition, dividends may only be declared or
distributed out of earned surplus. At December 31, 2009, Endurance U.S. Reinsurance, Endurance
American and Endurance American Specialty did not have earned surplus; therefore, these companies
are precluded from declaring or distributing dividends at June 30, 2010 without the prior approval
of the applicable insurance regulator. At June 30, 2010, Endurance Risk Solutions and ARMtech
(with notice to the Texas Department of Insurance) could pay dividends of $3.8 million and $0.6
million, respectively, without prior regulatory approval from the applicable regulators. In
addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk
Solutions would be subject to the dividend limitation of their respective parent insurance
companies.
Under the jurisdiction of the United Kingdoms Financial Services Authority (FSA), Endurance
U.K. must maintain a margin of solvency at all times, which is determined based on the type and
amount of insurance business written. The FSA regulatory requirements imposed no explicit
restrictions on Endurance U.K.s ability to pay a dividend, but Endurance U.K. would have to notify
the FSA 28 days prior to any proposed dividend payment. Dividends may only be distributed from
profits available for distributions. At June 30, 2010, Endurance U.K. did not have profits
available for distributions.
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The Companys aggregate invested assets, including fixed maturity investments, short term
investments, preferred equity securities, other investments, cash and cash equivalents and pending
securities transactions, as of June 30, 2010 totaled $6.2 billion compared to aggregate invested
assets of $6.0 billion as of December 31, 2009. The increase in invested assets since December 31,
2009 resulted from collections of premiums on insurance policies and reinsurance contracts,
investment income and the issuance of debt offset by losses and loss expenses paid, interest and
dividends paid, acquisition expenses paid, reinsurance premiums paid, general and administrative
expenses paid and repurchases of the
Companys ordinary shares. Cash flows from operations for the six months ended June 30, 2010
declined slightly compared to the first six months of 2009 as the Companys reserves for losses and
loss expenses have matured.
As of June 30, 2010 and December 31, 2009, the Company had pledged cash and cash equivalents
and fixed maturity investments of $184.6 million and $158.5 million, respectively, in favor of
certain ceding companies to collateralize obligations. As of June 30, 2010 and December 31, 2009,
the Company had also pledged $452.6 million and $664.0 million of its fixed maturity investments as
collateral for $407.9 million and $605.3 million in letters of credit outstanding under its credit
facility, respectively. In addition, at June 30, 2010 and December 31, 2009, cash and fixed
maturity investments with fair values of $363.3 million and $361.6 million were on deposit with
U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of
$10.3 million and $12.4 million were on deposit with Canadian regulators, respectively.
On March 23, 2010, the Company issued an additional $85.0 million principal amount of its 7%
Senior Notes due July 15, 2034, which were initially issued on July 15, 2004. On the closing of
this additional issuance, the Company had a total par value of $335 million of the 7% Senior Notes
outstanding. The additional 7% Senior Notes issued have terms identical to the previously issued
notes in the series, other than their date of issue, their initial purchase price to the public and
their first interest payment date. The additional 7% Senior Notes trade interchangeably with and
vote together with, the previously issued 7% Senior Notes. Endurance intends to use the proceeds
from the additional 7% Senior Notes for general corporate purposes.
The 7% Senior Notes are senior unsecured obligations of the Company and rank equally with all
of the Companys existing and future unsecured and unsubordinated debt. The 7% Senior Notes are
also effectively junior to claims of creditors of the Companys subsidiaries, including
policyholders, trade creditors, debt holders and taxing authorities.
Under the Companys amended and restated credit facility, the Company and its subsidiaries
have access to a revolving line of credit of up to $1.175 billion which expires May 8, 2012. As of
June 30, 2010, there were no borrowings under this line of credit and letters of credit outstanding
under the facility were $407.9 million.
On June 18, 2010, Endurance Holdings, Deutsche Bank AG, London Branch and Deutsche Bank
Securities Inc. entered into an agreement to terminate the variable delivery equity forward sale
agreement. Prior to its termination, the equity forward sale agreement gave Endurance Holdings the
ability to sell its ordinary shares to an affiliate of Deutsche Bank Securities, Inc. for proceeds
of approximately $150 million. The equity forward sale agreement was originally scheduled to be
settled or terminate commencing on July 20, 2010. The Company did not issue any of its ordinary
shares in connection with the equity forward sale agreement, nor has the Company incurred any early
termination penalties in connection with the termination of the agreement.
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Historically, the operating subsidiaries of the Company have generated sufficient cash flows
to meet all of their obligations. Because of the inherent volatility of the business written by the
Company, the seasonality in the timing of payments by ceding companies, the irregular timing of
loss payments, the impact of a change in interest rates on the Companys investment returns as well
as seasonality in coupon payment dates for fixed maturity investments, cash flows from the
Companys operating activities may vary significantly between periods. The Company expects to
continue to generate positive operating cash flows through 2010, absent the occurrence of one or
more significant loss events. In the event that paid losses accelerate beyond the ability to fund
such payments from operating cash flows, the Company would use its cash balances available,
liquidate a portion of its investment portfolio, access its existing credit facility, or arrange
for additional financing. However, there can be no assurance that the Company will be successful
in executing these strategies.
Currency and Foreign Exchange
The Companys functional currencies are U.S. dollars for its U.S. and Bermuda operations and
British Sterling for its U.K. operations. The reporting currency for all operations is U.S.
dollars. The Company maintains a portion of its investments and liabilities in currencies other
than the U.S. dollar. The Company has made a significant investment in the capitalization of
Endurance U.K, which is subject to the United Kingdoms 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. The Company may, from
time to time, experience losses resulting from fluctuations in the values of foreign currencies,
which could have a material adverse effect on the Companys results of operations.
Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar
are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of
such foreign operations are translated at average exchange rates during the year. The effect of
the translation adjustments for foreign operations is included in accumulated other comprehensive
gain (loss).
Other monetary assets and liabilities denominated in foreign currencies are revalued at the
exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and
losses included in earnings. Revenues and expenses denominated in foreign currencies are translated
at the prevailing exchange rate on the transaction date.
Effects of Inflation
The effects of inflation could cause the severity of claims to rise in the future. The
Companys 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, the Company will be required to increase the reserve for losses and loss expenses with a
corresponding reduction in its earnings in the period in which the deficiency is identified.
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Cautionary Statement Regarding Forward-Looking Statements
Some of the statements contained herein, and certain statements that the Company may make in
press releases or that Company officials may make orally, may include forward-looking statements
which reflect the Companys 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 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 those regarding contingent commissions, industry consolidation and development of competing financial products; |
| 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; |
| greater frequency or severity of loss activity, as a result of changing climate conditions primarily rising global temperatures; |
| changes in market conditions in the agriculture industry, which may vary depending upon demand for agricultural products, weather, commodity prices, natural disasters, technological advances in agricultural practices, changes in U.S. and foreign legislation and policies related to agricultural products and producers; |
| termination of or changes in the terms of the U.S. multiple peril crop insurance program and termination or changes to the U.S. farm bill, including modifications to the Standard Reinsurance Agreement put in place by the Risk Management Agency of the U.S. Department of Agriculture; |
| decreased demand for property and casualty insurance or reinsurance or increased competition due to an increase in capacity of property and casualty insurers and reinsurers; |
| changes in the availability, cost or quality of reinsurance or retrocessional coverage; |
| the inability to renew business previously underwritten or acquired; |
| the inability to obtain or maintain financial strength or claims-paying ratings by one or more of our subsidiaries; |
| our ability to effectively integrate acquired operations and to continue to expand our business; |
| uncertainties in our reserving process, including the potential for adverse development of our loss reserves or failure of our loss limitation methods; |
| Endurance Holdings or Endurance Bermuda becomes subject to income taxes in jurisdictions outside of Bermuda; |
| changes in tax regulations or laws applicable to us, our subsidiaries, brokers or customers; |
| state, federal and foreign regulations that impede our ability to charge adequate rates and efficiently allocate capital; |
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| changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including the implementation of Solvency II by the European Commission and the establishment of the Federal Insurance Office and other regulatory changes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the United States; |
| reduced acceptance of our existing or new products and services; |
| loss of business provided by any one of a few brokers on whom we depend for a large portion of our revenue, and our exposure to the credit risk of our brokers; |
| assessments by states for high risk or otherwise uninsured individuals; |
| the impact of acts of terrorism and acts of war; |
| the effects of terrorist related insurance legislation and laws; |
| loss of key personnel; |
| political stability of Bermuda; |
| changes in the political environment of certain countries in which we operate or underwrite business; |
| changes in accounting regulation, policies or practices; |
| our investment performance; |
| the valuation of our invested assets and the determination of impairments of those assets, if any; |
| the breach of our investment guidelines by our independent third party investment managers or the inability of those guidelines to mitigate investment risk; |
| the need for additional capital in the future which may not be available or only available on unfavorable terms; |
| development in the worlds financial and capital markets and our access to such markets; |
| potential government intervention in our industry as a result of recent events; |
| illiquidity in the credit markets worldwide and in the United States in particular; and |
| changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates, and other factors. |
The foregoing review of important factors should not be construed as exhaustive and should be
read in conjunction with the other cautionary statements that are included in our 2009 Annual
Report on Form 10-K, including the risk factors set forth in Item 1A thereof. We undertake no
obligation to publicly update or review any forward-looking statement, whether as a result of new
information, future developments or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided under the
caption Managements Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Information about Market Risk included in the Companys 2009 Annual
Report on Form 10-K.
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Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end
of the period covered by this report. Based on such evaluation, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective in recording, processing, summarizing
and reporting, on a timely basis, the information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any changes in the Companys
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the Companys second fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Companys internal control over financial
reporting.
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PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. Legal Proceedings
We are party to various legal proceedings generally arising in the normal course of our
business. While any proceeding contains an element of uncertainty, we do not believe that the
eventual outcome of any litigation or arbitration proceeding to which we are presently a party
could have a material adverse effect on our financial condition or business. Pursuant to our
insurance and reinsurance agreements, disputes are generally required to be finally settled by
arbitration.
Item 1A. Risk Factors
The risk factors set forth below supplement the risk factors section previously disclosed in
Item 1A of Part I of the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) may
adversely impact our business.
The U.S. Congress and the current administration have made, or called for consideration of,
several additional proposals relating to a variety of issues with respect to financial regulation
reform, including regulation of the over-the-counter derivatives market, the establishment of a
single-state system of licensure for U.S. and foreign reinsurers, executive compensation and
others. One of those initiatives, the Dodd-Frank Act, was signed into law by President Obama on
July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services
industry within the United States and establishes a Federal Insurance Office under the U.S.
Treasury Department to monitor all aspects of the insurance industry and of lines of business other
than certain health insurance, certain long-term care insurance and crop insurance. The director of
the Federal Insurance Office will have the ability to recommend that an insurance company or an
insurance holding company be subject to heightened prudential standards. The Dodd-Frank Act also
provides for the pre-emption of state laws in certain instances involving the regulation of
reinsurance and other limited insurance matters and established the federal Bureau of Consumer
Financial Protection (the BCFP) which will require the BCFP and other federal agencies to
implement many new rules. At this time, it is not possible to predict with any degree of certainty
whether any other proposed legislation, rules or regulatory changes will be adopted or what impact,
if any, the Dodd-Frank or any other such legislation, rules or changes could have on our business,
financial condition or results of operations.
Termination of or changes to the terms of the U.S. multi-peril crop insurance program and
termination of or changes to the U.S. farm bill could adversely impact the performance of our crop
insurance business.
On June 10, 2010, the Risk Management Agency of the U.S. Department of Agriculture adopted
several changes to the Standard Reinsurance Agreement, which governs substantial elements of the
U.S. multi-peril crop insurance program in which we participate. These changes include significant
reductions in the administrative and operating support provided to participating insurers and
revised profit and loss sharing arrangements related to the reinsurance of multi-peril crop
insurance by the U.S. Federal Crop Insurance Corporation. The changes to the Standard Reinsurance
Agreement have the potential to limit the underwriting gains of participants in the U.S.
multi-peril crop insurance program, including the Company. At this time, we cannot specifically
quantify the impact of these changes to the Standard Reinsurance Agreement on our crop insurance
business, financial condition or results of operations.
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Item 2. Changes in Securities and Issuer Purchases of Equity Securities
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
(d) Maximum Number | ||||||||||||||||
(c) Total Number | (or Approximate Dollar | |||||||||||||||
of Shares | Value) of Shares | |||||||||||||||
(a) Total | (b) Average | Purchased as Part of | that May Yet Be | |||||||||||||
Number of | Price Paid | Publicly Announced | Purchased Under the | |||||||||||||
Period | Shares Purchased (1) | per Share | Plans or Programs (1)(2) | Plans or Programs (1)(2) | ||||||||||||
April 1, 2010
April 30, 2010 |
440,000 | $ | 37.93 | 440,000 | 4,638,982 | |||||||||||
May 1, 2010 May
31, 2010 |
691,146 | $ | 36.12 | 691,146 | 3,947,836 | |||||||||||
June 1, 2010 June
30, 2010 |
745,007 | $ | 37.17 | 745,007 | 3,202,829 | |||||||||||
Total |
1,876,153 | $ | 36.92 | 1,876,153 | 3,202,829 | |||||||||||
(1) | Ordinary shares or share equivalents. | |
(2) | At its meeting on November 4, 2009, the Board of Directors of the Company authorized the repurchase of up to a total of 8,000,000 ordinary shares and share equivalents through November 4, 2011, superceding all previous authorizations. |
Item 3. Defaults Upon Senior Securities
None
Item 4. (Removed and Reserved)
Not applicable
Item 5. Other Information
None
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Item 6. Exhibits
(a) The following sets forth those exhibits filed pursuant to Item 601 of Regulation S-K:
Exhibit | ||||
Number | Description | |||
10.1 | Termination Agreement, dated June 18, 2010, among the Company,
Deutsche Bank AG, London Branch and Deutsche Bank Securities Inc.
Incorporated herein by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on June 24, 2010. |
|||
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. |
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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.
ENDURANCE SPECIALTY HOLDINGS LTD. |
||||
Date: August 6, 2010 | By: | /s/ David. S. Cash | ||
David S. Cash | ||||
Chief Executive Officer | ||||
Date: August 6, 2010 | By: | /s/ Michael J. McGuire | ||
Michael J. McGuire | ||||
Chief Financial Officer (Principal Financial Officer) |
61