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EX-32 - EX-32 - ENDURANCE SPECIALTY HOLDINGS LTDenhexhibit32q39302016.htm
EX-31.2 - EX-31.2 - ENDURANCE SPECIALTY HOLDINGS LTDenhexhibit312q39302016.htm
EX-31.1 - EX-31.1 - ENDURANCE SPECIALTY HOLDINGS LTDenhexhibit311q39302016.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q 
 
 
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the period ended September 30, 2016,
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-31599
 
 
ENDURANCE SPECIALTY HOLDINGS LTD.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Bermuda
 
98-0392908
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Waterloo House
100 Pitts Bay Road
Pembroke HM 08, Bermuda
(Address of principal executive offices,
including postal code)
Registrant's Telephone Number, Including Area Code: (441) 278-0400
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
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  ý    No  ¨
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
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Description of Class
 
Common Shares Outstanding
as of November 3, 2016
Ordinary Shares - $1.00 par value
 
67,603,885
 




INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


Cautionary Statement Regarding Forward-Looking Statements
Some of the statements under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The PSLRA provides a "safe harbor" for forward-looking statements. These forward-looking statements reflect our current views with respect to us specifically and the insurance and reinsurance business generally, investments, capital markets and the general economic environments in which we operate. 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 PSLRA 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, 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 or as a result of changing climate conditions, than our underwriting, reserving or investment practices have anticipated;
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;
the ability of the counterparty institutions with which we conduct business to continue to meet their obligations to us;
the failure or delay of the Florida Hurricane Catastrophe Fund or private market participants in Florida to promptly pay claims, particularly following a large windstorm or of multiple smaller storms;
our continued ability to comply with applicable financial standards and restrictive covenants, the breach of which could trigger significant collateral or prepayment obligations;
Endurance Specialty Holdings Ltd. ("Endurance Holdings") or Endurance Specialty Insurance Ltd. ("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;
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;
the impact of the United Kingdom's June 2016 referendum on European Union membership and the potential withdrawal of the United Kingdom from the European Union;
reduced acceptance of our existing or new products and services;

2


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;
actions by our competitors, many of which are larger or have greater financial resources than we do;
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;
the inability to retain key personnel;
political stability of Bermuda or other countries in which we operate;
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 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;
the ability to maintain the availability of our systems and safeguard the security of our data in the event of a disaster or other unanticipated event;
changes in general economic conditions and/or industry specific conditions, including inflation or deflation, foreign currency exchange rates, interest rates, and other factors; and
the failure of Sompo Holdings, Inc. to complete the acquisition of 100% of the outstanding ordinary shares of the Company.
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 Endurance Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 2015, Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 and this Quarterly Report on Form 10-Q, including the risk factors set forth in Item 1A. Risk Factors thereof and hereof. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.



3


ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars, except share amounts)
 
SEPTEMBER 30,
2016
 
DECEMBER 31,
2015
 
(UNAUDITED)
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed maturity investments, trading at fair value (amortized cost: $2,369,345 and $1,611,079 at September 30, 2016 and December 31, 2015, respectively)
$
2,393,352

 
$
1,587,160

Fixed maturity investments, available for sale at fair value (amortized cost: $3,525,682 and $4,361,997 at September 30, 2016 and December 31, 2015, respectively)
3,596,720

 
4,359,019

Short-term investments, trading at fair value (amortized cost: $226,437 and $394,096 at September 30, 2016 and December 31, 2015, respectively)
226,454

 
394,111

Short-term investments, available for sale at fair value (amortized cost: $34,934 and $25,657 at September 30, 2016 and December 31, 2015, respectively)
34,934

 
25,685

Equity securities, trading at fair value (cost: $22,978 and $15,290 at September 30, 2016 and December 31, 2015, respectively)
23,120

 
15,229

Equity securities, available for sale at fair value (cost: $468,176 and $542,429 at September 30, 2016 and December 31, 2015, respectively)
496,402

 
513,585

Other investments
679,007

 
872,617

Total investments
7,449,989

 
7,767,406

Cash and cash equivalents
1,323,110

 
1,177,750

Securities pledged under repurchase agreements
124,303

 

Premiums receivable, net
2,264,651

 
1,376,328

Insurance and reinsurance balances receivable
127,849

 
102,403

Deferred acquisition costs
311,894

 
255,501

Prepaid reinsurance premiums
825,913

 
498,574

Reinsurance recoverable on unpaid losses
1,124,976

 
907,944

Reinsurance recoverable on paid losses
311,324

 
288,026

Accrued investment income
30,073

 
30,213

Goodwill and intangible assets
489,522

 
553,960

Deferred tax asset
57,050

 
64,164

Net receivable on sales of investments
106,305

 
31,873

Other assets
283,474

 
187,383

Total assets
$
14,830,433

 
$
13,241,525

LIABILITIES
 
 
 
Reserve for losses and loss expenses
$
4,807,868

 
$
4,510,415

Reserve for unearned premiums
2,348,566

 
1,789,148

Reinsurance balances payable
1,018,618

 
661,213

Payable under repurchase agreements
120,997

 

Debt
705,179

 
717,650

Net payable on purchases of investments
203,592

 
63,442

Deferred tax liability
12,815

 
17,315

Other liabilities
389,561

 
358,270

Total liabilities
9,607,196

 
8,117,453

Commitments and contingent liabilities
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
Preferred shares, total liquidation preference $230,000 (2015 - $460,000)
9

 
9,209

Common shares, ordinary - 67,594,088 issued and outstanding (2015 - 66,797,991)
67,594

 
66,798

Additional paid-in capital
1,953,507

 
2,145,836

Accumulated other comprehensive income (loss)
27,993

 
(46,634
)
Retained earnings
2,917,141

 
2,681,053

Total shareholders' equity available to Endurance Holdings
4,966,244

 
4,856,262

Non-controlling interests
256,993

 
267,810

Total shareholders' equity
5,223,237

 
5,124,072

Total liabilities and shareholders' equity
$
14,830,433

 
$
13,241,525

See accompanying notes to unaudited condensed consolidated financial statements.

4


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  
 SEPTEMBER 30,
 
NINE MONTHS ENDED 
 SEPTEMBER 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
760,687

 
$
642,597

 
$
3,509,294

 
$
2,805,213

Ceded premiums written
(411,701
)
 
(305,907
)
 
(1,503,698
)
 
(1,144,486
)
Net premiums written
348,986

 
336,690

 
2,005,596

 
1,660,727

Change in unearned premiums
261,170

 
220,313

 
(242,641
)
 
(255,730
)
Net premiums earned
610,156

 
557,003

 
1,762,955

 
1,404,997

Net investment income
62,236

 
16,533

 
117,394

 
90,646

Net realized and unrealized gains
13,405

 
5,029

 
33,539

 
32,898

Net impairment losses recognized in earnings
(183
)
 
(38
)
 
(10,647
)
 
(1,111
)
Other underwriting (loss) income
(466
)
 
227

 
(1,980
)
 
4,022

Total revenues
685,148

 
578,754

 
1,901,261

 
1,531,452

Expenses
 
 
 
 
 
 
 
Net losses and loss expenses
331,462

 
263,993

 
950,902

 
675,051

Acquisition expenses
121,391

 
90,457

 
337,194

 
257,521

General and administrative expenses
67,738

 
60,793

 
195,042

 
170,648

Corporate expenses
11,952

 
74,308

 
35,553

 
99,210

Amortization of intangibles
21,154

 
11,318

 
63,471

 
14,496

Net foreign exchange (gains) losses
(18,576
)
 
8,621

 
(63,056
)
 
29,154

Interest expense
10,826

 
12,324

 
33,053

 
30,445

Total expenses
545,947

 
521,814

 
1,552,159

 
1,276,525

Income before income taxes
139,201

 
56,940

 
349,102

 
254,927

Income tax benefit (expense)
199

 
(2,410
)
 
2,570

 
(7,712
)
Net income
139,400

 
54,530

 
351,672

 
247,215

Net income attributable to non-controlling interests
(5,679
)
 
(2,707
)
 
(18,456
)
 
(2,707
)
Net income available to Endurance Holdings
133,721

 
51,823

 
333,216

 
244,508

Preferred dividends
(3,651
)
 
(8,188
)
 
(20,147
)
 
(24,564
)
Net income available to Endurance Holdings' common and participating common shareholders
$
130,070

 
$
43,635

 
$
313,069

 
$
219,944

Comprehensive income
 
 
 
 
 
 
 
Net income
$
139,400

 
$
54,530

 
$
351,672

 
$
247,215

Other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on investments arising during the period (net of other-than-temporary impairment losses recognized in other comprehensive income (loss), reclassification adjustment and applicable deferred income taxes of ($18,464) and $1,323 for the nine months ended September 30, 2016 and 2015, respectively)
21,136

 
(29,906
)
 
137,731

 
(72,396
)
Foreign currency translation adjustments
(13,114
)
 
(15,625
)
 
(63,170
)
 
(12,920
)
Reclassification adjustment for net losses on derivative designated as cash flow hedge included in net income
22

 
22

 
66

 
66

Other comprehensive income (loss)
8,044

 
(45,509
)
 
74,627

 
(85,250
)
Comprehensive income
147,444

 
9,021

 
426,299

 
161,965

Comprehensive income attributable to non-controlling interests
(5,679
)
 
(2,707
)
 
(18,456
)
 
(2,707
)
Comprehensive income attributable to Endurance Holdings
$
141,765

 
$
6,314

 
$
407,843

 
$
159,258

Per share data
 
 
 
 
 
 
 
Basic earnings per common share
$
1.93

 
$
0.73

 
$
4.65

 
$
4.41

Diluted earnings per common share
$
1.92

 
$
0.73

 
$
4.64

 
$
4.39

Dividend per common share
$
0.38

 
$
0.35

 
$
1.14

 
$
1.05

See accompanying notes to unaudited condensed consolidated financial statements.

5


ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(In thousands of United States dollars)

NINE MONTHS ENDED 
 SEPTEMBER 30,
 
2016

2015
Preferred shares



Balance, beginning of period
$
9,209

 
$
17,200

Redemption of Series B, non-cumulative preferred shares
(9,200
)
 

Balance, end of period
9

 
17,200

Common shares


 
Balance, beginning of period
66,798


44,765

Issuance of common shares, net of forfeitures
796


21,842

Balance, end of period
67,594


66,607

Additional paid-in capital



Balance, beginning of period
2,145,836


598,226

Issuance of common shares, net of forfeitures
10,218


1,474,432

Redemption of Series B, non-cumulative preferred shares
(219,741
)
 

Settlement of equity awards
(10,842
)

(10,494
)
Stock-based compensation expense
28,036


46,283

Balance, end of period
1,953,507


2,108,447

Accumulated other comprehensive income (loss)



Cumulative foreign currency translation adjustments:



Balance, beginning of period
(32,318
)

(7,628
)
Foreign currency translation adjustments
(63,170
)

(12,920
)
Balance, end of period
(95,488
)

(20,548
)
Unrealized holding gains on investments, net of deferred taxes:



Balance, beginning of period
(12,638
)

86,100

Net unrealized holding gains (losses) arising during the period, net of other-than-temporary impairment losses and reclassification adjustment
137,731


(72,396
)
Balance, end of period
125,093


13,704

Accumulated derivative loss on cash flow hedging instruments:



Balance, beginning of period
(1,678
)

(1,766
)
Net change from current period hedging transactions, net of reclassification adjustment
66


66

Balance, end of period
(1,612
)

(1,700
)
Total accumulated other comprehensive income (loss)
27,993


(8,544
)
Retained earnings



Balance, beginning of period
2,681,053


2,448,285

Net income
351,672


247,215

Net income attributable to non-controlling interests
(18,456
)
 
(2,707
)
Dividends on preferred shares
(20,147
)

(24,564
)
Dividends on common shares
(76,981
)

(55,069
)
Balance, end of period
2,917,141


2,613,160

Total shareholders' equity available to Endurance Holdings
4,966,244

 
4,796,870

Non-controlling interests
256,993

 
259,474

Total shareholders' equity
$
5,223,237


$
5,056,344

See accompanying notes to unaudited condensed consolidated financial statements.


6


ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States dollars)

NINE MONTHS ENDED 
 SEPTEMBER 30,
 
2016

2015
Cash flows provided by (used in) operating activities

Net income
$
351,672


$
247,215

Adjustments to reconcile net income to net cash provided by (used in) operating activities:



Amortization of net premium on investments
28,097


34,116

Amortization of other intangibles and depreciation
78,551


29,291

Net realized and unrealized gains
(33,539
)

(32,898
)
Net impairment losses recognized in earnings
10,647


1,111

Deferred taxes
(14,876
)

3,437

Stock-based compensation expense
28,036


46,283

Equity in losses of other investments
201


1,758

Change in:
 
 
 
   Premiums receivable, net
(888,323
)

(845,891
)
   Insurance and reinsurance balances receivable
(25,446
)

21,085

   Deferred acquisition costs
(56,393
)

(75,607
)
   Prepaid reinsurance premiums
(327,339
)

(227,337
)
   Reinsurance recoverable on unpaid losses
(217,032
)

(119,269
)
   Reinsurance recoverable on paid losses
(23,298
)

63,141

   Accrued investment income
140


4,996

   Other assets
(2,575
)

(319
)
   Reserve for losses and loss expenses
297,453


(77,954
)
   Reserve for unearned premiums
559,418


477,440

   Reinsurance balances payable
357,405


338,279

   Other liabilities
(63,412
)

37,094

Net cash flows provided by (used in) operating activities
59,387


(74,029
)
Cash flows provided by investing activities



Proceeds from sales and maturities of trading investments
2,059,959

 
103,450

Proceeds from sales and maturities of available for sale investments
3,150,250


4,201,152

Proceeds from the redemption of other investments
246,349


124,801

Purchases of trading investments
(2,643,730
)
 
(286,416
)
Purchases of available for sale investments
(2,385,309
)

(4,047,359
)
Purchases of other investments
(50,585
)

(116,988
)
Net settlements of other assets and other liabilities
(33,620
)

17,301

Purchases of fixed assets
(10,999
)

(18,053
)
Net cash (paid) received upon subsidiary acquisition
(7
)

675,310

Net cash flows provided by investing activities
332,308


653,198

Cash flows used in financing activities



Issuance of common shares
9,550


24,378

Redemption of Series B, non-cumulative preferred shares
(230,000
)
 

Net distributions to non-controlling interests
(27,517
)
 

Settlement of equity awards
(10,842
)

(10,494
)
Offering and registration costs paid
(319
)
 

Proceeds from issuance of repurchase agreements
120,997

 

Proceeds from issuance of debt
537


791

Repayments of debt
(13,645
)

(794
)
Dividends on preferred shares
(20,147
)

(24,564
)
Dividends on common shares
(76,934
)

(54,959
)
Net cash flows used in financing activities
(248,320
)

(65,642
)
Effect of exchange rate changes on cash and cash equivalents
1,985


(16,002
)
Net increase in cash and cash equivalents
145,360


497,525

Cash and cash equivalents, beginning of period
1,177,750


745,472

Cash and cash equivalents, end of period
$
1,323,110


$
1,242,997

See accompanying notes to unaudited condensed consolidated financial statements.

7

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)

1.
General
Endurance Specialty Holdings Ltd. ("Endurance Holdings" and together with its subsidiaries, the "Company") 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.
In addition, as part of its collateralized reinsurance and third party asset management operations, Endurance Holdings and Endurance Specialty Insurance Ltd. ("Endurance Bermuda") together own 33.3% of Blue Capital Reinsurance Holdings Ltd. ("BCRH"), and Endurance Bermuda owns 25.2% of Blue Capital Global Reinsurance Fund Limited ("BCGR").
BCRH is a Bermuda-based exempted limited liability holding company managed by Blue Capital Management Ltd. ("BCML"), a wholly-owned subsidiary of the Company. BCRH provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through its wholly-owned Bermuda-based subsidiaries, Blue Capital Re. Ltd. ("Blue Capital Re") and Blue Capital Re ILS Ltd. ("Blue Capital Re ILS"). BCRH's shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange.
BCGR is a closed-ended mutual fund incorporated in Bermuda and managed by BCML. BCGR serves as the feeder fund for the Blue Capital Global Reinsurance SA-I cell (the "BCGR Cell").  BCGR's shares are listed on the Specialist Fund Market of the London Stock Exchange and on the Bermuda Stock Exchange.
2.
Summary of significant accounting policies
The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The consolidated financial statements include the accounts of Endurance Holdings, its wholly-owned subsidiaries, and BCRH and the BCGR Cell. All intercompany transactions and balances have been eliminated in consolidation. Management is required to make estimates and assumptions that affect the amounts reported in the 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, to record the fair value of investments and to record reserves for losses and loss expenses and contingencies. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the period that they are determined to be necessary.
The balance sheet at December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These 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, 2015 contained in Endurance Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the "2015 Form 10-K").
Certain comparative information has been reclassified to conform to current year presentation.
There were no material changes in the Company's significant accounting and reporting policies subsequent to the filing of the 2015 Form 10-K with the exception of the additions to the Company's accounting policies described below relating to the Company's investment repurchase agreements in the current quarter.
(a) Investments
The Company has entered into investment repurchase agreements, whereby the Company sells securities and repurchases them at a future date for a predetermined price. These investment repurchase agreements are accounted for as secured borrowings and are recorded at the contractual repurchase price plus accrued interest. The securities to be repurchased are the same, or substantially the same, as those sold. The fair value of the underlying securities is included in securities pledged under repurchase agreements in the Consolidated Balance Sheets. The use of the cash received by the Company from the counterparty pursuant to the repurchase agreement is not restricted.

8

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


2.
Summary of significant accounting policies, cont'd.
(a) Investments, cont'd.
The obligation to return the cash is included in payable under repurchase agreements in the Consolidated Balance Sheets. In these repurchase transactions, the securities sold by the Company (pledged collateral) may be sold or repledged by the counterparties with whom the repurchase agreement is executed.
(b) Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016, however, in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as a result, ASU 2014-09 will be effective for public business entities in annual and interim period beginning after December 15, 2017. Early adoption is permitted. This guidance is not expected to have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"). Under ASU 2015-02, all legal entities are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 set forth amendments: (1) modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminating the presumption that a general partner should consolidate a limited partnership; (3) affecting the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) providing a scope exception from consolidation guidance for certain reporting entities. ASU 2015-02 became effective for public business entities for annual and interim periods beginning after December 15, 2015. Early adoption was permitted. The Company adopted ASU 2015-02 effective January 1, 2016 and it did not have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. ASU 2015-16 became effective for public business entities in interim and annual periods beginning after December 15, 2015. Early adoption was permitted. The Company adopted ASU 2015-16 effective January 1, 2016 and it did not have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall, Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 requires entities to measure certain equity investments at fair value and recognize any changes in fair value in net income unless the investments qualify for a practicability exception. For financial liabilities measured using the fair value option, entities will need to present any change in fair value caused by a change in instrument-specific credit risk separately in other comprehensive income. ASU 2016-01 also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for public business entities for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted, except for certain provisions. ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively. The Company is currently evaluating the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements.

9

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


2.
Summary of significant accounting policies, cont'd.
(b) Recent accounting pronouncements, cont'd.
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). The objective of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for public business entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02 must be applied using a modified retrospective approach. The Company is currently evaluating the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The guidance also changes employers' accounting for an employee's use of shares to satisfy the employer's statutory income tax withholding obligation, and accounting for forfeitures. ASU 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. This guidance is not expected to have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 will change how companies measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. ASU 2016-13 is effective for public business entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements.
3.
Investments
Net Investment Income
The components of net investment income for the three and nine months ended September 30, 2016 and 2015 are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Fixed income investments
$
41,078

 
$
36,204

 
$
118,382

 
$
96,145

Equity investments
1,906

 
1,748

 
8,754

 
5,200

Other investments
22,804

 
(17,716
)
 
(201
)
 
(1,758
)
Cash and cash equivalents
392

 
515

 
2,043

 
2,108

 
$
66,180

 
$
20,751

 
$
128,978

 
$
101,695

Investment expenses
(3,944
)
 
(4,218
)
 
(11,584
)
 
(11,049
)
Net investment income
$
62,236

 
$
16,533

 
$
117,394

 
$
90,646


10

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
Contractual maturities of the Company's fixed maturity and short-term investments are shown below as of September 30, 2016 and December 31, 2015. 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.
 
September 30, 2016
 
December 31, 2015
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
508,899

 
$
509,417

 
$
622,070

 
$
622,248

Due after one year through five years
2,005,903

 
2,031,970

 
2,005,456

 
1,995,502

Due after five years through ten years
736,318

 
757,530

 
683,147

 
676,932

Due after ten years
45,303

 
48,537

 
33,168

 
34,651

Residential mortgage-backed securities
1,299,811

 
1,329,069

 
1,301,083

 
1,311,373

Commercial mortgage-backed securities
702,760

 
714,142

 
817,570

 
812,886

Collateralized loan and debt obligations
392,578

 
393,922

 
419,795

 
405,128

Asset-backed securities
464,826

 
466,873

 
510,540

 
507,255

Total
$
6,156,398

 
$
6,251,460

 
$
6,392,829

 
$
6,365,975

The following table summarizes the fair value of the fixed maturity investments, short-term investments and equity securities classified as trading at September 30, 2016 and December 31, 2015:
 
 
September 30, 2016
 
December 31, 2015
Fixed maturity investments
 
 
 
 
U.S. government and agencies securities
 
$
396,468

 
$
319,674

U.S. state and municipal securities
 
5,203

 
5,559

Foreign government securities
 
128,786

 
49,861

Government guaranteed corporate securities
 
31,526

 
38,201

Corporate securities
 
951,523

 
532,192

Residential mortgage-backed securities
 
391,704

 
258,574

Commercial mortgage-backed securities
 
181,569

 
127,124

Collateralized loan and debt obligations(1)
 
93,307

 
103,219

Asset-backed securities
 
213,266

 
152,756

Total fixed maturity investments
 
2,393,352

 
1,587,160

Short-term investments
 
226,454

 
394,111

Total fixed income investments
 
$
2,619,806

 
$
1,981,271

Equity securities
 
 
 
 
Equity investments
 
$
117

 
$
48

Preferred equity investments
 
5,966

 
553

Short-term fixed income fund
 
17,037

 
14,628

Total equity securities
 
$
23,120

 
$
15,229

(1)
Balances include amounts related to collateralized debt obligations held with total fair values of $3.6 million and $38.5 million at September 30, 2016 and December 31, 2015, respectively.
In addition to the Company's fixed maturity, short-term and equity securities, the Company invests in alternative funds and specialty funds. The Company's alternative funds and specialty funds are recorded on the Company's Condensed Consolidated Balance Sheets as "other investments." At September 30, 2016 and December 31, 2015, the Company had invested, net of capital returned, a total of $569.2 million and $737.1 million, respectively, in other investments. At September 30, 2016 and December 31, 2015, the carrying value of other investments was $679.0 million and $872.6 million, respectively.

11

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
The following table summarizes the composition, unfunded commitments and redemption restrictions of other investments as of September 30, 2016 and December 31, 2015:
September 30, 2016
 
Market Value
 
Unfunded
Commitments
 
Ineligible for
Redemption over
next 12 months
Alternative funds
 
 
 
 
 
 
Hedge funds
 
$
576,291

 
$

 
$
97,334

Private investment funds
 
76,665

 
95,846

 
76,665

Other investment funds
 
26,051

 

 
25,575

Total alternative funds
 
679,007

 
95,846

 
199,574

Total other investments
 
$
679,007

 
$
95,846

 
$
199,574

December 31, 2015
 
Market Value
 
Unfunded
Commitments
 
Ineligible for
Redemption in 2016
Alternative funds
 
 
 
 
 
 
Hedge funds
 
$
704,966

 
$

 
$
57,876

Private investment funds
 
80,690

 
102,070

 
80,690

Other investment funds
 
23,465

 

 
24,958

Total alternative funds
 
809,121

 
102,070

 
163,524

Specialty funds
 
 
 
 
 
 
High yield loan funds
 
63,496

 
30,000

 

Total specialty funds
 
63,496

 
30,000

 

Total other investments
 
$
872,617

 
$
132,070

 
$
163,524

Hedge funds – The redemption frequency of the hedge funds in which the Company invests range from monthly to biennially with notice periods from 30 to 180 days. Over one year, it is estimated that the Company can liquidate approximately 83.1% of its hedge fund portfolio, with the remainder over the following two years.
Private investment funds – The Company generally has no right to redeem its interest in any private investment fund in advance of dissolution of the applicable partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the liquidation of or distribution of earnings from the underlying assets of the applicable limited partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 5 to 10 years from inception of the limited partnership. A secondary market, with unpredictable liquidity, exists for limited partner interests in private equity funds.
Other investment funds – Other investment funds includes funds on deposit with Lloyd's of London ("Lloyd's"), which are restricted, and the Company's investment in BCGR, which represents the net asset or liability of the Company's investment in BCGR that has not been deployed into the BCGR cell.
High yield loan funds – There are generally no restrictions on the Company's right to redeem its interest in high yield loan funds with the exception of certain redemption frequency and notice requirements. The redemption frequency of these funds is monthly with notice periods from 30 to 60 days.

12

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
Net Realized and Unrealized Gains
Realized gains and losses are recognized in earnings using the first in, first out method. The analysis of gross realized gains and losses, net unrealized gains (losses) on trading securities, and the change in the fair value of investment-related derivative financial instruments for the three and nine months ended September 30, 2016 and 2015 is as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Gross realized gains on investment sales
$
11,072

 
$
20,107

 
$
35,776

 
$
57,420

Gross realized losses on investment sales
(3,365
)
 
(8,236
)
 
(50,537
)
 
(18,190
)
Net unrealized gains (losses) on trading securities
6,153

 
(5,037
)
 
48,229

 
(5,037
)
Change in fair value of investment-related derivative financial instruments(1)
(455
)
 
(1,805
)
 
71

 
(1,295
)
Net realized and unrealized gains
$
13,405

 
$
5,029

 
$
33,539

 
$
32,898

(1)
For additional information on the Company's derivative financial instruments, see Note 7, Derivatives.
Unrealized Gains and Losses
The Company classifies some of its investments in fixed maturity investments, short-term investments and equity securities as available for sale. The amortized cost, fair value and related gross unrealized gains and losses on the Company's securities classified as available for sale at September 30, 2016 and December 31, 2015 are as follows:
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Fixed maturity investments
 
 
 
 
 
 
 
 
U.S. government and agencies securities
 
$
338,564

 
$
8,551

 
$
(79
)
 
$
347,036

U.S. state and municipal securities
 
10,804

 
125

 
(157
)
 
10,772

Foreign government securities
 
82,096

 
2,196

 
(2
)
 
84,290

Government guaranteed corporate securities
 
9,613

 
298

 

 
9,911

Corporate securities
 
1,096,722

 
24,174

 
(345
)
 
1,120,551

Residential mortgage-backed securities
 
912,540

 
25,283

 
(458
)
 
937,365

Commercial mortgage-backed securities
 
523,921

 
11,920

 
(3,268
)
 
532,573

Collateralized loan and debt obligations(1)
 
298,990

 
2,239

 
(614
)
 
300,615

Asset-backed securities
 
252,432

 
1,860

 
(685
)
 
253,607

Total fixed maturity investments
 
3,525,682

 
76,646

 
(5,608
)
 
3,596,720

Short-term investments
 
34,934

 

 

 
34,934

Total fixed income investments
 
$
3,560,616

 
$
76,646

 
$
(5,608
)
 
$
3,631,654

Equity securities
 
 
 
 
 
 
 
 
Equity investments
 
$
330,971

 
$
22,347

 
$
(2,068
)
 
$
351,250

Emerging market debt funds
 
83,668

 
4,057

 

 
87,725

Convertible funds
 
46,331

 
2,313

 

 
48,644

Preferred equity investments
 
7,078

 
1,684

 
(110
)
 
8,652

Short-term fixed income fund
 
128

 
3

 

 
131

Total equity securities
 
$
468,176

 
$
30,404

 
$
(2,178
)
 
$
496,402

 
(1)
Balances include amounts related to collateralized debt obligations held with total fair values of $3.2 million.

13

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Fixed maturity investments
 
 
 
 
 
 
 
 
U.S. government and agencies securities
 
$
499,386

 
$
2,561

 
$
(3,153
)
 
$
498,794

U.S. state and municipal securities
 
16,908

 
120

 
(181
)
 
16,847

Foreign government securities
 
110,893

 
803

 
(581
)
 
111,115

Government guaranteed corporate securities
 
19,248

 
311

 
(7
)
 
19,552

Corporate securities
 
1,323,276

 
5,698

 
(11,232
)
 
1,317,742

Residential mortgage-backed securities
 
1,041,540

 
16,400

 
(5,141
)
 
1,052,799

Commercial mortgage-backed securities
 
689,078

 
4,737

 
(8,053
)
 
685,762

Collateralized loan and debt obligations(1)
 
304,915

 
796

 
(3,802
)
 
301,909

Asset-backed securities
 
356,753

 
585

 
(2,839
)
 
354,499

Total fixed maturity investments
 
4,361,997

 
32,011

 
(34,989
)
 
4,359,019

Short-term investments
 
25,657

 
28

 

 
25,685

Total fixed income investments
 
$
4,387,654

 
$
32,039

 
$
(34,989
)
 
$
4,384,704

Equity securities
 
 
 
 
 
 
 
 
Equity investments
 
$
418,822

 
$
6,834

 
$
(31,875
)
 
$
393,781

Emerging market debt funds
 
61,874

 

 
(5,453
)
 
56,421

Convertible funds
 
46,331

 

 
(146
)
 
46,185

Preferred equity investments
 
15,275

 
1,946

 
(151
)
 
17,070

Short-term fixed income funds
 
127

 
1

 

 
128

Total equity securities
 
$
542,429

 
$
8,781

 
$
(37,625
)
 
$
513,585

 
(1)
Balances include amounts related to collateralized debt obligations held with total fair values of $11.4 million.

14

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
The following tables summarize, for all available for sale securities in an unrealized loss position at September 30, 2016 and December 31, 2015, 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
September 30, 2016
 
Unrealized
Losses(1)
 
Fair
Value
 
Unrealized
Losses(1)
 
Fair
Value
 
Unrealized
Losses(1)
 
Fair
Value
Fixed maturity investments
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies securities
 
$
(79
)
 
$
24,932

 
$

 
$

 
$
(79
)
 
$
24,932

U.S. state and municipal securities
 
(74
)
 
5,697

 
(83
)
 
2,250

 
(157
)
 
7,947

Foreign government securities
 
(1
)
 
1,349

 
(1
)
 
549

 
(2
)
 
1,898

Corporate securities
 
(161
)
 
65,619

 
(184
)
 
19,814

 
(345
)
 
85,433

Residential mortgage-backed securities
 
(188
)
 
29,949

 
(270
)
 
36,070

 
(458
)
 
66,019

Commercial mortgage-backed securities
 
(1,356
)
 
118,481

 
(1,912
)
 
63,554

 
(3,268
)
 
182,035

Collateralized loan and debt obligations
 
(240
)
 
18,373

 
(374
)
 
52,084

 
(614
)
 
70,457

Asset-backed securities
 
(263
)
 
49,423

 
(422
)
 
31,248

 
(685
)
 
80,671

Total fixed income investments
 
$
(2,362
)
 
$
313,823

 
$
(3,246
)
 
$
205,569

 
$
(5,608
)
 
$
519,392

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
Equity investments
 
$
(1,284
)
 
$
15,453

 
$
(784
)
 
$
14,222

 
$
(2,068
)
 
$
29,675

Preferred equity investments
 
(95
)
 
1,614

 
(15
)
 
235

 
(110
)
 
1,849

Total equity securities
 
$
(1,379
)
 
$
17,067

 
$
(799
)
 
$
14,457

 
$
(2,178
)
 
$
31,524

(1)
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at September 30, 2016.

As of September 30, 2016, 478 available for sale securities were in an unrealized loss position aggregating $7.8 million. Of those, 210 securities with aggregated unrealized losses of $4.0 million had been in a continuous unrealized loss position for twelve months or greater.

15

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
 
 
Less than 12 months
 
12 months or greater
 
Total
December 31, 2015
 
Unrealized
Losses(1)
 
Fair
Value
 
Unrealized
Losses(1)
 
Fair
Value
 
Unrealized
Losses(1)
 
Fair
Value
Fixed maturity investments
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies securities
 
$
(2,175
)
 
$
347,024

 
$
(978
)
 
$
16,669

 
$
(3,153
)
 
$
363,693

U.S. state and municipal securities
 
(96
)
 
9,662

 
(85
)
 
695

 
(181
)
 
10,357

Foreign government securities
 
(404
)
 
31,881

 
(177
)
 
3,966

 
(581
)
 
35,847

Government guaranteed corporate securities
 
(7
)
 
1,692

 

 

 
(7
)
 
1,692

Corporate securities
 
(9,222
)
 
830,349

 
(2,010
)
 
51,024

 
(11,232
)
 
881,373

Residential mortgage-backed securities
 
(3,378
)
 
365,082

 
(1,763
)
 
79,355

 
(5,141
)
 
444,437

Commercial mortgage-backed securities
 
(6,708
)
 
436,387

 
(1,345
)
 
42,246

 
(8,053
)
 
478,633

Collateralized loan and debt obligations
 
(3,107
)
 
224,520

 
(695
)
 
48,167

 
(3,802
)
 
272,687

Asset-backed securities
 
(2,624
)
 
311,814

 
(215
)
 
12,880

 
(2,839
)
 
324,694

Total fixed income investments
 
$
(27,721
)
 
$
2,558,411

 
$
(7,268
)
 
$
255,002

 
$
(34,989
)
 
$
2,813,413

Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
Equity investments
 
$
(31,875
)
 
$
283,095

 
$

 
$

 
$
(31,875
)
 
$
283,095

Emerging market debt funds
 

 

 
(5,453
)
 
56,421

 
(5,453
)
 
56,421

Convertible funds
 
(146
)
 
46,185

 

 

 
(146
)
 
46,185

Preferred equity investments
 
(151
)
 
7,361

 

 

 
(151
)
 
7,361

Total equity securities
 
$
(32,172
)
 
$
336,641

 
$
(5,453
)
 
$
56,421

 
$
(37,625
)
 
$
393,062

 
(1)
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive loss at December 31, 2015.
As of December 31, 2015, 1,310 available for sale securities were in an unrealized loss position aggregating $72.6 million. Of those, 158 securities with aggregated unrealized losses of $12.7 million had been in a continuous unrealized loss position for twelve months or greater.


16

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
The decrease in gross unrealized losses on the Company's available for sale fixed income investments at September 30, 2016 compared to December 31, 2015 was primarily due to a decrease in interest rates during the nine months ended September 30, 2016. At September 30, 2016, the Company did not have the intent to sell any of the remaining fixed income investments in an unrealized loss position and determined that it was unlikely that the Company would be required to sell those securities in an unrealized loss position. During the nine months ended September 30, 2016, the Company impaired certain equity securities that were in an unrealized loss position for more than twelve consecutive months. The Company recognized in earnings total other-than-temporary impairments of $0.2 million and $10.6 million for the three and nine months ended September 30, 2016.
Other Investments
The Company is involved in the normal course of business with VIEs as a passive investor in residential and commercial mortgage-backed securities and through its interests in various other investments that are structured as limited partnerships considered to be third party VIEs. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose and the Company's 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 determined that it was not the primary beneficiary for any of these investments as of September 30, 2016. The Company believes its exposure to loss with respect to these investments is generally limited to the investment carrying amounts reported in the Company's Condensed Consolidated Balance Sheets and any unfunded investment commitments.
Collateralized Reinsurance Entities
As of September 30, 2016, Endurance Holdings and Endurance Bermuda together owned 33.3% of BCRH's common shares. BCRH is considered a VIE under U.S. GAAP due to service agreements for investment management, underwriting and insurance management and administrative services between BCRH and BCML, and the economic penalty to terminate the service agreements by BCRH. The Company has determined that it is BCRH's primary beneficiary due to its ability to direct the activities of BCRH through BCML along with its economic interest in BCRH. As a result, the Company fully consolidates the assets, liabilities and operations of BCRH and its subsidiaries within its Unaudited Condensed Consolidated Financial Statements. The interests in BCRH and its subsidiaries that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Unaudited Condensed Consolidated Financial Statements as non-controlling interests. BCRH's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determination with respect to BCRH on an ongoing basis.
As of September 30, 2016, Endurance Bermuda owned 25.2% of BCGR's ordinary shares. BCGR is considered a "voting interest entity" under U.S. GAAP and, because the Company owns less than 50% of its outstanding ordinary shares, the Company does not consolidate BCGR's assets, liabilities or operations within its Unaudited Condensed Consolidated Financial Statements.  However, the BCGR Cell and Blue Water Re Ltd. ("Blue Water Re"), the Company's wholly-owned Bermuda-based special purpose insurance vehicle, are considered VIEs under U.S. GAAP due to service agreements for investment management, underwriting and insurance management and administrative services between Blue Water Re and BCML. The Company has determined that it is the primary beneficiary of these entities due to its ability to direct the activities of Blue Water Re and the BCGR Cell along with its economic interest in these entities. Therefore, as funds held in BCGR are invested in the BCGR Cell, and ultimately into Blue Water Re, they are included in the Company's Unaudited Condensed Consolidated Financial Statements. Conversely, as funds previously invested by BCGR and the BCGR Cell into Blue Water Re are returned to BCGR, they are no longer included in the Company's Unaudited Condensed Consolidated Financial Statements. The interests in the BCGR Cell and Blue Water Re that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Unaudited Condensed Consolidated Financial Statements as non-controlling interests. BCGR's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determinations with respect to the BCGR Cell and Blue Water Re on an ongoing basis.

17

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


3.
Investments, cont'd.
The following table summarizes the movements in the non-redeemable non-controlling interests balance during the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Non-controlling interests, beginning of period
 
$
259,851

 
$
258,529

 
$
267,810

 
$
258,529

Income attributable to third-party investments in the BCGR Cell
 
3,453

 
821

 
11,603

 
821

Income attributable to third-party investments in BCRH
 
2,226

 
1,886

 
6,853

 
1,886

Net income attributable to non-controlling interests
 
5,679

 
2,707

 
18,456

 
2,707

Net preferred share redemptions attributable to third-party investments in the BCGR Cell(1)
 
(6,800
)
 

 
(16,807
)
 

Net investments attributable to third-parties in BCRH
 
20

 
(7
)
 
53

 
(7
)
Net change in third-party investments in non-controlling interests
 
(6,780
)
 
(7
)
 
(16,754
)
 
(7
)
Dividends declared by BCRH attributable to non-controlling interests
 
(1,757
)
 
(1,755
)
 
(12,519
)
 
(1,755
)
Non-controlling interests, end of period
 
$
256,993

 
$
259,474

 
$
256,993

 
$
259,474

(1) The redemption from the BCGR Cell during the three and nine months ended September 30, 2016 was required to fund expenses, repay debt and fund dividends by BCGR.
4.
Fair value measurement
The Company determines the fair value of its fixed maturity investments, short-term investments, equity securities, debt, and other assets and liabilities 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 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 fixed maturity 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. Current issue U.S. government securities are generally valued based on Level 1 inputs, which use the market approach valuation technique.
Government guaranteed corporate fixed maturity 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 fixed maturity 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. The Company uses models that include unobservable inputs to price its corporate bank loan portfolio. As such, the fair values of the corporate bank loans are generally classified in Level 3.
Equity securities – These securities are generally priced by pricing services or index providers. Depending on the type of underlying equity security or equity fund, the securities are priced by pricing services or index providers based on quoted market prices in active markets or through a discounted cash flow model that incorporates benchmark curves for treasury, swap and credits for like or similar securities. The Company generally classifies the fair values of its equity securities in Level 1 or 2.

18

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


4.
Fair value measurement, cont'd.
Structured securities including agency and non-agency, residential and commercial mortgage-backed securities, asset-backed securities and collateralized loan and debt obligations – 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.
Securities pledged under repurchase agreements - These securities have been sold under a repurchase agreement and consist of U.S. government and agencies and residential mortgage-backed securities. Please refer to the pricing methods used for these types of securities.
Other assets and liabilities – A portion of other assets and liabilities are composed of a variety of derivative instruments used to enhance the efficiency of the investment portfolio and economically hedge certain risks. These instruments are generally priced by pricing services, broker/dealers and/or recent trading activity. The market value approach valuation technique is used to estimate the fair value for these derivatives based on significant observable market inputs. Certain derivative instruments are priced by pricing services based on quoted market prices in active markets. These derivative instruments are generally classified in Level 1. Other derivative instruments are priced using industry valuation models and are considered Level 2, as the inputs to the valuation model are based on observable market inputs. Also included in this line item are proprietary, non-exchange traded derivative-based risk management products primarily used to address weather and energy risks. The trading market for these weather and energy derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. In instances where market prices are not available, the Company uses industry or internally developed valuation techniques such as spread option, Black Scholes, quanto and simulation modeling to determine fair value and classifies these in Level 3. These models may reference prices for similar instruments.
Debt – Outstanding debt consists of the Company's 7.0% Senior Notes due July 15, 2034, the 4.7% Senior Notes due October 15, 2022 (together, the "Senior Notes") and the Trust Preferred Securities. The fair values of the Senior Notes were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. The fair values of the Trust Preferred Securities were based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of the Senior Notes and the Trust Preferred Securities are classified in Level 2.
The carrying values of cash and cash equivalents, accrued investment income, other investments, net receivable on sales of investments, net payable on purchases of investments, payable under repurchase agreements, the amount outstanding under the BCRH Credit Agreement (as defined in Note 10) and other financial instruments not described above approximated their fair values at September 30, 2016 and December 31, 2015.
Transfers between levels are assumed to occur at the end of each period.

19

ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)


4.
Fair value measurement, cont'd.
The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, securities pledged under repurchase agreements, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at September 30, 2016:
 
Fair Value Measurements at September 30, 2016
 
Total at September 30, 2016
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Fixed maturity investments
 
 
 
 
 
 
 
U.S. government and agencies securities
$
743,504

 
$
51,668

 
$
691,836

 
$

U.S. state and municipal securities
15,975

 

 
15,975

 

Foreign government securities
213,076

 

 
213,076

 

Government guaranteed corporate securities
41,437

 

 
41,437

 

Corporate securities
2,072,074

 

 
1,893,278

 
178,796

Residential mortgage-backed securities
1,329,069

 

 
1,329,069

 

Commercial mortgage-backed securities
714,142

 

 
712,448

 
1,694

Collateralized loan and debt obligations
393,922

 

 
393,865

 
57

Asset-backed securities
466,873

 

 
466,873

 

Total fixed maturity investments
5,990,072

 
51,668

 
5,757,857

 
180,547

Equity securities
 
 
 
 
 
 
 
Equity investments
351,367

 
163,412

 
187,955

 

Emerging market debt funds
87,725

 

 
87,725

 

Convertible funds
48,644

 

 
48,644

 

Preferred equity investments
14,618

 

 
14,618

 

Short-term fixed income fund
17,168

 
17,168

 

 

Total equity securities
519,522

 
180,580

 
338,942

 

Short-term investments
261,388

 

 
261,388

 

Securities pledged under repurchase agreements (see Note 10)
124,303

 

 
124,303

 

Other assets (see Note 7)
159,273

 
2,331

 
124,373

 
32,569

Total assets
$
7,054,558

 
$
234,579

 
$
6,606,863

 
$
213,116

Liabilities
 
 
 
 
 
 
 
Other liabilities (see Note 7)
$
97,958

 
$
2,942

 
$
67,075

 
$
27,941

Debt
799,393

 

 
799,393

 

Total liabilities
$
897,351

 
$
2,942

 
$
866,468

 
$
27,941

During the three months ended September 30, 2016, $62.9 million of primarily corporate securities were transferred into Level 3 as no observable inputs were available. No securities were transferred out of Level 3 to Level 2 during the period.
During the three months ended September 30, 2015, $128.9 million of primarily of corporate securities were transferred into Level 3 as no observable inputs were available. No securities were transferred out of Level 3 to Level 2 during the period.
During the nine months ended September 30, 2016, $79.3 million of primarily corporate securities were transferred into Level 3 as no observable inputs were available. $5.5 million of primarily corporate securities were transferred out of Level 3 to Level 2 during the period as market activity for these securities increased and observable inputs became available.

20

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)


4.
Fair value measurement, cont'd.
During the nine months ended September 30, 2015, $130.9 million of primarily of corporate securities were transferred into Level 3 as no observable inputs were available, and $9.2 million of primarily asset-backed and commercial mortgage-backed securities were transferred out of Level 3 to Level 2 during the period as market activity for these securities increased and observable inputs became available.
The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2015:
 
Fair Value Measurements at December 31, 2015
 
Total at December 31, 2015
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Fixed maturity investments
 
 
 
 
 
 
 
U.S. government and agencies securities
$
818,468

 
$
37,741

 
$
780,727

 
$

U.S. state and municipal securities
22,406

 

 
22,406

 

Foreign government securities
160,976

 

 
160,976

 

Government guaranteed corporate securities
57,753

 

 
57,753

 

Corporate securities
1,849,934

 

 
1,739,002

 
110,932

Residential mortgage-backed securities
1,311,373

 

 
1,311,373

 

Commercial mortgage-backed securities
812,886

 

 
812,174

 
712

Collateralized loan and debt obligations
405,128

 

 
404,319

 
809

Asset-backed securities
507,255

 

 
507,255

 

Total fixed maturity investments
5,946,179

 
37,741

 
5,795,985

 
112,453

Equity securities
 
 
 
 
 
 
 
Equity investments
393,829

 
260,330

 
133,499

 

Emerging market debt funds
56,421

 

 
56,421

 

Convertible funds
46,185

 

 
46,185

 

Preferred equity investments
17,623

 

 
17,623

 

Short-term fixed income fund
14,756

 
14,756

 

 

Total equity securities
528,814

 
275,086

 
253,728

 

Short-term investments
419,796

 

 
419,796

 

Other assets (see Note 7)
68,892

 
4

 
27,385

 
41,503

Total assets
$
6,963,681

 
$
312,831

 
$
6,496,894

 
$
153,956

Liabilities
 
 
 
 
 
 
 
Other liabilities (see Note 7)
$
46,088

 
$

 
$
4,059

 
$
42,029

Debt
737,974

 

 
737,974

 

Total liabilities
$
784,062

 
$

 
$
742,033

 
$
42,029

Level 3 assets represented 3.0% and 2.2% of the Company's total fair valued assets at September 30, 2016 and December 31, 2015, respectively. Level 3 securities are primarily comprised of corporate securities, commercial mortgage-backed securities, collateralized loan and debt obligations, and weather derivatives. There were no material changes in the Company's valuation techniques for the nine months ended September 30, 2016.

21

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)


4.
Fair value measurement, cont'd.
Other assets and other liabilities measured at fair value and classified as Level 3 at September 30, 2016 include assets of $32.6 million (December 31, 2015 - $41.5 million) and liabilities of $27.9 million (December 31, 2015 - $42.0 million) related to proprietary, non-exchange traded derivative-based risk management products used in the Company's weather risk management business, and hedging and trading activities related to these risks. In instances where market prices are not available, the Company may use industry or internally developed valuation techniques such as historical analysis and simulation modeling to determine fair value and are considered Level 3.
Observable and unobservable inputs to these valuation techniques vary by contract requirements and commodity type, are validated using market-based or independently sourced parameters where applicable and may typically include the following:
Observable inputs: contract price, notional, option strike, term to expiry, contractual limits,
temperature, rainfall, windspeed, wave height, snow fall, cyclone category;
Unobservable inputs: correlation, composite weather variable; and
Both observable and unobservable: forward commodity price.
The Company's weather curves are determined by taking the average payouts for each transaction within its portfolio utilizing de-trended historical weather measurements. The Company's commodity curves are determined using historical market data scaled to currently observed market prices. The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the below table on quantitative information.
If a trade has one or more significant valuation inputs that are unobservable, such trades are initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the initial valuation, the Company updates market observable inputs to reflect observable market changes. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data.
Changes in any or all of the unobservable inputs listed above may contribute positively or negatively to the overall portfolio fair value depending upon the underlying position. In general, movements in weather curves are the largest contributing factor that impacts fair value.

22

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)


4.
Fair value measurement, cont'd.
Below is a summary of quantitative information regarding the significant inputs used in determining the fair value of the net weather and energy related derivative assets and liabilities classified in Level 3 that are measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
Fair Value
(Level 3)
 
Valuation
Techniques
 
Inputs
 
Range
 
 
 
 
Low
 
High
 
(Commodity curve in U.S. dollars in thousands)
Net weather and energy related derivative assets
$
4,628

 
Historical 
Analysis and Simulation
 
Correlation
 
0

 
1

 
 
 
 
 
Temperature
 
 -15F

 
 115F

 
 
 
 
 
Composite weather variable
 
 -25 deg.

 
 45 deg.

 
 
 
 
 
Rainfall
 
 0"

 
 2"

 
 
 
 
 
Windspeed
 
 0.01 m/s

 
 25 m/s

 
 
 
 
 
Wave height
 
 0 m

 
 25 m

 
 
 
 
 
Commodity curve
 
$
(1
)
 
$
14

 
December 31, 2015
 
Fair Value
(Level 3)
 
Valuation
Techniques
 
Inputs
 
Range
 
 
 
 
Low
 
High
 
(Commodity curve in U.S. dollars in thousands)
Net weather and energy related derivative liabilities
$
526

 
Historical 
Analysis and Simulation
 
Correlation
 
0

 
1

 
 
 
 
 
Temperature
 
 -15F

 
 115F

 
 
 
 
 
Composite weather variable
 
 -25 deg.

 
 45 deg.

 
 
 
 
 
Rainfall
 
 0"

 
 2"

 
 
 
 
 
Windspeed
 
 0.01 m/s

 
 25 m/s

 
 
 
 
 
Snowfall
 
 0"

 
 18"

 
 
 
 
 
Cyclone (category)
 
0

 
5

 
 
 
 
 
Commodity curve
 
$

 
$
13


23

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)


4.
Fair value measurement, cont'd.
The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the three months ended September 30, 2016 and 2015:
 
Three Months Ended September 30, 2016
 
Fixed maturity
investments
 
Other assets
 
Total assets
 
Other
liabilities
Level 3, beginning of period
$
109,025

 
$
34,357

 
$
143,382

 
$
(21,549
)
Total realized and unrealized gains included in earnings
1,585

 

 
1,585

 

Total realized and unrealized losses included in earnings
(117
)
 

 
(117
)
 

Total income included in other underwriting (loss) income

 
1,651

 
1,651

 
7,186

Total loss included in other underwriting (loss) income

 
(3,762
)
 
(3,762
)
 
(3,185
)
Change in unrealized gains included in other comprehensive income (loss)
60

 

 
60

 

Change in unrealized losses included in other comprehensive income (loss)
(46
)
 

 
(46
)
 

Purchases
15,004

 

 
15,004

 

Issues

 
9,378

 
9,378

 
(14,035
)
Sales
(7,831
)
 

 
(7,831
)
 

Settlements

 
(9,055
)
 
(9,055
)
 
3,642

Transfers into Level 3
62,867

 

 
62,867

 

Transfers out of Level 3

 

 

 

Level 3, end of period
$
180,547

 
$
32,569

 
$
213,116

 
$
(27,941
)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
Fixed maturity
investments
 
Other assets
 
Total assets
 
Other
liabilities
Level 3, beginning of period
$
4,707

 
$
23,691

 
$
28,398

 
$
(22,184
)
Total realized and unrealized losses included in earnings
(24
)
 

 
(24
)
 

Total income included in other underwriting (loss) income

 
1,589

 
1,589

 
14,745

Total loss included in other underwriting (loss) income

 
(11,794
)
 
(11,794
)
 
(2,552
)
Change in unrealized gains included in other comprehensive income (loss)
85

 

 
85

 

Change in unrealized losses included in other comprehensive income (loss)
(35
)
 

 
(35
)
 

Purchases

 
1,250

 
1,250

 
(737
)
Issues

 
5,441

 
5,441

 
(9,058
)
Sales
(237
)
 

 
(237
)
 

Settlements

 

 

 
61

Transfers into Level 3
128,880

 

 
128,880

 

Transfers out of Level 3

 

 

 

Level 3, end of period
$
133,376

 
$
20,177

 
$
153,553

 
$
(19,725
)

24

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)


4.
Fair value measurement, cont'd.
The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the nine months ended September 30, 2016 and 2015:
 
Nine Months Ended September 30, 2016
 
Fixed maturity
investments
 
Other assets
 
Total assets
 
Other
liabilities
Level 3, beginning of period
$
112,453

 
$
41,503

 
$
153,956

 
$
(42,029
)
Total realized and unrealized gains included in earnings
3,901

 

 
3,901

 

Total realized and unrealized losses included in earnings
(2,464
)
 

 
(2,464
)
 

Total income included in other underwriting (loss) income

 
5,199

 
5,199

 
18,305

Total loss included in other underwriting (loss) income

 
(11,544
)
 
(11,544
)
 
(8,541
)
Change in unrealized gains included in other comprehensive income (loss)
384

 

 
384

 

Change in unrealized losses included in other comprehensive income (loss)
(121
)
 

 
(121
)
 

Purchases
16,678

 

 
16,678

 

Issues

 
22,964

 
22,964

 
(32,780
)
Sales
(24,100
)
 

 
(24,100
)
 

Settlements

 
(25,553
)
 
(25,553
)
 
37,104

Transfers into Level 3
79,332

 

 
79,332

 

Transfers out of Level 3
(5,516
)
 

 
(5,516
)
 

Level 3, end of period
$
180,547

 
$
32,569

 
$
213,116

 
$
(27,941
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
Fixed maturity
investments
 
Other assets
 
Total assets
 
Other
liabilities
Level 3, beginning of period
$
12,290

 
$
25,615

 
$
37,905

 
$
(35,366
)
Total realized and unrealized gains included in earnings
113

 

 
113

 

Total realized and unrealized losses included in earnings
(35
)
 

 
(35
)
 

Total income included in other underwriting (loss) income

 
7,184

 
7,184

 
35,610

Total loss included in other underwriting (loss) income

 
(24,788
)
 
(24,788
)
 
(9,772
)
Change in unrealized gains included in other comprehensive income (loss)
109

 

 
109

 

Change in unrealized losses included in other comprehensive income (loss)
(228
)
 

 
(228
)
 

Purchases

 
1,250

 
1,250

 
(737
)
Issues

 
17,774

 
17,774

 
(27,806
)
Sales
(547
)
 

 
(547
)
 

Settlements

 
(6,858
)
 
(6,858
)
 
18,346

Transfers into Level 3
130,850

 

 
130,850

 

Transfers out of Level 3
(9,176
)
 

 
(9,176
)
 

Level 3, end of period
$
133,376

 
$
20,177

 
$
153,553

 
$
(19,725
)

25

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)


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 shares (also referred to as "common shares") and participating common shares, which includes unvested restricted shares and restricted share units that receive cash dividends, according to dividends declared and participation rights in undistributed earnings. Net income available to Endurance Holdings 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 Company's common and participating common shares. Any 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. In periods of loss, no losses are allocated to participating common shareholders. Instead, all such losses are allocated solely to the common shareholders.
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 excludes any dilutive effect of outstanding options and convertible securities such as unvested restricted shares and restricted share units.
Diluted earnings per common share are based on the weighted average number of common shares and assumes the exercise of all dilutive stock options and the vesting or conversion of all convertible securities such as unvested restricted shares using the two-class method described above.
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income available to common and participating common shareholders
$
130,070

 
$
43,635

 
$
313,069

 
$
219,944

Less amount allocated to participating common
shareholders(1)
(2,607
)
 
(1,251
)
 
(6,662
)
 
(6,442
)
Net income allocated to common shareholders
$
127,463

 
$
42,384

 
$
306,407

 
$
213,502

Denominator:
 
 
 
 
 
 
 
Weighted average shares - basic
66,185,375

 
57,923,044

 
65,920,276

 
48,453,368

Share equivalents:
 
 
 
 
 
 
 
Options
37,597

 
111,760

 
53,438

 
137,366

Restricted shares
18,976

 
11,344

 
8,699

 
1,367

Weighted average shares - diluted
66,241,948

 
58,046,148

 
65,982,413

 
48,592,101

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.93

 
$
0.73

 
$
4.65

 
$
4.41

Diluted earnings per common share
$
1.92

 
$
0.73

 
$
4.64

 
$
4.39

(1)
Represents earnings attributable to holders of unvested restricted shares and restricted share units issued under the Company's equity compensation plan that are considered participating. In periods of loss, no losses are allocated to participating common shareholders (unvested restricted shares and restricted share units).

26

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)


5.     Earnings per share, cont'd.
Endurance Holdings declared a dividend of $396.8750 per Series C preferred share on August 17, 2016 (2015 - Series A: $0.484375, Series B: $0.468750, Series C - Nil). The Series C preferred share dividend was paid on September 15, 2016 to shareholders of record on September 1, 2016. Endurance Holdings also declared a dividend of $0.38 per common share on August 17, 2016 (2015 - $0.35). The dividend was paid on September 30, 2016 to shareholders of record on September 16, 2016.
On June 1, 2016, Endurance Holdings redeemed all 9,200,000 of its Series B preferred shares. The Series B preferred shares were redeemed at a redemption price of $25.00 per share together with a dividend of $0.395830 per share.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Dividends declared per Series A preferred share
$

 
$
0.484375

 
$

 
$
1.453125

Dividends declared per Series B preferred share
$

 
$
0.468750

 
$
0.864580

 
$
1.406250

Dividends declared per Series C preferred share
$
396.8750

 
$

 
$
1,283.2292

 
$

Dividends declared per common share
$
0.38

 
$
0.35

 
$
1.14

 
$
1.05

6.
Accumulated other comprehensive income (loss)
The following tables present the changes in accumulated other comprehensive income (loss) balances by component for the three months ended September 30, 2016 and 2015:
 
For the Three Months Ended September 30, 2016
 
Losses on cash flow hedges
 
Unrealized gains (losses) on available for sale securities
 
Foreign currency translation adjustments
 
Total
Beginning balance
$
(1,634
)
 
$
103,957

 
$
(82,374
)
 
$
19,949

Other comprehensive income (loss) before reclassifications

 
24,799

 
(13,114
)
 
11,685

Amounts reclassified from accumulated other comprehensive income (loss)(1)
22

 
(3,663
)
 

 
(3,641
)
Net current period other comprehensive income (loss)
22

 
21,136

 
(13,114
)
 
8,044

Ending balance
$
(1,612
)
 
$
125,093

 
$
(95,488
)
 
$
27,993

(1)All amounts are net of tax.
 
For the Three Months Ended September 30, 2015
 
Losses on cash flow hedges
 
Unrealized gains (losses) on available for sale securities
 
Foreign currency translation adjustments
 
Total
Beginning balance
$
(1,722
)
 
43,610

 
$
(4,923
)
 
$
36,965

Other comprehensive income (loss) before reclassifications

 
(18,258
)
 
(15,625
)
 
(33,883
)
Amounts reclassified from accumulated other comprehensive income (loss)(1)
22

 
(11,648
)
 

 
(11,626
)
Net current period other comprehensive income (loss)
22

 
(29,906
)
 
(15,625
)
 
(45,509
)
Ending balance
$
(1,700
)
 
$
13,704

 
$
(20,548
)
 
$
(8,544
)
(1)All amounts are net of tax.


27

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)


6.
Accumulated other comprehensive income (loss), cont'd.
The following tables present the changes in accumulated other comprehensive income (loss) balances by component for the nine months ended September 30, 2016 and 2015:
 
For the Nine Months Ended September 30, 2016
 
Losses on cash flow hedges
 
Unrealized gains (losses) on available for sale securities
 
Foreign currency translation adjustments
 
Total
Beginning balance
$
(1,678
)
 
$
(12,638
)
 
$
(32,318
)
 
$
(46,634
)
Other comprehensive income (loss) before reclassifications

 
116,722

 
(63,170
)
 
53,552

Amounts reclassified from accumulated other comprehensive income (loss)(1)
66

 
21,009

 

 
21,075

Net current period other comprehensive income (loss)
66

 
137,731

 
(63,170
)
 
74,627

Ending balance
$
(1,612
)
 
$
125,093

 
$
(95,488
)
 
$
27,993

(1)All amounts are net of tax.
 
For the Nine Months Ended September 30, 2015
 
Losses on cash flow hedges
 
Unrealized gains (losses)
 on available for sale securities
 
Foreign currency translation adjustments
 
Total
Beginning balance
$
(1,766
)
 
$
86,100

 
$
(7,628
)
 
$
76,706

Other comprehensive income (loss) before reclassifications

 
(35,195
)
 
(12,920
)
 
(48,115
)
Amounts reclassified from accumulated other comprehensive income (loss)(1)
66

 
(37,201
)
 

 
(37,135
)
Net current period other comprehensive income (loss)
66

 
(72,396
)
 
(12,920
)
 
(85,250
)
Ending balance
$
(1,700
)
 
$
13,704

 
$
(20,548
)
 
$
(8,544
)
(1)All amounts are net of tax.


28

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)


6.
Accumulated other comprehensive income (loss), cont'd.
The following tables present the significant items reclassified out of accumulated other comprehensive income (loss) during the three months ended September 30, 2016 and 2015:
Three Months Ended September 30, 2016
Details about accumulated other comprehensive
income (loss) components
 
Amount reclassified
from accumulated other
comprehensive income (loss)
 
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
Losses on cash flow hedges - Debt
 
$
22

 
Interest expense
 
 
22

 
Total before income taxes
 
 

 
Income tax expense
 
 
$
22

 
Total net of income taxes
 
 
 
 
 
Unrealized gains on available for sale securities
 
$
(4,476
)
 
Net realized and unrealized gains
 
 
183

 
Net impairment losses recognized in earnings
 
 
(4,293
)
 
Total before income taxes
 
 
630

 
Income tax expense
 
 
$
(3,663
)
 
Total net of income taxes
 
 
 
 
 
Three Months Ended September 30, 2015
Details about accumulated other comprehensive
income (loss) components
 
Amount reclassified
from accumulated other
comprehensive income (loss)
 
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
Losses on cash flow hedges - Debt
 
$
22

 
Interest expense
 
 
22

 
Total before income taxes
 
 

 
Income tax expense
 
 
$
22

 
Total net of income taxes
 
 
 
 
 
Unrealized gains on available for sale securities
 
$
(11,871
)
 
Net realized and unrealized gains
 
 
38

 
Net impairment losses recognized in earnings
 
 
(11,833
)
 
Total before income taxes
 
 
185

 
Income tax expense
 
 
$
(11,648
)
 
Total net of income taxes



29

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)


6.
Accumulated other comprehensive income (loss), cont'd.
The following tables present the significant items reclassified out of accumulated other comprehensive income (loss) during the nine months ended September 30, 2016 and 2015:
Nine Months Ended September 30, 2016
Details about accumulated other comprehensive
income (loss) components
 
Amount reclassified
from accumulated other
comprehensive income (loss)
 
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
Losses on cash flow hedges - Debt
 
$
66

 
Interest expense
 
 
66

 
Total before income taxes
 
 

 
Income tax expense
 
 
$
66

 
Total net of income taxes
 
 
 
 
 
Unrealized losses on available for sale securities
 
$
9,620

 
Net realized and unrealized losses
 
 
10,647

 
Net impairment losses recognized in earnings
 
 
20,267

 
Total before income taxes
 
 
742

 
Income tax expense
 
 
$
21,009

 
Total net of income taxes
 
 
 
 
 
Nine Months Ended September 30, 2015
Details about accumulated other comprehensive
income (loss) components
 
Amount reclassified
from accumulated other
comprehensive income (loss)
 
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
Losses on cash flow hedges - Debt
 
$
66

 
Interest expense
 
 
66

 
Total before income taxes
 
 

 
Income tax expense
 
 
$
66

 
Total net of income taxes
 
 
 
 
 
Unrealized gains on available for sale securities
 
$
(39,230
)
 
Net realized and unrealized gains
 
 
1,111

 
Net impairment losses recognized in earnings
 
 
(38,119
)
 
Total before income taxes
 
 
918

 
Income tax expense
 
 
$
(37,201
)
 
Total net of income taxes


30

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)


7.
Derivatives
The Company regularly transacts in certain derivative-based weather risk management products primarily to address weather and energy risks on behalf of third parties. The markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Generally, the Company's current portfolio of such derivative contracts is of short duration and such contracts are predominantly seasonal in nature. The Company also invests a portion of its investments with third party investment managers with investment guidelines that permit the use of derivative instruments. The Company may enter derivative transactions directly or as part of strategies employed by its external investment managers.
The Company's derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value and gains and losses recognized in net realized and unrealized gains, net foreign exchange (gains) losses and other underwriting (loss) income in the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income.
The Company's derivatives are not designated as hedges under current accounting guidance.
The Company's objectives for holding these derivatives are as follows:
Interest Rate Futures, Swaps, Swaptions and Options - to manage exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk through modification of the portfolio composition and duration.
Industry Loss Warranty ("ILW") Swaps - to manage underwriting risk. The Company has entered into ILW swap contracts which provide reinsurance-like protection to the Company for specific loss events associated with certain lines of its business. The Company has also sold ILW protection, which provides reinsurance-like protection to third parties for specific loss events.
Foreign Exchange Forwards, Futures and Options - as part of overall currency risk management and investment strategies.
Credit Default Swaps - to manage market exposures. The Company may assume or economically hedge credit risk through credit default swaps to replicate or hedge investment positions. The original term of these credit default swaps is generally five years or less.
To-Be-Announced Mortgage-backed Securities ("TBAs") - to enhance investment performance and as part of overall investment strategy. TBAs represent commitments to purchase or sell a future issuance of agency mortgage-backed securities. For the period between purchase of a TBA and issuance of the underlying securities, the Company’s position is accounted for as a derivative.
Energy and Weather Contracts – to address weather and energy risks. The Company may purchase or sell contracts with financial settlements based on the performance of an index linked to a quantifiable weather element, such as temperature, precipitation, snowfall or windspeed, and structures with multiple risk triggers indexed to a quantifiable weather element and a weather sensitive commodity price, such as temperature and electrical power or natural gas. Generally, the Company's current portfolio of energy and weather derivative contracts is of comparably short duration and such contracts are predominantly seasonal in nature.
LIBOR Swap – to establish future net cash flows in connection with the Trust Preferred Securities for the five-year period beginning March 30, 2012 as if these securities bore interest at a fixed rate of 4.905%.
Loss Development Cover – as part of the sale of Montpelier U.S. Insurance Company ("MUSIC") to Selective Insurance Group, Inc. ("Selective"), Montpelier Reinsurance Ltd. (now Endurance Bermuda) entered into a loss development cover with MUSIC which ensures that MUSIC's reserve for losses and loss expenses relating to retained business written on or prior to December 31, 2011 remains adequate. Under the loss development cover, any future adverse development associated with such retained reserves will be protected by Endurance Bermuda and any future favorable development associated with such retained reserves will benefit Endurance Bermuda.


31

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)


7.
Derivatives, cont'd.
The fair values and the related notional values of derivatives at September 30, 2016 and December 31, 2015 are shown below.
 
September 30, 2016
 
December 31, 2015
 
Fair
Value
 
Notional
Principal
Amount
 
Fair
Value
 
Notional
Principal
Amount
Derivatives recorded in other assets
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
213

 
$
32,895

 
$
425

 
$
38,818

Credit default swaps
117

 
3,241

 
36

 
4,225

ILWs
2,336

 
20,000

 

 

TBAs
121,707

 
115,900

 
26,924

 
25,700

Energy and weather contracts
34,900

 
96,859

 
41,507

 
70,388

Total recorded in other assets
$
159,273

 
 
 
$
68,892

 
 
Derivatives recorded in other liabilities
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
118

 
$
41,736

 
$
372

 
$
30,400

Credit default swaps
31

 
2,059

 
276

 
7,800

Interest rate swaps
110

 
1,100

 
7

 
42,000

Interest rate futures

 

 
8

 
54,488

ILWs
733

 
14,209

 
259

 
19,500

LIBOR swap
114

 
100,000

 
233

 
100,000

TBAs
61,991

 
59,000

 

 

Loss development cover
3,978

 
24,426

 
2,904

 
22,322

Energy and weather contracts
30,883

 
153,344

 
42,029

 
148,325

Total recorded in other liabilities
$
97,958

 
 
 
$
46,088

 
 
Net derivative asset
$
61,315

 
 
 
$
22,804

 
 
At September 30, 2016, the Company's derivative assets of $159.3 million (December 31, 2015 - $68.9 million) and liabilities of $98.0 million (December 31, 2015 - $46.1 million) are subject to master netting agreements, which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. Interest rate futures are not subject to master netting agreements. At September 30, 2016 and December 31, 2015, the Company's derivative instruments were recorded on a gross basis in the Condensed Consolidated Balance Sheets.
At September 30, 2016, the Company held no reverse repurchase agreements. At December 31, 2015, the Company held $30.0 million reverse repurchase agreements. These agreements were fully collateralized, were generally outstanding for a short period of time and were presented as part of cash and cash equivalents in the Condensed Consolidated Balance Sheets. The required collateral for these agreements was either cash or U.S. treasury securities at a minimum rate of 102% of the principal amount. Upon maturity, the Company received the principal and interest income.

32

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)


7.
Derivatives, cont'd.
The gains and losses on the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for derivatives for the three and nine months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Total (losses) gains included in net foreign exchange (gains) losses from foreign exchange forward contracts
$
(231
)
 
$
155

 
$
(732
)
 
$
1,281

 
 
 
 
 
 
 
 
Interest rate futures

 
(78
)
 
(227
)
 
17

Credit default swaps
70

 
(143
)
 
(12
)
 
(134
)
Interest rate swaps
(69
)
 
(705
)
 
(117
)
 
(940
)
Interest rate swaptions

 
28

 
(27
)
 
56

ILWs
(958
)
 
(652
)
 
(898
)
 
(652
)
LIBOR swap
232

 
(173
)
 
120

 
(173
)
TBAs
270

 
(82
)
 
1,232

 
531

Total (losses) gains included in net realized and unrealized gains
(455
)
 
(1,805
)
 
71

 
(1,295
)
 
 
 
 
 
 
 
 
Energy and weather contracts
1,486

 
1,988

 
2,808

 
8,030

Loss development cover
(618
)
 
(465
)
 
(2,104
)
 
(465
)
Total gains included in other underwriting (loss) income
868

 
1,523

 
704

 
7,565

 
 
 
 
 
 
 
 
Total gains (losses) from derivatives
$
182

 
$
(127
)
 
$
43

 
$
7,551


8.
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 Company's ordinary shares, share appreciation rights, restricted shares, restricted share units, share bonuses and other equity incentive awards to key employees.
No options were granted, expired or vested during the quarters ended September 30, 2016 and 2015. No options were exercised during the quarter ended September 30, 2016 (2015 - 480,000). The total intrinsic value of options exercised during the quarter ended September 30, 2015 was $9.5 million. The Company received proceeds of $23.1 million from the exercise of options during the quarter ended September 30, 2015. The Company issued new ordinary shares in connection with the exercise of the above options. For the quarter ended September 30, 2016, compensation costs recognized in earnings for all options totaled $0.1 million (2015 - $0.3 million). At September 30, 2016, compensation costs not yet recognized related to unvested stock options was $0.3 million (2015 - $1.3 million).
No options were granted or expired during the nine months ended September 30, 2016 and 2015. During the nine months ended September 30, 2016, 160,000 (2015 - 480,000) options were exercised. During the nine months ended September 30, 2016, 160,000 options vested (2015 - 160,000). The total intrinsic value of options exercised during the nine months ended September 30, 2016 was $3.2 million (2015 - $9.5 million). The Company received proceeds of $7.7 million from the exercise of options during the nine months ended September 30, 2016 (2015 - $23.1 million). The Company issued new ordinary shares in connection with the exercise of the above options. For the nine months ended September 30, 2016, compensation costs recognized in earnings for all options totaled $0.7 million (2015 - $1.3 million).

33

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)


8.
Stock-based employee compensation and other stock plans, cont'd.
During the quarter ended September 30, 2016, the Company granted an aggregate of 24,250 (2015856,629) restricted shares and restricted share units. The restricted shares and restricted share units granted had weighted average grant date fair values of $1.6 million (2015 - $59.4 million). During the quarter ended September 30, 2016, the aggregate fair value of restricted shares and restricted share units that vested was nil (2015 - $23.0 million). For the quarter ended September 30, 2016, compensation costs recognized in earnings for all restricted shares and restricted share units were $8.2 million (2015 - $28.1 million). At September 30, 2016, compensation costs not yet recognized related to unvested restricted shares and restricted share units was $34.4 million (2015 - $32.0 million).
During the nine months ended September 30, 2016, the Company granted an aggregate of 638,217 (20151,360,981) restricted shares and restricted share units. The restricted shares and restricted share units granted had weighted average grant date fair values of $38.5 million (2015 - $89.4 million). During the nine months ended September 30, 2016, the aggregate fair value of restricted shares and restricted share units that vested was $41.2 million (2015 - $44.7 million). For the nine months ended September 30, 2016, compensation costs recognized in earnings for all restricted shares and restricted share units were $27.4 million (2015 - $45.0 million).
Employee Share Purchase Plan
The Company also has an Employee Share Purchase Plan ("ESPP") under which employees of Endurance Holdings and certain of its subsidiaries may purchase the Company's ordinary shares. For the three and nine months ended September 30, 2016, total expenses related to the Company's ESPP were approximately $109,000 (2015 - $76,000) and $324,000 (2015 - $220,000), respectively.
9.
Segment reporting
The determination of the Company's business segments is based on how the Company monitors the performance of its underwriting operations. The Company has two reportable business segments, Insurance and Reinsurance, which are comprised of the following lines of business:
Insurance segment lines of business 
Agriculture
Casualty and other specialty
Professional lines
Property, marine/energy and aviation
Reinsurance segment lines of business 
Catastrophe
Property
Casualty
Professional lines
Specialty
Management measures Insurance and Reinsurance segment results on the basis of the combined ratio, which is obtained by dividing the sum of the net 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 incurred by the segments are classified as corporate expenses and are not allocated to the individual business segments. Ceded reinsurance and recoveries are recorded within the business segment to which they apply.

34

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)


9.
Segment reporting, cont'd.
The following table provides a summary of segment revenues and results for the three months ended September 30, 2016 and the reserve for losses and loss expenses as of September 30, 2016:
 
Three Months Ended September 30, 2016
 
 
Insurance
 
Reinsurance
 
Total
 
Revenues
 
 
 
 
 
 
Gross premiums written
$
568,277

 
$
192,410

 
$
760,687

 
Ceded premiums written
(365,573
)
 
(46,128
)
 
(411,701
)
 
Net premiums written
202,704

 
146,282

 
348,986

 
Net premiums earned
272,603

 
337,553

 
610,156

 
Other underwriting loss

 
(466
)
 
(466
)
 
 
272,603

 
337,087

 
609,690

 
Expenses
 
 
 
 
 
 
Net losses and loss expenses
202,717

 
128,745

 
331,462

 
Acquisition expenses
41,773

 
79,618

 
121,391

 
General and administrative expenses
40,658

 
27,080

 
67,738

 
 
285,148

 
235,443

 
520,591

 
Underwriting (loss) income
$
(12,545
)
 
$
101,644

 
89,099

 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
62,236

 
Corporate expenses
 
 
 
 
(11,952
)
 
Net foreign exchange gains
 
 
 
 
18,576

 
Net realized and unrealized gains
 
 
 
 
13,405

 
Net impairment losses recognized in earnings
 
 
 
 
(183
)
 
Amortization of intangibles
 
 
 
 
(21,154
)
 
Interest expense
 
 
 
 
(10,826
)
 
Income before income taxes
 
 
 
 
$
139,201

 
 
 
 
 
 
 
 
Net loss ratio
74.4
%
 
38.1
%
 
54.3
%
 
Acquisition expense ratio
15.3
%
 
23.6
%
 
19.9
%
 
General and administrative expense ratio
14.9
%
 
8.0
%
 
13.1
%
(1)
Combined ratio
104.6
%
 
69.7
%
 
87.3
%
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
2,712,403

 
$
2,095,465

 
$
4,807,868

 
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.

35

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)


9.
Segment reporting, cont'd.
The following table provides a summary of segment revenues and results for the three months ended September 30, 2015 and the reserve for losses and loss expenses as of September 30, 2015:
 
Three Months Ended September 30, 2015
 
 
Insurance
 
Reinsurance
 
Total
 
Revenues
 
 
 
 
 
 
Gross premiums written
$
448,563

 
$
194,034

 
$
642,597

 
Ceded premiums written
(273,626
)
 
(32,281
)
 
(305,907
)
 
Net premiums written
174,937

 
161,753

 
336,690

 
Net premiums earned
234,143

 
322,860

 
557,003

 
Other underwriting income

 
227

 
227

 
 
234,143

 
323,087

 
557,230

 
Expenses
 
 
 
 
 
 
Net losses and loss expenses
139,603

 
124,390

 
263,993

 
Acquisition expenses
24,375

 
66,082

 
90,457

 
General and administrative expenses
31,880

 
28,913

 
60,793

 
 
195,858

 
219,385

 
415,243

 
Underwriting income
$
38,285

 
$
103,702

 
141,987

 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
16,533

 
Corporate expenses
 
 
 
 
(74,308
)
 
Net foreign exchange losses
 
 
 
 
(8,621
)
 
Net realized and unrealized gains
 
 
 
 
5,029

 
Net impairment losses recognized in earnings
 
 
 
 
(38
)
 
Amortization of intangibles
 
 
 
 
(11,318
)
 
Interest expense
 
 
 
 
(12,324
)
 
Income before income taxes
 
 
 
 
$
56,940

 
 
 
 
 
 
 
 
Net loss ratio
59.6
%
 
38.5
%
 
47.4
%
 
Acquisition expense ratio
10.4
%
 
20.5
%
 
16.2
%
 
General and administrative expense ratio
13.6
%
 
9.0
%
 
24.3
%
(1)
Combined ratio
83.6
%
 
68.0
%
 
87.9
%
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
2,429,385

 
$
2,060,451

 
$
4,489,836

 
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.


36

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)


9.
Segment reporting, cont'd.
The following table provides gross and net premiums written by line of business for the three months ended September 30, 2016 and 2015:
 
Gross
premiums
written
 
Net
premiums
written
 
Gross
premiums
written
 
Net
premiums
written
Business Segment
2016
 
2016
 
2015
 
2015
Insurance
 
 
 
 
 
 
 
Agriculture
$
151,483

 
$
49,062

 
$
156,145

 
$
29,634

Casualty and other specialty
168,644

 
68,211

 
128,509

 
64,490

Professional lines
97,432

 
30,328

 
80,069

 
37,479

Property, marine/energy and aviation
150,718

 
55,103

 
83,840

 
43,334

Total Insurance
568,277

 
202,704

 
448,563

 
174,937

Reinsurance
 
 
 
 
 
 
 
Catastrophe
51,040

 
32,696

 
40,660

 
14,814

Property
41,975

 
40,882

 
53,423

 
52,887

Casualty
35,438

 
35,772

 
42,802

 
42,802

Professional lines
33,289

 
31,883

 
31,705

 
31,705

Specialty
30,668

 
5,049

 
25,444

 
19,545

Total Reinsurance
192,410

 
146,282

 
194,034

 
161,753

Total
$
760,687

 
$
348,986

 
$
642,597

 
$
336,690


37

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)


9.
Segment reporting, cont'd.
The following table provides a summary of the segment revenues and results for the nine months ended September 30, 2016:
 
Nine Months Ended September 30, 2016
 
 
Insurance
 
Reinsurance
 
Total
 
Revenues
 
 
 
 
 
 
Gross premiums written
$
1,997,100

 
$
1,512,194

 
$
3,509,294

 
Ceded premiums written
(1,183,850
)
 
(319,848
)
 
(1,503,698
)
 
Net premiums written
813,250

 
1,192,346

 
2,005,596

 
Net premiums earned
745,956

 
1,016,999

 
1,762,955

 
Other underwriting loss

 
(1,980
)
 
(1,980
)
 
 
745,956

 
1,015,019

 
1,760,975

 
Expenses
 
 
 
 
 
 
Net losses and loss expenses
499,104

 
451,798

 
950,902

 
Acquisition expenses
104,999

 
232,195

 
337,194

 
General and administrative expenses
108,912

 
86,130

 
195,042

 
 
713,015

 
770,123

 
1,483,138

 
Underwriting income
$
32,941

 
$
244,896

 
277,837

 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
117,394

 
Corporate expenses
 
 
 
 
(35,553
)
 
Net foreign exchange gains
 
 
 
 
63,056

 
Net realized and unrealized gains
 
 
 
 
33,539

 
Net impairment losses recognized in earnings
 
 
 
 
(10,647
)
 
Amortization of intangibles
 
 
 
 
(63,471
)
 
Interest expense
 
 
 
 
(33,053
)
 
Income before income taxes
 
 
 
 
$
349,102

 
 
 
 
 
 
 
 
Net loss ratio
66.9
%
 
44.4
%
 
53.9
%
 
Acquisition expense ratio
14.1
%
 
22.8
%
 
19.1
%
 
General and administrative expense ratio
14.6
%
 
8.5
%
 
13.1
%
(1)
Combined ratio
95.6
%
 
75.7
%
 
86.1
%
 
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.

38

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)


9.
Segment reporting, cont'd.
The following table provides a summary of the segment revenues and results for the nine months ended September 30, 2015:
 
Nine Months Ended September 30, 2015
 
 
Insurance
 
Reinsurance
 
Total
 
Revenues
 
 
 
 
 
 
Gross premiums written
$
1,653,647

 
$
1,151,566

 
$
2,805,213

 
Ceded premiums written
(984,372
)
 
(160,114
)
 
(1,144,486
)
 
Net premiums written
669,275

 
991,452

 
1,660,727

 
Net premiums earned
571,467

 
833,530

 
1,404,997

 
Other underwriting income

 
4,022

 
4,022

 
 
571,467

 
837,552

 
1,409,019

 
Expenses
 
 
 
 
 
 
Net losses and loss expenses
359,598

 
315,453

 
675,051

 
Acquisition expenses
57,960

 
199,561

 
257,521

 
General and administrative expenses
89,289

 
81,359

 
170,648

 
 
506,847

 
596,373

 
1,103,220

 
Underwriting income
$
64,620

 
$
241,179

 
305,799

 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
90,646

 
Corporate expenses
 
 
 
 
(99,210
)
 
Net foreign exchange losses
 
 
 
 
(29,154
)
 
Net realized and unrealized gains
 
 
 
 
32,898

 
Net impairment losses recognized in earnings
 
 
 
 
(1,111
)
 
Amortization of intangibles
 
 
 
 
(14,496
)
 
Interest expense
 
 
 
 
(30,445
)
 
Income before income taxes
 
 
 
 
$
254,927

 
 
 
 
 
 
 
 
Net loss ratio
63.0
%
 
37.8
%
 
48.1
%
 
Acquisition expense ratio
10.1
%
 
23.9
%
 
18.3
%
 
General and administrative expense ratio
15.6
%
 
9.8
%
 
19.2
%
(1)
Combined ratio
88.7
%
 
71.5
%
 
85.6
%
 
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.


39

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)


9.
Segment reporting, cont'd.
The following table provides gross and net premiums written by line of business for the nine months ended September 30, 2016 and 2015:
 
Gross
premiums
written
 
Net
premiums
written
 
Gross
premiums
written
 
Net
premiums
written
Business Segment
2016
 
2016
 
2015
 
2015
Insurance
 
 
 
 
 
 
 
Agriculture
$
714,621

 
$
254,727

 
$
785,073

 
$
254,771

Casualty and other specialty
484,980

 
209,673

 
375,247

 
174,850

Professional lines
297,526

 
124,866

 
231,565

 
105,153

Property, marine/energy and aviation
499,973

 
223,984

 
261,762

 
134,501

Total Insurance
1,997,100

 
813,250

 
1,653,647

 
669,275

Reinsurance
 
 
 
 
 
 
 
Catastrophe
488,865

 
319,245

 
304,900

 
190,579

Property
229,087

 
222,242

 
209,683

 
206,454

Casualty
216,421

 
215,412

 
149,032

 
149,032

Professional lines
217,476

 
215,134

 
209,803

 
209,803

Specialty
360,345

 
220,313

 
278,148

 
235,584

Total Reinsurance
1,512,194

 
1,192,346

 
1,151,566

 
991,452

Total
$
3,509,294

 
$
2,005,596

 
$
2,805,213

 
$
1,660,727

10.
Commitments and contingencies
Concentrations of credit risk. The Company's reinsurance recoverables on paid and unpaid losses at September 30, 2016 and December 31, 2015 amounted to $1,436.3 million and $1,196.0 million, respectively. At September 30, 2016, substantially all reinsurance recoverables on paid and unpaid losses were due from the U.S. government or from reinsurers rated A- or better by A.M. Best Company, Inc. or Standard & Poor's Corporation. At September 30, 2016 and December 31, 2015, the Company held collateral of $479.8 million and $321.5 million, respectively, related to its ceded reinsurance agreements.
Major production sources. The following table shows the percentage of gross premiums written generated through the Company's largest brokers for the nine months ended September 30, 2016 and 2015, respectively:
Broker
 
2016
 
2015
Marsh & McLennan Companies, Inc.
 
20.6
%
 
24.9
%
Aon Benfield
 
14.4
%
 
15.8
%
Willis Companies
 
9.5
%
 
12.8
%
Total of largest brokers
 
44.5
%
 
53.5
%
Letters of credit. As of September 30, 2016, the Company had issued letters of credit of $278.7 million (December 31, 2015$341.6 million) under its credit facilities and letter of credit reimbursement agreements in favor of certain ceding companies to collateralize obligations.
Investment commitments. As of September 30, 2016 and December 31, 2015, the Company had pledged cash and cash equivalents and fixed maturity investments of $111.2 million and $108.9 million, respectively, in favor of certain ceding companies to collateralize obligations. As of September 30, 2016 and December 31, 2015, the Company had also pledged $319.3 million and $383.3 million of its cash and fixed maturity investments as required to meet collateral obligations for $278.7 million and $341.6 million, respectively, in letters of credit outstanding under its credit facilities and letter of credit reimbursement agreements. In addition, as of September 30, 2016 and December 31, 2015, cash and fixed maturity investments with fair values of $211.1 million and $208.3 million were on deposit with U.S. state regulators, respectively.

40

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)


10.
Commitments and contingencies, cont'd.
The Company is subject to certain commitments with respect to other investments at September 30, 2016 and December 31, 2015. See Note 3, Investments.
Investment assets held in trust. Blue Water Re and Blue Water Re II do not operate with a financial strength rating and, instead, fully collateralize their reinsurance obligations through cash and cash equivalents held in trust funds established by Blue Water Re and Blue Water Re II (the "Blue Water Trusts") for the benefit of ceding companies. As of September 30, 2016, the fair value of the assets held in the Blue Water Trusts was $405.2 million (December 31, 2015 - $438.9 million), which met the minimum value required on that date.
As of September 30, 2016, Blue Capital Re had pledged $180.7 million (December 31, 2015 - $195.3 million) of its cash and cash equivalents to trust accounts established for the benefit of Blue Water Re.
Blue Capital Re ILS fully collateralizes its insurance-linked security obligations through cash and cash equivalents held in trust funds established by Blue Capital Re ILS (the "Blue Capital Re ILS Trusts") for the benefit of third parties. As of September 30, 2016, the fair value of the assets held in the Blue Capital Re ILS Trusts was $3.3 million (December 31, 2015 - $5.2 million), which met the minimum value required on that date.
During 2015, Endurance Bermuda established a multi-beneficiary reinsurance trust (the "Endurance Reinsurance Trust") domiciled in Delaware. The Endurance Reinsurance Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants. As of September 30, 2016, the fair value of the investments held in the Endurance Reinsurance Trust exceeded $806.6 million (December 31, 2015 - $94.1 million), the minimum value required on that date.
During 2015, Endurance Bermuda also established a second multi-beneficiary reinsurance trust domiciled in Delaware as a means of providing statutory credit to Endurance Bermuda's U.S. cedants in connection with a reduction in collateral requirements in certain states (the "Reduced Collateral Trust"). As of September 30, 2016, the fair value of the assets held in the Reduced Collateral Trust exceeded $21.4 million (December 31, 2015 - $10.8 million), the minimum value required on that date.
Endurance Bermuda is party to a reinsurance trust (the "MUSIC Trust"). The MUSIC Trust was established as a means of providing statutory credit to MUSIC in support of the business retained in connection with the 2011 sale by Montpelier of MUSIC. As of September 30, 2016, the fair value of the assets held in the MUSIC Trust was $22.1 million (December 31, 2015 - $21.3 million).
Endurance Bermuda is party to a Lloyd's Deposit Trust Deed (the "Lloyd's Capital Trust") in order to meet Endurance Corporate Capital Limited ("ECCL")'s ongoing funds at Lloyd's ("FAL") requirements. The minimum value of cash and investments held by the Lloyd’s Capital Trust is subject to approval by Lloyd's and is based on ECCL's Solvency Capital Requirement, which is used to determine the required amount of FAL. As of September 30, 2016, the fair value of cash and investments held in the Lloyd's Capital Trust was $278.6 million (December 31, 2015 - $276.8 million), which met the minimum value required on that date.
Premiums received by Syndicate 5151 are required to be received into the Lloyd's Premiums Trust Funds (the "Premiums Trust Funds"). Under the Premiums Trust Funds' deeds, assets may only be used for the payment of claims and valid expenses for a stated period of time. As of September 30, 2016, the fair value of all assets held in the Premiums Trust Funds was $177.2 million (December 31, 2015 - $231.9 million).

41

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)


10.
Commitments and contingencies, cont'd.
The Company's investment assets held in trust appear on the Company's Condensed Consolidated Balance Sheets as cash and cash equivalents, fixed maturity investments and accrued investment income, as appropriate.
Lloyd's New Central Fund. The Lloyd's New Central Fund is available to satisfy claims if a member of Lloyd's is unable to meet its obligations to policyholders. The Lloyd's New Central Fund is funded by an annual levy imposed on members, which is determined annually by Lloyd's as a percentage of each member's gross written premiums (0.35% with respect to 2016). In addition, the Council of Lloyd's has power to call on members to make an additional contribution to the Lloyd's New Central Fund of up to 3.0% of their underwriting capacity each year should it decide that such additional contributions are necessary. The Company currently estimates that its 2016 obligation to the Lloyd's New Central Fund will be approximately $1.2 million and accrues for this obligation ratably throughout the year on a quarterly basis.
Lloyd's also imposes other charges on its members and the syndicates on which they participate, including an annual subscription charge (0.45% of gross written premiums with respect to 2016) and an overseas business charge, levied as a percentage of gross international premiums (defined as business outside the U.K. and the Channel Islands), with the percentage depending on the type of business written. Lloyd's also has power to impose additional charges under Lloyd's Powers of Charging Byelaw. The Company currently estimates that its 2016 obligation to Lloyd's for such charges will be approximately $1.6 million and accrues for this obligation ratably throughout the year on a quarterly basis.
BCRH Credit Agreement. Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCRH 364-day unsecured credit agreement (the "BCRH Credit Agreement"), which permitted BCRH to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company was entitled to receive an annual guarantee fee from BCRH equal to 0.125% of the facility's total capacity (the "BCRH Guarantee Agreement"). The BCRH Credit Agreement and the BCRH Guarantee Agreement expired on April 29, 2016.
As of September 30, 2016, BCRH had no outstanding borrowings under the BCRH Credit Agreement (December 31, 2015 - $13.0 million). With respect to BCRH's outstanding borrowings at December 31, 2015, $4.0 million was repaid on February 2, 2016 and was subject to an annual interest rate of 1.33%, $5.0 million was repaid on February 22, 2016 and was subject to an annual interest rate of 1.48%, and $4.0 million was repaid on March 11, 2016 and was subject to an annual interest rate of 1.51%.
On May 6, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCRH (the "BCRH Credit Facility"). The BCRH Credit Facility provides BCRH with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCRH Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points.  The BCRH Credit Facility contains covenants that limit BCRH's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt.  If BCRH fails to comply with any of these covenants, the Company could terminate the BCRH Credit Facility and exercise remedies against BCRH. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCRH, the Company has the right to terminate the BCRH Credit Facility. As of September 30, 2016, BCRH had no outstanding borrowings under the BCRH Credit Facility.
BCGR Credit Agreement. Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCGR 364-day unsecured credit agreement (the "BCGR Credit Agreement"), which permitted BCGR to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company was entitled to receive an annual guarantee fee from BCGR equal to 0.125% of the facility's total capacity (the "BCGR Guarantee Agreement"). The BCGR Credit Agreement and the BCGR Guarantee Agreement expired on May 12, 2016.
As of September 30, 2016, BCGR had no outstanding borrowings under the BCGR Credit Agreement (December 31, 2015 - $6.0 million). With respect to BCGR's outstanding borrowing at December 31, 2015, $3.0 million was repaid on February 1, 2016 and was subject to an annual interest rate of 1.54%, and $3.0 million was repaid on February 12, 2016 and was subject to an annual interest rate of 1.51%.


42

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)


10.
Commitments and contingencies, cont'd.
On May 6, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCGR (the "BCGR Credit Facility"). The BCGR Credit Facility provides BCGR with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCGR Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points.  The BCGR Credit Facility contains covenants that limit BCGR's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt.  If BCGR fails to comply with any of these covenants, the Company could terminate the BCGR Credit Facility and exercise remedies against BCGR. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCGR, the Company has the right to terminate the BCGR Credit Facility. As of September 30, 2016, BCGR had no outstanding borrowings under the BCGR Credit Facility.
Investment repurchase agreements. At September 30, 2016, the Company's investment repurchase agreement obligations of $121.0 million were fully collateralized. The following table presents the fair value of collateral pledged under repurchase agreements by investment category. The remaining contractual maturity of the repurchase agreements is less than 30 days.
 
 
September 30, 2016
Collateral pledged under repurchase agreements
 
 
U.S. government and agencies securities
 
$
25,876

Residential mortgage-backed securities
 
98,427

 
 
$
124,303

Gross amount of recognized liabilities for repurchase agreements
 
$
120,997

Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transaction. In the event of a decline in the fair value of the pledged collateral under these agreements, the Company may be required to transfer cash or additional securities as pledged collateral under these agreements. Upon termination of the transactions, the Company and its counterparties are obligated to return the amounts borrowed and the securities transferred, respectively.
Reinsurance commitments. In the ordinary course of business, the Company periodically enters into reinsurance agreements that include terms that could require the Company to collateralize certain of its obligations.
Employment agreements. The Company has entered into employment agreements with certain officers that provide for equity incentive awards, 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 September 30, 2016 are as follows:
Twelve months ended September 30,
 
Amount
2017
 
$
15,810

2018
 
16,194

2019
 
15,644

2020
 
14,874

2021
 
13,132

2022 and thereafter
 
17,425

 
 
$
93,079

Total net lease expense under operating leases for the nine months ended September 30, 2016 was $8.7 million (2015$10.5 million).

43

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)


10.
Commitments and contingencies, cont'd.
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 Company's insurance and reinsurance agreements, disputes are generally required to be settled by arbitration.
11.     Debt and financing arrangements
Credit Facility
On March 23, 2016, the Company and certain designated subsidiaries of the Company entered into a $450.0 million five-year letter of credit facility with JPMorgan Chase Bank, N.A. ("JPMorgan") as administrative agent (the "Credit Facility"). Upon entering into the Credit Facility, the Company terminated its existing $700.0 million credit agreement, dated April 19, 2012, with JPMorgan as administrative agent. As of September 30, 2016, there were letters of credit outstanding under the Credit Facility of $255.3 million (December 31, 2015$329.9 million). The Credit Facility does not provide for revolving or term loans.
The Credit Facility is collateralized on a several basis by each entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas as collateral agent. So long as there is no default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $100.0 million, but no participating lender is obligated to increase its commitments under the Credit Facility.
The Company is required to pay a fee of 0.40% per annum on the daily stated amount of outstanding letters of credit issued under the Credit Facility. In addition, the Credit Facility requires the Company to pay to the lenders a commitment fee in the amount of 0.125% per annum on the average daily amount of the unused commitments of the lenders. The Credit Facility permits a lender, if requested and in its discretion, to issue a letter of credit pursuant to which it fronts for the other lenders. For such letters of credit, such fronting lenders may receive certain fronting fees from the Company.
The Credit Facility requires the Company's compliance with certain customary restrictive covenants, including a financial covenant that the Company maintain a leverage ratio of no greater than 0.35:1.00 at any time. In addition, each of the Company's regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times.
The Credit Facility also contains customary event of default provisions, including failure to pay any unpaid drawing under a letter of credit under the Credit Facility or interest thereon and failure to pay any fee under the Credit Facility, insolvency events of the Company or any of its subsidiaries (other than certain immaterial subsidiaries), a change in control of the Company, a breach of the representations or covenants in the Credit Facility or the security documents relating thereto and certain defaults by the Company or its subsidiaries under other indebtedness. In the case of an event of default that occurs as a result of an insolvency event of the Company or one of its designated subsidiary borrowers, the commitments of the lenders will automatically terminate and the repayment of outstanding obligations will be automatically accelerated. Upon the occurrence of any other event of default under the Credit Facility, the lenders can terminate their commitments under the Credit Facility, require repayment of any outstanding obligations under the Credit Facility, give notice of non-extension of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any collateral held by the lenders (or any agent on their behalf) under the Credit Facility.
12.     Subsequent events
Merger with Sompo Holdings, Inc.
On October 5, 2016, the Company entered into an agreement and plan of merger (the "Merger Agreement") for the acquisition of 100% of the outstanding ordinary shares of the Company by Sompo Holdings, Inc. ("SOMPO") for $93.00 per share in cash (the "Merger"). The Merger has been approved by both companies' Board of Directors. The Merger is expected to close as soon as practicable following the satisfaction of customary closing conditions including, but not limited to, approval by the Company's shareholders and regulatory approvals. There can be no assurance that the Merger will occur.

44

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)


12.     Subsequent events, cont'd.
Under the terms of the Merger Agreement, the aggregate consideration for the Merger will be approximately $6,304.0 million in cash. The purchase will be financed by SOMPO with existing sources of liquidity and supplementary facilities without a financing contingency.
If the Merger is terminated under certain circumstances, the Company is obligated to pay SOMPO a cash termination fee of $204.9 million together with SOMPO's expenses relating to the Merger up to $15.8 million.
The Company incurred $1.0 million of corporate expenses associated with the Merger during the three months ended September 30, 2016 and is contractually obligated to pay investment banking fees upon closing of the Merger. The Company expects to incur additional costs and expenses associated with the Merger during the fourth quarter of 2016 and the first quarter of 2017.
Hurricane Matthew
On October 7 and 8, 2016, Hurricane Matthew affected the southeastern coast of the United States, ultimately making landfall in South Carolina. To date, reported claims as a result of this storm have been limited. While losses emanating from the storm cannot be accurately estimated at this time, the Company may need to establish appropriate loss reserves related to Hurricane Matthew in the fourth quarter of 2016, which may have a negative impact on its results of operations.

45


MANAGEMENT’S 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 nine months ended September 30, 2016 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, 2015, 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, 2015 (the "2015 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 Company's 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" 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 2015 Form 10-K and this Form 10-Q 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 writes specialty lines of property and casualty insurance and reinsurance on a global basis through its operating subsidiaries. The Company seeks to create a portfolio of specialty lines of business that are profitable and have limited correlation with one another. The Company's portfolio of specialty lines of business is organized into two business segments, Insurance and Reinsurance.    
In the Insurance segment, the Company writes agriculture, casualty and other specialty, professional lines, and property, marine/energy and aviation insurance. In the Reinsurance segment, the Company writes catastrophe, property, casualty, professional lines and specialty reinsurance.
The Company's 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 Company's 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.         
As part of its collateralized reinsurance and third party asset management operations, Endurance Holdings and Endurance Specialty Insurance Ltd. ("Endurance Bermuda") together own 33.3% of Blue Capital Reinsurance Holdings Ltd. ("BCRH"), and Endurance Bermuda owns 25.2% of Blue Capital Global Reinsurance Fund Limited ("BCGR").
BCRH is a Bermuda-based exempted limited liability holding company managed by a subsidiary of the Company. BCRH provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through its wholly-owned Bermuda-based subsidiaries, Blue Capital Re. Ltd. and Blue Capital Re ILS Ltd. Blue Capital Re Ltd. is a Class 3A insurer licensed under the Bermuda Insurance Act. BCRH's shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange.
BCGR is a closed-ended mutual fund incorporated in Bermuda and managed by a subsidiary of the Company. BCGR serves as the feeder fund for the Blue Capital Global Reinsurance SA-I cell.  BCGR's shares are listed on the Specialist Fund Market of the London Stock Exchange and on the Bermuda Stock Exchange.
Application of Critical Accounting Estimates
The Company's unaudited 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 and fair value measurements of certain portions of the investment portfolio. There were no material changes in the application of the Company's critical accounting estimates. Management has discussed the application of these critical accounting estimates with the Company's Board of Directors and the Audit Committee of the Board of Directors. For a detailed discussion of the Company's critical accounting estimates, please refer to the 2015 Form 10-K and the Notes to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.

46


Consolidated Results of Operations – For the Three Months Ended September 30, 2016 and 2015
Results of operations for the three months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended 
 September 30,
 
 
 
2016
 
2015
 
Change(1)
 
(U.S. dollars in thousands, except for ratios)
Revenues
 
 
 
 
 
Gross premiums written
$
760,687

 
$
642,597

 
18.4
 %
Ceded premiums written
(411,701
)
 
(305,907
)
 
34.6
 %
Net premiums written
348,986

 
336,690

 
3.7
 %
Net premiums earned
610,156

 
557,003

 
9.5
 %
Net investment income
62,236

 
16,533

 
276.4
 %
Net realized and unrealized gains
13,405

 
5,029

 
166.6
 %
Net impairment losses recognized in earnings
(183
)
 
(38
)
 
381.6
 %
Other underwriting (loss) income
(466
)
 
227

 
NM(2)

Total revenues
685,148

 
578,754

 
18.4
 %
Expenses
 
 
 
 
 
Net losses and loss expenses
331,462

 
263,993

 
25.6
 %
Acquisition expenses
121,391

 
90,457

 
34.2
 %
General and administrative expenses
67,738

 
60,793

 
11.4
 %
Corporate expenses
11,952

 
74,308

 
(83.9
)%
Amortization of intangibles
21,154

 
11,318

 
86.9
 %
Net foreign exchange (gains) losses
(18,576
)
 
8,621

 
NM(2)

Interest expense
10,826

 
12,324

 
(12.2
)%
Income tax (benefit) expense
(199
)
 
2,410

 
NM(2)

Net income
139,400

 
54,530

 
155.6
 %
Net income attributable to non-controlling interests
(5,679
)
 
(2,707
)
 
109.8
 %
Preferred dividends
(3,651
)
 
(8,188
)
 
(55.4
)%
Net income available to Endurance Holdings' common and participating common shareholders
$
130,070

 
$
43,635

 
198.1
 %
 
 
 
 
 
 
Net loss ratio
54.3
%
 
47.4
%
 
6.9

Acquisition expense ratio
19.9
%
 
16.2
%
 
3.7

General and administrative expense ratio(3)
13.1
%
 
24.3
%
 
(11.2
)
Combined ratio
87.3
%
 
87.9
%
 
(0.6
)
 
(1)
With respect to ratios, changes show increase or decrease in percentage points.
(2)
Not meaningful.
(3)
General and administrative expense ratio includes general and administrative expenses and corporate expenses.

47


Premiums
Gross premiums written in the three months ended September 30, 2016 were $760.7 million, an increase of $118.1 million, or 18.4%, compared to the same period in 2015. Net premiums written in the three months ended September 30, 2016 were $349.0 million, an increase of $12.3 million, or 3.7% compared to the same period in 2015. The increase in gross premiums written were driven by the following factors:
An increase in the property, marine/energy and aviation, professional lines and casualty and other specialty lines of business in the Insurance segment due primarily to business generated by new underwriting teams in the U.S. and the U.K. and new business resulting from the acquisition of Montpelier Re Holdings Ltd. ("Montpelier");
A decline in the agriculture line of business in the Insurance segment due to lower commodity prices;
An increase in the catastrophe line of business in the Reinsurance segment due to new business resulting from the acquisition of Montpelier, partially offset by non-renewal of policies that no longer met profitability targets and declines in signed lines;
An increase in the specialty line of business in the Reinsurance segment due to new business written and increased renewals, partially offset by non-renewal of policies that no longer met profitability targets;
A decline in the property line of business in the Reinsurance segment due to non-renewal of a large contract and declines in signed lines; and
A decline in the casualty line of business in the Reinsurance segment due to the timing of renewals for certain multi-year deals, partially offset by new business.
Ceded premiums written increased 34.6% during the quarter ended September 30, 2016 as compared to the same period in 2015. In the Insurance segment, increased gross premiums written resulted in increased ceded premiums under the whole account quota share treaty covering the entire Insurance segment's business, combined with additional purchases of quota share and excess of loss reinsurance coverage. In the Reinsurance segment, ceded premiums written increased due to additional excess of loss retrocessional coverage purchased on the catastrophe line of business, quota share coverage on the specialty line of business, and growth in gross written premiums ceded under existing quota share treaties.
Net premiums earned for the three months ended September 30, 2016 were $610.2 million, an increase of $53.2 million, or 9.5%, from the third quarter of 2015 due to the increase in gross premiums written and the earning of premiums acquired, partially offset by increased ceded premiums.
Net Investment Income
The Company's net investment income of $62.2 million increased by 276.4%, or $45.7 million, for the quarter ended September 30, 2016 as compared to the same period in 2015. This increase resulted primarily from the Company's other investments, which is comprised of alternative funds and specialty funds. Net investment income during the third quarter of 2016 included net mark to market gains of $22.8 million on other investments as compared to mark to market losses of $17.7 million in the third quarter of 2015. Investment expenses, including investment management fees, for the three months ended September 30, 2016 were $3.9 million compared to $4.2 million for the same period in 2015.    
During the third quarter of 2016, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 31 basis point range, with a high of 0.96% and a low of 0.65%. Trading activity in the Company's trading and available for sale portfolios during the third quarter included reductions in government guaranteed corporate securities, residential and commercial mortgage-backed securities, asset-backed securities, equity securities, and short-term investments and increased allocations to corporate securities and foreign government securities. The duration of fixed income investments decreased to 2.66 years at September 30, 2016 from 2.74 years at December 31, 2015.
Net Realized and Unrealized Gains
The Company's investment portfolio is actively managed to generate attractive economic returns and income. 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 and maturities of investments classified as trading and available for sale during the three months ended September 30, 2016 were $1,393.1 million compared to $1,507.9 million during the same period a year ago. Net realized and unrealized gains increased during the three months ended September 30, 2016 compared to the same period in 2015 due to a reduction in realized losses incurred in the current period compared to the prior period which included losses due to the repositioning the Company's portfolio of equity securities and increased net unrealized gains on trading securities from mark to market adjustments recorded in the current period.

48


Gross realized investment gains and losses, net unrealized gains (losses) on trading securities and the change in the fair value of investment-related derivative financial instruments for the three months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended 
 September 30,
 
2016
 
2015
 
(U.S. dollars in thousands)
Gross realized gains on investment sales
$
11,072

 
$
20,107

Gross realized losses on investment sales
(3,365
)
 
(8,236
)
Net unrealized gains (losses) on trading securities
6,153

 
(5,037
)
Change in fair value of investment-related derivative financial instruments
(455
)
 
(1,805
)
Net realized and unrealized gains
$
13,405

 
$
5,029

Net Foreign Exchange (Gains) Losses
For the three months ended September 30, 2016, the Company re-measured its monetary assets and liabilities denominated in foreign currencies, which resulted in a net foreign exchange gain of $18.6 million compared to a net foreign exchange loss of $8.6 million for the same period of 2015. The current period net foreign exchange gain resulted from the British Sterling weakening against the U.S. dollar and other key currencies during the period resulting in the upward revaluation of net asset positions in those currencies. In the prior year, the net foreign exchange loss resulted partly from sales of invested assets that yielded realized foreign exchange losses recognized in net income, which had previously been recognized as unrealized foreign exchange losses in other comprehensive income (loss). Foreign exchange losses in the prior period also resulted from the impact of the U.S. dollar strengthening against British Sterling and the Canadian, Australian and New Zealand dollar as applied against the Company's net exposures.
Net Losses and Loss Expenses
The Company's net loss ratio for the three months ended September 30, 2016 increased compared to the same period in 2015 due primarily to an increase in the current accident year loss ratio in the Insurance segment in the current quarter, which reflected increased attritional and large losses primarily in the property, marine/energy and aviation line of business.
        The following table shows the net losses after adjustment for reinstatement premiums recorded by the Company in connection with current calendar year catastrophes for the three months ended September 30, 2016 and 2015.
Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2015
Event Date
 
Event
 
Loss
 
Event Date
 
Event
 
Loss
(U.S. dollars in millions)

 
Other loss events in 2016
 
$
5.1

 
August 2015
 
Tianjin explosions
 
$
8.9

 
 
 
 
 
 
August 2015
 
Unipetrol fire
 
9.7

 
 
 
 
 
 
 
 
Other loss events in 2015
 
4.1

Total impact on net losses and loss expenses
 
5.1

 
Total impact on net losses and loss expenses
 
22.7

Add: reduction in reinstatement premiums
 
0.9

 
Less: reinstatement premiums
 
(1.4
)
Net losses after adjustment for reinstatement premiums
 
$
6.0

 
Net losses after adjustment for reinstatement premiums
 
$
21.3

For the three months ended September 30, 2016, natural catastrophe related losses added 0.9 percentage points to the Company's net loss ratio after adjustment for reinstatement premiums compared to 3.9 percentage points in the same period for 2015.
Favorable prior year loss reserve development was $54.3 million for the third quarter of 2016, which decreased the net loss ratio by 8.9 percentage points, compared to $67.3 million during the same period in 2015, which decreased the net loss ratio by 12.1 percentage points. In the third quarter of 2016, prior year loss reserves emerged favorably across the agriculture, casualty and other specialty, and property, marine/energy and aviation lines of business in the Insurance segment, and all lines of business in the Reinsurance segment.
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 Company's unaudited consolidated

49


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 Company's actuaries and reflect management's 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 September 30, 2016 was higher than the same period in 2015 primarily due to the addition of earned premiums in 2015 resulting from the Company's acquisition of Montpelier, which had no associated acquisition costs as these were written off upon the closing of the acquisition in accordance with applicable accounting guidance.
General and Administrative Expenses and Corporate Expenses
The Company's general and administrative expense ratio for the third quarter of 2016 decreased by 11.2 percentage points compared to the same period in 2015 primarily due to transaction and integration costs associated with the Company's acquisition of Montpelier which were included in corporate expenses in 2015. Excluding transaction and integration costs related to Montpelier, general and administrative and corporate expenses increased for the current quarter compared to the same period in 2015 due to an increase in personnel costs associated with the addition of new underwriting teams and additional employees, partially offset by increased ceding commission reimbursements as a result of increased ceded premiums. At September 30, 2016, the Company had a total of 1,228 employees compared to 1,173 employees at September 30, 2015.
Amortization of Intangible Assets
The Company's amortization of intangibles for the third quarter of 2016 increased by $9.8 million compared to the same period in 2015 primarily due to $293.2 million of intangible assets recognized in the purchase of Montpelier that are being amortized over their related useful lives.
Income Tax (Benefit) Expense
The Company recorded an income tax benefit for the quarter ended September 30, 2016 of $0.2 million compared to income tax expense of $2.4 million for the quarter ended September 30, 2015. The income tax benefit in 2016 resulted from changes in the deferred tax valuation allowance recorded at the Company's subsidiaries located in United States taxable jurisdictions.
Net Income
The Company generated net income of $139.4 million in the three months ended September 30, 2016 compared to net income of $54.5 million in the same period of 2015. The increase in net income in the current period primarily resulted from increased net premiums earned, increased net investment income, increased net foreign exchange gains, and decreased corporate expenses, partially offset by increased net losses and loss expenses, acquisition expenses, and amortization expense.
Net Income Attributable to Non-controlling Interests
The Company's net income attributable to non-controlling interests was $5.7 million in the three months ended September 30, 2016 compared to $2.7 million in the same period of 2015. At September 30, 2016, Endurance Holdings and Endurance Bermuda together owned 33.3% of BCRH's common shares and Endurance Bermuda owned 25.2% of BCGR's ordinary shares. Net income attributable to non-controlling interests relates to the share of the Company's net income attributable to the BCRH common shares and BCGR ordinary shares that are not owned by the Company.

50


Consolidated Results of Operations – For the Nine Months Ended September 30, 2016 and 2015
Results of operations for the nine months ended September 30, 2016 and 2015 were as follows:
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
Change(1)
 
(U.S. dollars in thousands, except for ratios)
Revenues
 
 
 
 
 
Gross premiums written
$
3,509,294

 
$
2,805,213

 
25.1
 %
Ceded premiums written
(1,503,698
)
 
(1,144,486
)
 
31.4
 %
Net premiums written
2,005,596

 
1,660,727

 
20.8
 %
Net premiums earned
1,762,955

 
1,404,997

 
25.5
 %
Net investment income
117,394

 
90,646

 
29.5
 %
Net realized and unrealized gains
33,539

 
32,898

 
1.9
 %
Net impairment losses recognized in earnings
(10,647
)
 
(1,111
)
 
858.3
 %
Other underwriting (loss) income
(1,980
)
 
4,022

 
NM(2)

Total revenues
1,901,261

 
1,531,452

 
24.1
 %
Expenses
 
 
 
 
 
Losses and loss expenses
950,902

 
675,051

 
40.9
 %
Acquisition expenses
337,194

 
257,521

 
30.9
 %
General and administrative expenses
195,042

 
170,648

 
14.3
 %
Corporate expenses
35,553

 
99,210

 
(64.2
)%
Amortization of intangibles
63,471

 
14,496

 
337.9
 %
Net foreign exchange (gains) losses
(63,056
)
 
29,154

 
NM(2)

Interest expense
33,053

 
30,445

 
8.6
 %
Income tax (benefit) expense
(2,570
)
 
7,712

 
NM(2)

Net income
351,672

 
247,215

 
42.3
 %
Net income attributable to non-controlling interests
(18,456
)
 
(2,707
)
 
581.8
 %
Preferred dividends
(20,147
)
 
(24,564
)
 
(18.0
)%
Net income available to Endurance Holdings' common and participating common shareholders
$
313,069

 
$
219,944

 
42.3
 %
 
 
 
 
 
 
Net loss ratio
53.9
%
 
48.1
%
 
5.8

Acquisition expense ratio
19.1
%
 
18.3
%
 
0.8

General and administrative expense ratio(3)
13.1
%
 
19.2
%
 
(6.1
)
Combined ratio
86.1
%
 
85.6
%
 
0.5

 
(1)
With respect to ratios, changes show increase or decrease in percentage points.
(2)
Not meaningful.
(3)
General and administrative expense ratio includes general and administrative expenses and corporate expenses.
Premiums
Gross premiums written in the nine months ended September 30, 2016 were $3,509.3 million, an increase of $704.1 million, or 25.1%, compared to the same period in 2015. Net premiums written in the nine months ended September 30, 2016 were $2,005.6 million, an increase of $344.9 million, or 20.8%, compared to the same period in 2015. The increase in gross premiums written were driven by the following factors: 
An increase in the property, marine/energy and aviation, professional lines and casualty and other specialty lines of business in the Insurance segment due primarily to business generated by new underwriting teams in the U.S. and the U.K. and new business resulting from the acquisition of Montpelier;
A decline in the agriculture line of business in the Insurance segment due to lower commodity prices;

51


An increase in the catastrophe line of business in the Reinsurance segment due to new business resulting from the acquisition of Montpelier, partially offset by non-renewal of policies that no longer met profitability targets and declines in renewal rates;
An increase in the casualty line of business in the Reinsurance segment due to new business written in the U.S. and the U.K. and new business resulting from the acquisition of Montpelier, partially offset by non-renewal of policies that no longer met profitability targets;
An increase in the property line of business in the Reinsurance segment due to new business resulting from the acquisition of Montpelier, partially offset by the non-renewal of a large contract and declines in signed lines; and
An increase in the specialty line of business in the Reinsurance segment due to new business written and increased renewals, partially offset by non-renewal of policies that no longer met profitability targets.
Ceded premiums written increased during the nine months ended September 30, 2016 as compared to the same period in 2015. In the Insurance segment, increased gross premiums written resulted in increased ceded premiums under the whole account quota share treaty covering the entire Insurance segment's business, combined with additional purchases of facultative and excess of loss reinsurance in the property, marine/energy and aviation line of business. In the Reinsurance segment, ceded premiums written increased due to increased purchases of aggregate excess of loss retrocessional protection within the catastrophe line of business, and additional quota share and excess of loss retrocessional coverage purchased on the specialty line of business.
Net premiums earned for the nine months ended September 30, 2016 were $1,763.0 million, an increase of $358.0 million, or 25.5%, from the nine months ended September 30, 2015 principally due to the increase in gross premiums written and earning of premiums acquired, partially offset by increased ceded premiums.
Net Investment Income
The Company's net investment income of $117.4 million increased by 29.5%, or $26.7 million, for the nine months ended September 30, 2016 as compared to the same period in 2015. This increase resulted primarily from income generated by the Company's equity securities and fixed income investments, which consist of fixed maturity and short-term investments, during the nine months ended September 30, 2016. Net investment income during the first nine months of 2016 included net mark to market losses of $0.2 million on other investments, comprised of alternative funds and specialty funds, as compared to mark to market losses of $1.8 million in the first nine months of 2015. Investment expenses, including investment management fees, for the nine months ended September 30, 2016 were $11.6 million compared to $11.0 million for the same period in 2015.
During the nine months ended September 30, 2016, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 65 basis point range, with a high of 1.30% and a low of 0.65%. Trading activity in the Company's trading and available for sale portfolios for the nine months ended September 30, 2016 included reductions in short-term investments, commercial mortgage-backed securities, U.S. government agencies securities, asset-backed securities, equity securities, collateralized obligations, and government and agency guaranteed corporate securities, and increased allocations to corporate securities, foreign government securities, and residential mortgage-backed securities.
Net Realized and Unrealized Gains
The Company's investment portfolio is actively managed on a fair value basis to generate attractive economic returns and income. 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 trading and available for sale during the nine months ended September 30, 2016 were $5,210.2 million compared to $4,304.6 million during the same period a year ago. Net realized investment gains during the nine months ended September 30, 2016 were consistent with the same period in 2015 due to increased realized losses incurred due to the repositioning the Company's portfolio of equity securities in the current period, offset by increased net unrealized gains on trading securities in the current period.

52


Gross realized investment gains and losses, net unrealized gains (losses) on trading securities and the change in the fair value of investment-related derivative financial instruments for the nine months ended September 30, 2016 and 2015 were as follows:
 
Nine Months Ended September 30,
 
2016
 
2015
 
(U.S. dollars in thousands)
Gross realized gains on investment sales
$
35,776

 
$
57,420

Gross realized losses on investment sales
(50,537
)
 
(18,190
)
Net unrealized gains (losses) on trading securities
48,229

 
(5,037
)
Change in fair value of investment-related derivative financial instruments
71

 
(1,295
)
Net realized and unrealized gains
$
33,539

 
$
32,898

Net Foreign Exchange (Gains) Losses
For the nine months ended September 30, 2016, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange gains of $63.1 million compared to net foreign exchange losses of $29.2 million for the same period in 2015. The net foreign exchange gains in the nine months ended September 30, 2016 resulted from the British Sterling weakening against the U.S. dollar and other key currencies during the period resulting in the upward revaluation of net asset positions in those currencies. Additionally, sales of invested assets yielded realized foreign exchange gains recognized in net income that had previously been recognized as unrealized foreign exchange gains in other comprehensive income (loss). In the prior year, the net foreign exchange loss resulted principally from a decrease in the value of net asset positions in key foreign currencies as the U.S. dollar strengthened generally in the nine months ended September 30, 2015. Additionally, sales of invested assets yielded realized foreign exchange losses recognized in net income which had previously been recognized as unrealized foreign exchange losses in other comprehensive income (loss).
Net Losses and Loss Expenses
The Company's net loss ratio for the nine months ended September 30, 2016 increased compared to the same period in 2015 due primarily to an increase in catastrophe losses incurred in 2016.
The following table shows the net losses after adjustment for reinstatement premiums recorded by the Company in connection with current calendar year catastrophes for the nine months ended September 30, 2016 and 2015.
Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
Event Date
 
Event
 
Loss
 
Event Date
 
Event
 
Loss
(U.S. dollars in millions)
February 2016
 
Earthquake in Taiwan
 
$
6.8

 
February 2015
 
Winter storm in the United States
 
$
12.0

April 2016
 
Convective storms in the United States
 
17.8

 
April 2015
 
Windstorm in the United States
 
7.4

April 2016
 
Earthquake in Japan
 
10.7

 
May 2015
 
Windstorm in the United States
 
5.2

May 2016
 
Wildfires in Canada
 
39.7

 
August 2015
 
Tianjin explosions
 
8.9

May 2016
 
Convective storms in Germany
 
3.9

 
August 2015
 
Unipetrol fire
 
9.7

 
 
Other loss events in 2016
 
6.1

 
 
 
 
 
 
Total impact on net losses and loss expenses
 
85.0

 
Total impact on net losses and loss expenses
 
43.2

Less: reinstatement premiums
 
(10.3
)
 
Less: reinstatement premiums
 
(3.0
)
Net losses after adjustment for reinstatement premiums
 
$
74.7

 
Net losses after adjustment for reinstatement premiums
 
$
40.2

For the nine months ended September 30, 2016, catastrophe related losses added 4.5 percentage points to the Company's net loss ratio after adjustment for reinstatement premiums compared to 3.0 percentage points in the same period in 2015.
Favorable loss reserve development was recorded in the current period in the agriculture, casualty and other specialty and property, marine/energy and aviation lines of business in the Insurance segment and across all lines of business in the Reinsurance segment. Favorable prior year loss reserve development was $174.0 million for the nine months ended September 30, 2016, which decreased the net loss ratio by 9.9 percentage points, as compared to $183.3 million for the same period in 2015, which decreased the net loss ratio by 13.0 percentage points. Favorable reserve development in the nine months ended September 30, 2016 was lower than the nine months ended September 30, 2015 in the Insurance segment due primarily

53


to lower than expected reported losses in the casualty and other specialty line of business in the prior year compared to the current year. Favorable reserve development in the nine months ended September 30, 2016 was lower than the nine months ended September 30, 2015 in the Reinsurance segment due primarily to higher than expected reported losses in the casualty and property lines of business.
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 Company's 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 Company's actuaries and reflect management's best estimate of ultimate losses. See "Reserve for Losses and Loss Expenses" below for further discussion.
Acquisition Expenses
The acquisition expense ratio for the nine months ended September 30, 2016 was higher than the same period in 2015 primarily due to growth in net premiums earned in the casualty and other specialty, property, marine/energy and aviation and professional lines of business in the Insurance segment, which incur a higher net acquisition expense rate, and a decline in net premiums earned in the agriculture line of business in the Insurance segment, which incurs a lower net acquisition expense rate. This increase was partially offset by the addition of earned premiums in 2015 from the Company's acquisition of Montpelier, which had no associated acquisition costs in accordance with applicable accounting guidance.
General and Administrative Expenses and Corporate Expenses
The Company's general and administrative expense ratio for the nine months ended September 30, 2016 decreased by 6.1% percentage points compared to the same period in 2015 primarily due to transaction and integration costs associated with the Company's acquisition of Montpelier which were included in corporate expenses in 2015. Excluding transaction and integration costs related to Montpelier, general and administrative and corporate expenses increased for the nine months ended September 30, 2016 compared to the same period in 2015 due to an increase in personnel costs associated with the addition of new underwriting teams and additional employees from the Company's acquisition of Montpelier. This increase was partially offset by increased ceding commission reimbursements as a result of additional purchases of reinsurance.
Income Tax (Benefit) Expense
The Company recorded an income tax benefit for the nine months ended September 30, 2016 of $2.6 million compared to an income tax expense of $7.7 million for the same period in 2015. The tax benefit in 2016 resulted from changes in the deferred tax valuation allowance recorded at the Company's subsidiaries located in United States taxable jurisdictions.
Net Income
The Company generated net income of $351.7 million for the nine months ended September 30, 2016 compared to net income of $247.2 million in the same period of 2015. The increase in net income was primarily due to increased net premiums earned, net foreign exchange gains, and net investment income and decreased corporate expenses, partially offset by increased net losses and loss expenses, acquisition expenses and general and administrative expenses, higher amortization expense and higher impairment losses.
Net Income Attributable to Non-controlling Interests
The Company's net income attributable to non-controlling interest was $18.5 million in the nine months ended September 30, 2016 compared to $2.7 million in the same period of 2015. At September 30, 2016, the Company owned 33.3% of BCRH's common shares and 25.2% of BCGR's ordinary shares. Net income attributable to non-controlling interests relates to the share of the Company's net income attributable to the BCRH common shares and BCGR ordinary shares that are not owned by the Company.
Reserve for Losses and Loss Expenses
As of September 30, 2016, the Company had accrued losses and loss expense reserves of $4.8 billion (December 31, 2015 - $4.5 billion). This amount represents management's best estimate of the ultimate liability for payment of losses and loss expenses related to loss events. During the nine months ended September 30, 2016 and 2015, the Company's net paid losses and loss expenses were $864.3 million and $843.2 million, respectively.
As more fully described under "Reserving Process" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2015 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 Company's business segments. The Company's loss

54


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 Company's own operating history.
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 tables under the heading "Potential Variability in Reserves for Losses and Loss Expenses" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2015 Form 10-K.
Losses and loss expenses for the three and nine months ended September 30, 2016 are summarized as follows:
 
Incurred related to:
 
 
Three Months Ended September 30, 2016
Current year
 
Prior years
 
Total incurred
losses
 
(U.S. dollars in thousands)
Insurance:
 
 
 
 
 
Agriculture
$
63,143

 
$
(448
)
 
$
62,695

Casualty and other specialty
50,998

 
(5,855
)
 
45,143

Professional lines
28,805

 
29

 
28,834

Property, marine/energy and aviation
69,391

 
(3,346
)
 
66,045

Total Insurance
212,337

 
(9,620
)
 
202,717

Reinsurance:
 
 
 
 
 
Catastrophe
17,551

 
(5,747
)
 
11,804

Property
42,276

 
(7,327
)
 
34,949

Casualty
39,719

 
(5,379
)
 
34,340

Professional lines
39,447

 
(9,789
)
 
29,658

Specialty
34,384

 
(16,390
)
 
17,994

Total Reinsurance
173,377

 
(44,632
)
 
128,745

Totals
$
385,714

 
$
(54,252
)
 
$
331,462

 
Incurred related to:
 
 
Nine Months Ended September 30, 2016
Current year
 
Prior years
 
Total incurred
losses
 
(U.S. dollars in thousands)
Insurance:
 
 
 
 
 
Agriculture
$
159,581

 
$
(15,005
)
 
$
144,576

Casualty and other specialty
140,620

 
(28,038
)
 
112,582

Professional lines
81,029

 
199

 
81,228

Property, marine/energy and aviation
174,887

 
(14,169
)
 
160,718

Total Insurance
556,117

 
(57,013
)
 
499,104

Reinsurance:
 
 
 
 
 
Catastrophe
96,660

 
(28,556
)
 
68,104

Property
132,148

 
(11,306
)
 
120,842

Casualty
109,540

 
(17,216
)
 
92,324

Professional lines
110,278

 
(25,741
)
 
84,537

Specialty
120,155

 
(34,164
)
 
85,991

Total Reinsurance
568,781

 
(116,983
)
 
451,798

Totals
$
1,124,898

 
$
(173,996
)
 
$
950,902

Losses and loss expenses for the three and nine months ended September 30, 2016 included $54.3 million and $174.0 million in favorable development of reserves relating to prior accident years, respectively. The favorable loss reserve development experienced during the three and nine months ended September 30, 2016 benefited the Company's reported net loss ratios by approximately 8.9 and 9.9 percentage points, respectively. This net reduction in estimated losses for prior accident

55


years reflects lower than expected claims emergence for the three and nine months ended September 30, 2016 in the agriculture, casualty and other specialty and property, marine/energy and aviation lines of business within the Insurance segment, and all lines of business within the Reinsurance segment.
For the three and nine months ended September 30, 2016, the Company did not materially alter the 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 segments as the variances in reported losses for those segments were within the range of possible results anticipated by the Company.
Losses and loss expenses for the three and nine months ended September 30, 2015 are summarized as follows:
 
Incurred related to:
 
 
Three Months Ended September 30, 2015
Current year
 
Prior years
 
Total incurred
losses
 
(U.S. dollars in thousands)
Insurance:
 
 
 
 
 
Agriculture
$
65,145

 
$
(212
)
 
$
64,933

Casualty and other specialty
34,757

 
(12,581
)
 
22,176

Professional lines
21,980

 
345

 
22,325

Property, marine/energy and aviation
40,277

 
(10,108
)
 
30,169

Total Insurance
162,159

 
(22,556
)
 
139,603

Reinsurance:
 
 
 
 
 
Catastrophe
16,561

 
(11,734
)
 
4,827

Property
47,976

 
(8,101
)
 
39,875

Casualty
33,928

 
(9,787
)
 
24,141

Professional lines
31,676

 
(6,614
)
 
25,062

Specialty
39,040

 
(8,555
)
 
30,485

Total Reinsurance
169,181

 
(44,791
)
 
124,390

Totals
$
331,340

 
$
(67,347
)
 
$
263,993

 
Incurred related to:
 
 
Nine Months Ended September 30, 2015
Current year
 
Prior years
 
Total incurred
losses
 
(U.S. dollars in thousands)
Insurance:
 
 
 
 
 
Agriculture
$
186,841

 
$
(1,367
)
 
$
185,474

Casualty and other specialty
94,642

 
(47,954
)
 
46,688

Professional lines
56,956

 
106

 
57,062

Property, marine/energy and aviation
82,986

 
(12,612
)
 
70,374

Total Insurance
421,425

 
(61,827
)
 
359,598

Reinsurance:
 
 
 
 
 
Catastrophe
44,262

 
(27,355
)
 
16,907

Property
117,627

 
(17,117
)
 
100,510

Casualty
87,747

 
(28,953
)
 
58,794

Professional lines
88,564

 
(23,949
)
 
64,615

Specialty
98,767

 
(24,140
)
 
74,627

Total Reinsurance
436,967

 
(121,514
)
 
315,453

Totals
$
858,392

 
$
(183,341
)
 
$
675,051

Losses and loss expenses for the three and nine months ended September 30, 2015 included $67.3 million and $183.3 million in favorable development of reserves relating to prior accident years, respectively. The favorable loss reserve development experienced during the three and nine months ended September 30, 2015 benefited the Company's reported net loss ratio by approximately 12.1 and 13.0 percentage points, respectively. This net reduction in estimated losses for prior accident years reflects lower than expected claims emergence for the three and nine months ended September 30, 2015 in the agriculture, casualty and other specialty and property, marine/energy and aviation lines of business within the Insurance segment and all lines of business within the Reinsurance segment.

56


For the three and nine months ended September 30, 2015, 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 segments as the variances in reported losses for those segments were within the range of possible results anticipated by the Company.
Insurance
Agriculture. For the three and nine months ended September 30, 2016, the Company recorded favorable loss emergence due to lower than anticipated multi-peril crop insurance claims settlements for the 2015 crop year. For the three and nine months ended September 30, 2015, the Company recorded modest favorable loss emergence due to lower than anticipated crop hail insurance claims settlements for the 2014 crop year.
Casualty and other specialty. For the three and nine months ended September 30, 2016, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity, particularly within the Bermuda healthcare and excess casualty businesses, which was partially offset by unfavorable development on the Company's U.S. based small commercial casualty business taken during the second quarter of 2016. For the three and nine months ended September 30, 2015, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity, particularly within the Bermuda excess casualty business.
Professional lines. For the three and nine months ended September 30, 2016 and 2015, the Company's professional lines insurance booked ultimate losses for prior years were relatively stable as reported loss activity was in line with expectations.
Property, marine/energy and aviation. For the three and nine months ended September 30, 2016, the favorable loss emergence within the property, marine/energy and aviation line of business was primarily due to lower than expected reported claims emergence within the property line of business, particularly for business written in the Company's Lloyd's operation. For the three and nine months ended September 30, 2015, the favorable loss emergence within the property, marine/energy and aviation line of business was primarily due to lower than expected claims emergence for the U.K. property and energy lines of business. For the three months ended September 30, 2015, the favorable development largely emanated from the Company's Lloyd's operation.
Reinsurance
Catastrophe. For the three and nine months ended September 30, 2016 and 2015, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity within both the U.S. and international property catastrophe businesses.
Property. For the three and nine months ended September 30, 2016 and 2015, the Company recorded favorable loss emergence in the property line of business primarily due to lower than expected claims activity within the property treaty business, as lower than expected claims activity in the U.S. and Bermuda offset greater than expected claims activity in Europe.
Casualty. For the three and nine months ended September 30, 2016 and 2015, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity, particularly for business arising from the Company's Bermuda operation.
Professional lines. For the three and nine months ended September 30, 2016 and 2015, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected directors and officers liability claims emergence in prior accident years.
Specialty. For the three and nine months ended September 30, 2016, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity within the marine, aerospace, political risk and mortgage businesses. For the three and nine months ended September 30, 2015, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity in the Company's aerospace, surety and marine lines of business.

57


The total reserves for losses and loss expenses recorded on the Company's balance sheet were comprised of the following at September 30, 2016:
 
Case Reserves
 
IBNR Reserves
 
Reserve for losses
and loss expenses
 
(U.S. dollars in thousands)
Insurance:
 
 
 
 
 
Agriculture
$
244,392

 
$
21,878

 
$
266,270

Casualty and other specialty
298,723

 
1,044,771

 
1,343,494

Professional lines
152,279

 
523,760

 
676,039

Property, marine/energy and aviation
294,036

 
132,564

 
426,600

Total Insurance
989,430

 
1,722,973

 
2,712,403

Reinsurance:
 
 
 
 
 
Catastrophe
144,210

 
75,520

 
219,730

Property
226,985

 
112,994

 
339,979

Casualty
242,503

 
517,980

 
760,483

Professional lines
76,129

 
329,400

 
405,529

Specialty
146,847

 
222,897

 
369,744

Total Reinsurance
836,674

 
1,258,791

 
2,095,465

Totals
$
1,826,104

 
$
2,981,764

 
$
4,807,868

The total reserves for losses and loss expenses recorded on the Company's balance sheet were comprised of the following at December 31, 2015:
 
Case Reserves
 
IBNR Reserves
 
Reserve for losses
and loss expenses
 
(U.S. dollars in thousands)
Insurance:
 
 
 
 
 
Agriculture
$
226,753

 
$
57,799

 
$
284,552

Casualty and other specialty
267,877

 
1,010,083

 
1,277,960

Professional lines
116,920

 
464,638

 
581,558

Property, marine/energy and aviation
226,894

 
122,930

 
349,824

Total Insurance
838,444

 
1,655,450

 
2,493,894

Reinsurance:
 
 
 
 
 
Catastrophe
109,374

 
89,734

 
199,108

Property
229,283

 
112,026

 
341,309

Casualty
247,802

 
539,896

 
787,698

Professional lines
70,301

 
285,692

 
355,993

Specialty
142,217

 
190,196

 
332,413

Total Reinsurance
798,977

 
1,217,544

 
2,016,521

Totals
$
1,637,421

 
$
2,872,994

 
$
4,510,415

Underwriting Results by Business Segments
The determination of the Company's business segments is based on the manner in which management monitors the performance of the Company's underwriting operations. As a result, we report two business segments – Insurance and Reinsurance.
Management measures the Company's 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. The Company's historic combined ratios may not be indicative of future underwriting performance. 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 business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by the business segments are allocated directly. Remaining general and administrative expenses not incurred by the business segments are classified as corporate expenses and are not allocated to the individual business segments. Ceded reinsurance and recoveries are recorded within the business segment to which they apply.

58


Insurance
The following table summarizes the underwriting results and associated ratios for the Company's Insurance segment for the three and nine months ended September 30, 2016 and 2015.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(U.S. dollars in thousands, except for ratios)
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
568,277

 
$
448,563

 
$
1,997,100

 
$
1,653,647

Ceded premiums written
(365,573
)
 
(273,626
)
 
(1,183,850
)
 
(984,372
)
Net premiums written
202,704

 
174,937

 
813,250

 
669,275

Net premiums earned
272,603

 
234,143

 
745,956

 
571,467

Expenses
 
 
 
 
 
 
 
Losses and loss expenses
202,717

 
139,603

 
499,104

 
359,598

Acquisition expenses
41,773

 
24,375

 
104,999

 
57,960

General and administrative expenses
40,658

 
31,880

 
108,912

 
89,289

 
285,148

 
195,858

 
713,015

 
506,847

Underwriting (loss) income
$
(12,545
)
 
$
38,285

 
$
32,941

 
$
64,620

 
 
 
 
 
 
 
 
Net loss ratio
74.4
%
 
59.6
%
 
66.9
%
 
63.0
%
Acquisition expense ratio
15.3
%
 
10.4
%
 
14.1
%
 
10.1
%
General and administrative expense ratio
14.9
%
 
13.6
%
 
14.6
%
 
15.6
%
Combined ratio
104.6
%
 
83.6
%
 
95.6
%
 
88.7
%
Premiums. Gross premiums written for the three and nine months ended September 30, 2016 in the Insurance segment increased by 26.7% and 20.8% over the same period in 2015. Gross and net premiums written for each line of business in the Insurance segment were as follows:
 
Three Months Ended September 30,
 
2016
 
2015
 
Gross
Premiums
Written
 
Net 
Premiums
Written
 
Gross
Premiums
Written
 
Net 
Premiums
Written
 
(U.S. dollars in thousands)
Agriculture
$
151,483

 
$
49,062

 
$
156,145

 
$
29,634

Casualty and other specialty
168,644

 
68,211

 
128,509

 
64,490

Professional lines
97,432

 
30,328

 
80,069

 
37,479

Property, marine/energy and aviation
150,718

 
55,103

 
83,840

 
43,334

Total
$
568,277

 
$
202,704

 
$
448,563

 
$
174,937

 
Nine Months Ended September 30,
 
2016
 
2015
 
Gross
Premiums
Written
 
Net
Premiums
Written
 
Gross
Premiums
Written
 
Net
Premiums
Written
 
(U.S. dollars in thousands)
Agriculture
$
714,621

 
$
254,727

 
$
785,073

 
$
254,771

Casualty and other specialty
484,980

 
209,673

 
375,247

 
174,850

Professional lines
297,526

 
124,866

 
231,565

 
105,153

Property, marine/energy and aviation
499,973

 
223,984

 
261,762

 
134,501

Total
$
1,997,100

 
$
813,250

 
$
1,653,647

 
$
669,275

The movements in the gross premiums written in the Insurance segment for the three and nine months ended September 30, 2016 compared to the same periods in 2015 were primarily due to the following factors: 
An increase in gross premiums written in the property, marine/energy and aviation, professional lines and casualty and other specialty lines of business due primarily to business generated by new underwriting teams in the U.S. and the U.K. and new business resulting from the acquisition of Montpelier; and

59


A decline in gross premiums written in the agriculture line of business due to lower commodity prices.
Ceded premiums written increased during the three and nine months ended September 30, 2016 as compared to the same period in 2015. Increased gross premiums written resulted in increased ceded premiums under the whole account quota share treaty covering the entire Insurance segment's business, combined with additional purchases of facultative and excess of loss reinsurance in the property, marine/energy and aviation line of business. In the agriculture line of business, the decline in ceded premiums written during the three months ended September 30, 2016 compared to the same period in 2015, resulted from changes in premium estimates subject to cessions, which resulted in an increase in cessions in the third quarter of 2015. For the nine months ended September 30, 2016 and 2015, ceded premiums written decreased in the current period compared to 2015 due to lower gross premiums written and the timing of third party reinsurance contract placements.
Net premiums earned by the Company in the Insurance segment increased in the three and nine months ended September 30, 2016 compared to the same periods in 2015. The increase was a result of growth in gross premiums written partially offset by increased ceded premiums across the segment.
Losses and Loss Expenses. The net loss ratios in the Company's Insurance segment increased by 14.8 and 3.9 percentage points for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. The increase in the net loss ratios for the three and nine months ended September 30, 2016 was primarily due to increased attritional and large losses, primarily within the property, marine/energy and aviation lines of business. Five large industry losses totaling $2.0 billion in this line of business resulted in net losses of $16.4 million in the current periods. Partially offsetting these increases was lower net losses in the agriculture line due to improved growing conditions for the three and nine months ended September 30, 2016.
During the three and nine months ended September 30, 2016, the Company's previously estimated losses and loss expense reserves for the Insurance segment for prior accident years were reduced by $9.6 million and $57.0 million, respectively, which decreased the net loss ratio by 3.5 and 7.6 percentage points, respectively, as compared to a reduction of $22.6 million and $61.8 million, respectively, that decreased the net loss ratios by 9.6 and 10.8 percentage points, respectively, for the three and nine months ended September 30, 2015. Lower levels of favorable loss development in the three and nine months ended September 30, 2016 compared to 2015 was experienced mainly in the casualty and other specialty line of business, with the agriculture line of business experiencing higher favorable loss development.
Acquisition Expenses. The acquisition expense ratios in the Insurance segment in the three and nine months ended September 30, 2016 increased compared to the same periods in 2015 primarily due to growth in net earned premiums in the property, marine/energy and aviation and casualty and other specialty lines of business, which incur a higher than average net acquisition expense rate, and a decline in the proportion of net earned premiums attributable to the agriculture line of business, which incurs a lower than average net acquisition expense rate.
General and Administrative Expenses. The general and administrative expense ratio in the Insurance segment in the three months ended September 30, 2016 increased compared to the same period in 2015, and decreased in the nine months ended September 30, 2016. General and administrative expenses increased for the current quarter and nine months ended September 30, 2016 compared to the same periods in 2015 due to an increase in personnel costs associated with the addition of new underwriting teams and additional employees from the Company's acquisition of Montpelier over the past year, partially offset by increased ceding commission reimbursements as a result of additional purchases of reinsurance.

60


Reinsurance
The following table summarizes the underwriting results and associated ratios for the Company's Reinsurance business segment for the three and nine months ended September 30, 2016 and 2015.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(U.S. dollars in thousands, except for ratios)
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
192,410

 
$
194,034

 
$
1,512,194

 
$
1,151,566

Ceded premiums written
(46,128
)
 
(32,281
)
 
(319,848
)
 
(160,114
)
Net premiums written
146,282

 
161,753

 
1,192,346

 
991,452

Net premiums earned
337,553

 
322,860

 
1,016,999

 
833,530

Other underwriting (loss) income
(466
)
 
227

 
(1,980
)
 
4,022

 
337,087

 
323,087

 
1,015,019

 
837,552

Expenses
 
 
 
 
 
 
 
Losses and loss expenses
128,745

 
124,390

 
451,798

 
315,453

Acquisition expenses
79,618

 
66,082

 
232,195

 
199,561

General and administrative expenses
27,080

 
28,913

 
86,130

 
81,359

 
235,443

 
219,385

 
770,123

 
596,373

Underwriting income
$
101,644

 
$
103,702

 
$
244,896

 
$
241,179

 
 
 
 
 
 
 
 
Net loss ratio
38.1
%
 
38.5
%
 
44.4
%
 
37.8
%
Acquisition expense ratio
23.6
%
 
20.5
%
 
22.8
%
 
23.9
%
General and administrative expense ratio
8.0
%
 
9.0
%
 
8.5
%
 
9.8
%
Combined ratio
69.7
%
 
68.0
%
 
75.7
%
 
71.5
%
Premiums. In the three and nine months ended September 30, 2016, net premiums written in the Reinsurance segment decreased by 9.6% and increased 20.3% over the same periods in 2015, respectively. Gross and net premiums written for each line of business in the Reinsurance segment for the three and nine months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended September 30,
 
2016
 
2015
 
Gross
Premiums
Written
 
Net
Premiums
Written
 
Gross
Premiums
Written
 
Net
Premiums
Written
 
(U.S. dollars in thousands)
Catastrophe
$
51,040

 
$
32,696

 
$
40,660

 
$
14,814

Property
41,975

 
40,882

 
53,423

 
52,887

Casualty
35,438

 
35,772

 
42,802

 
42,802

Professional lines
33,289

 
31,883

 
31,705

 
31,705

Specialty
30,668

 
5,049

 
25,444

 
19,545

Total
$
192,410

 
$
146,282

 
$
194,034

 
$
161,753

 
Nine Months Ended September 30,
 
2016
 
2015
 
Gross
Premiums
Written
 
Net
Premiums
Written
 
Gross
Premiums
Written
 
Net
Premiums
Written
 
(U.S. dollars in thousands)
Catastrophe
$
488,865

 
$
319,245

 
$
304,900

 
$
190,579

Property
229,087

 
222,242

 
209,683

 
206,454

Casualty
216,421

 
215,412

 
149,032

 
149,032

Professional lines
217,476

 
215,134

 
209,803

 
209,803

Specialty
360,345

 
220,313

 
278,148

 
235,584

Total
$
1,512,194

 
$
1,192,346

 
$
1,151,566

 
$
991,452


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The movements in gross premiums written in the Reinsurance segment for the three and nine months ended September 30, 2016 compared to the same periods in 2015 were primarily due to the following factors: 
An increase in gross premiums written in the catastrophe line of business due to new business resulting from the acquisition of Montpelier, partially offset by non-renewal of policies that no longer met profitability targets and declines in rates;
An increase in gross premiums written in the property line of business for the nine months ended September 30, 2016 due to new business resulting from the acquisition of Montpelier, partially offset by non-renewal of policies that no longer met profitability targets and declines in rates;
A decline in gross premiums written in the property line of business for the three months ended September 30, 2016 due to the non-renewal of a large contract and declines in signed lines;
An increase in gross premiums written in the specialty line of business due to new agriculture, marine and aerospace business written and increased renewals, partially offset by non-renewal of policies that no longer met profitability targets;
An increase in gross premiums written in the casualty line of business for the nine months ended September 30, 2016 due to new business written in the U.S. and the U.K. and new business resulting from the acquisition of Montpelier, partially offset by non-renewal of policies that no longer met profitability targets; and
A decline in gross premiums written in the casualty line of business for the three months ended September 30, 2016 due to the timing of renewals for certain multi-year deals, partially offset by new business.
        Ceded premiums written increased in the three and nine months ended September 30, 2016 as compared to the same periods in 2015. Ceded premiums written increased due to increased purchases of aggregate excess of loss retrocessional protection within the catastrophe line of business, and additional quota share and excess of loss retrocessional coverage purchased on the specialty line of business during the current periods.
Net premiums earned by the Company in the Reinsurance segment for the three and nine months ended September 30, 2016 increased compared to net premiums earned during the same periods in 2015 due to the earning of premiums acquired in the Montpelier acquisition.
Other Underwriting (Loss) Income. Other underwriting (loss) income decreased for the three and nine months ended September 30, 2016. The decrease in other underwriting (loss) income for the three and nine months was primarily due to decreased income from the Company's weather derivative products for the periods and the cost of the adverse loss development cover with Selective Insurance Group, Inc. ("Selective") as part of the sale of Montpelier U.S. Insurance Company ("MUSIC") to Selective which ensures that MUSIC's reserve for losses and loss expenses relating to retained business written on or prior to December 31, 2011 remains adequate..
Losses and Loss Expenses. The net loss ratio in the Company's Reinsurance segment for the three months ended September 30, 2016 was consistent with the same period in 2015, and increased for the nine months ended September 30, 2016 compared to the same period in 2015. The increase in the net loss ratio for the nine months ended September 30, 2016 was primarily due to an increase in catastrophe losses.
The following tables show the net losses after adjustment for reinstatement premiums recorded by the Company in the Reinsurance segment in connection with current calendar year catastrophes for the three and nine months ended September 30, 2016 and 2015.
Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2015
Event Date
 
Event
 
Loss
 
Event Date
 
Event
 
Loss
(U.S. dollars in millions)

 
Other loss events in 2016
 
$
5.8

 
August 2015
 
Tianjin explosions
 
$
8.9

 
 
 
 
 
 
August 2015
 
Unipetrol fire
 
4.5

 
 
 
 
 
 
 
 
Other loss events in 2015
 
4.1

Total impact on net losses and loss expenses
 
5.8

 
Total impact on net losses and loss expenses
 
17.5

Add: reduction in reinstatement premiums
 
0.9

 
Less: reinstatement premiums
 
(1.3
)
Net losses after adjustment for reinstatement premiums
 
$
6.7

 
Net losses after adjustment for reinstatement premiums
 
$
16.2


62


Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
Event Date
 
Event
 
Loss
 
Event Date
 
Event
 
Loss
(U.S. dollars in millions)
February 2016
 
Earthquake in Taiwan
 
$
6.8

 
February 2015
 
Winter storm in the United States
 
$
7.6

April 2016
 
Convective storms in the United States
 
16.7

 
April 2015
 
Windstorm in the United States
 
7.2

April 2016
 
Earthquake in Japan
 
8.1

 
May 2015
 
Windstorm in the United States
 
4.0

May 2016
 
Wildfires in Canada
 
39.7

 
August 2015
 
Tianjin explosions
 
8.9

May 2016
 
Convective storms in Germany
 
3.9

 
August 2015
 
Unipetrol fire
 
4.5

 
 
Other events in 2016
 
6.1

 
 
 
 
 
 
Total impact on net losses and loss expenses
 
81.3

 
Total impact on net losses and loss expenses
 
32.2

Less: reinstatement premiums
 
(10.3
)
 
Less: reinstatement premiums
 
(2.8
)
Net losses after adjustment for reinstatement premiums
 
$
71.0

 
Net losses after adjustment for reinstatement premiums
 
$
29.4

The net losses from catastrophes added 1.8 and 7.7 percentage points to the Reinsurance segment's net loss ratios for the three and nine months ended September 30, 2016, respectively. The net losses from catastrophes added 5.1 and 3.7 percentage points, respectively, to the Reinsurance segment's net loss ratios for the three and nine months ended September 30, 2015.
The Company recorded $44.6 million and $117.0 million of favorable prior year loss reserve development in the three and nine months ended September 30, 2016, respectively, which benefited the net loss ratios by 13.2 and 11.5 percentage points, respectively, compared to $44.8 million and $121.5 million in the three and nine months ended September 30, 2015, respectively, which benefited the net loss ratios by 13.9 and 14.6 percentage points, respectively. Favorable reserve development in the three and nine months ended September 30, 2016 was lower than the same periods in 2015 primarily in the casualty line of business.
Acquisition Expenses. The Company's acquisition expense ratio in the Reinsurance segment for the three months ended September 30, 2016 was higher than the same period in 2015 and lower for the nine months ended September 30, 2016 than in the same period in 2015. The increase in the acquisition expense ratio for the current quarter was primarily due to the earning of premiums in 2015 from the Company's acquisition of Montpelier, which had no associated acquisition costs. The decrease in the acquisition expense ratio for the nine months ended September 30, 2016 compared to the same period in 2015 was primarily due to earning of premiums in the current period from the Company's acquisition of Montpelier, which had no associated acquisition costs, and reduced profit commission and loss sensitive accruals due to increased loss activity compared to 2015.
General and Administrative Expenses. The general and administrative expense ratios in the Reinsurance segment for the three and nine months ended September 30, 2016 decreased compared to the same periods in 2015 due to increased net earned premiums for the current periods. General and administrative expenses were consistent for the three and nine months ended September 30, 2016 compared to the same period in 2015 due to the addition of new underwriting teams and additional employees from the Company's acquisition of Montpelier, offset by increased ceding commission reimbursements as a result of increased ceded premiums.
Subsequent Events
Merger with Sompo Holdings, Inc.
On October 5, 2016, the Company entered into an agreement and plan of merger (the "Merger Agreement") for the acquisition of 100% of the outstanding ordinary shares of the Company by Sompo Holdings, Inc. ("SOMPO") for $93.00 per share in cash (the "Merger"). The Merger has been approved by both companies' Board of Directors. The Merger is expected to close as soon as practicable following the satisfaction of customary closing conditions including, but not limited to, approval by the Company's shareholders and regulatory approvals. There can be no assurance that the Merger will occur.
Under the terms of the Merger Agreement, the aggregate consideration for the Merger will be approximately $6,304.0 million in cash. The purchase will be financed by SOMPO with existing sources of liquidity and supplementary facilities without a financing contingency.
If the Merger is terminated under certain circumstances, the Company is obligated to pay SOMPO a cash termination fee of $204.9 million together with SOMPO's expenses relating to the Merger up to $15.8 million.

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The Company incurred $1.0 million of corporate expenses associated with the Merger during the three months ended September 30, 2016 and is contractually obligated to pay investment banking fees upon closing of the Merger. The Company expects to incur additional costs and expenses associated with the Merger during the fourth quarter of 2016 and the first quarter of 2017.
Hurricane Matthew
On October 7 and 8, 2016, Hurricane Matthew affected the southeastern coast of the United States, ultimately making landfall in South Carolina. To date, reported claims as a result of this storm have been limited. While losses emanating from the storm cannot be accurately estimated at this time, the Company may need to establish appropriate loss reserves related to Hurricane Matthew in the fourth quarter of 2016, which may have a negative impact on its results of operations.
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 subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its ordinary shares, and its 6.35% Non-Cumulative Preferred Shares, Series C ("Series C Preferred Shares"). There are restrictions on the payment of dividends by the Company's operating subsidiaries to Endurance Holdings, which are described in more detail below.
Ability of Subsidiaries to Pay Dividends. The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda's assets would thereby be less than the aggregate of its liabilities and its issued share capital and 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 September 30, 2016, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $720.7 million (December 31, 2015$1,034.4 million) without prior regulatory approval based upon the Bermuda insurance and corporate regulations. In addition, in 2011, Endurance Holdings loaned Endurance Bermuda $200.0 million, which remains outstanding and is callable on demand.
Each of the Company's U.S. operating subsidiaries, except American Agri-Business Insurance Company ("American Agri-Business") is subject to regulation by the State of Delaware Department of Insurance. American Agri-Business 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, 2015, none of the Company's U.S. operating subsidiaries, except American Agri-Business, had earned surplus; therefore, these companies are precluded from declaring or distributing dividends at September 30, 2016 without the prior approval of the applicable insurance regulator. At September 30, 2016, American Agri-Business could pay dividends of $3.5 million with notice to the Texas Department of Insurance. 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 Kingdom's Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA"), Endurance Worldwide Insurance Limited ("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 PRA regulatory requirements impose no explicit restrictions on Endurance U.K.'s ability to pay a dividend, but Endurance U.K. would have to notify the PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At September 30, 2016, Endurance U.K. did not have retained profits available for distributions.
Endurance Corporate Capital Limited, Syndicate 5151 and Endurance at Lloyd's Limited ("Endurance at Lloyd's") are subject to oversight by the Council of Lloyd's. Endurance at Lloyd's is also subject to regulation by the PRA and the FCA. Underwriting capacity of a member of Lloyd's must be supported by providing a deposit in the form of cash, securities or letters of credit, which are referred to as Funds at Lloyd's ("FAL"). This amount is determined by Lloyd's and is based on Syndicate 5151's solvency and capital requirement as calculated through its internal model. In addition, if the FAL are not sufficient to cover all losses, the Lloyd's Central Fund provides an additional level of security for policyholders. At September 30, 2016, the FAL requirement set by Lloyd's for Syndicate 5151 was $278.5 million (December 31, 2015 - $215.2 million) based on its business plan, approved in December 2015. Actual FAL posted for Syndicate 5151 at September 30, 2016 was $278.6 million (December 31, 2015 - $276.8 million). At September 30, 2016, Endurance Corporate Capital Limited did not have assets available for distribution.

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Cash and Invested Assets. The Company's aggregate invested assets, including fixed maturity investments, short-term investments, equity securities, other investments, cash and cash equivalents and pending securities transactions, as of September 30, 2016 totaled $8.8 billion compared to aggregate invested assets of $8.9 billion as of December 31, 2015.
At September 30, 2016, the Company's available for sale investments had gross unrealized gains of $107.1 million and gross unrealized losses of $7.8 million compared to gross unrealized gains of $40.8 million and gross unrealized losses of $72.6 million at December 31, 2015. The decrease in gross unrealized losses on the Company's available for sale investments at September 30, 2016 compared to December 31, 2015 was primarily due to a decrease in interest rates. The Company did not have the intent to sell any of its fixed income investments 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 at September 30, 2016. During the nine months ended September 30, 2016, the Company impaired certain equity securities that were in an unrealized loss position for more than twelve consecutive months and therefore recognized in earnings total other-than-temporary impairments of $10.6 million for the nine months ended September 30, 2016.
The Company's aggregate direct exposure to the indebtedness and equity securities of those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) was $913.5 million at September 30, 2016, compared to $820.1 million at December 31, 2015.
Cash Flows
 
Nine Months Ended September 30,
 
2016
 
2015
 
(U.S. dollars in thousands)
Net cash flows provided by (used in) operating activities
$
59,387

 
$
(74,029
)
Net cash flows provided by investing activities
332,308

 
653,198

Net cash flows used in financing activities
(248,320
)
 
(65,642
)
Effect of exchange rate changes on cash and cash equivalents
1,985

 
(16,002
)
Net increase in cash and cash equivalents
145,360

 
497,525

Cash and cash equivalents, beginning of period
1,177,750

 
745,472

Cash and cash equivalents, end of period
$
1,323,110

 
$
1,242,997

Cash flows provided by (used in) operating activities in the nine months ended September 30, 2016 improved compared to the same period in 2015 as growth in cash inflows from premium collections and lower levels of gross loss payments were partially offset by lower ceded loss collections and higher payments of ceded premiums.
Investing activity cash flows reflect the Company's active management of its investment portfolio to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing of investment sales and purchases. The decrease in cash flows provided by investing activities in 2016 is primarily due to the decrease in cash assumed from the acquisition of Montpelier in 2015, offset by the increased investment asset base due to the acquisition of Montpelier.
The cash flows used in financing activities in the nine months ended September 30, 2016 were higher than in the same period in 2015 as a result of the repayment of the Series B preferred shares, higher dividends paid and debt repayments and increased net distributions to non-controlling interest, offset by increased proceeds from the issuance of repurchase agreements.
Foreign exchange rate changes had a positive impact on the cash balances of the Company in the nine months ended September 30, 2016 as the British Sterling weakened against most key currencies in the period resulting in an increase in the reported value of holdings in those currencies in the accounts of the Company's U.K. subsidiary. Additionally, the Japanese Yen strengthened significantly in the period resulting in the upward revaluation of Yen holdings across the Company's subsidiaries. Foreign exchange rate changes in the nine months ended September 30, 2015 had a negative impact on the cash balances of the Company as the U.S. dollar strengthened against all key currencies in the period resulting in a decrease in the reported value of holdings in those currencies.
As of September 30, 2016 and December 31, 2015, the Company had pledged cash and cash equivalents and fixed maturity investments of $111.2 million and $108.9 million, respectively, in favor of certain ceding companies to collateralize obligations. As of September 30, 2016 and December 31, 2015, the Company had also pledged $319.3 million and $383.3 million of its cash and fixed maturity investments to meet collateral obligations for $278.7 million and $341.6 million, respectively, in letters of credit outstanding under its Credit Facility (as defined below) and LOC Agreements (as defined below). In addition, at September 30, 2016 and December 31, 2015, cash and fixed maturity investments with fair values of $211.1 million and $208.3 million were on deposit with U.S. state regulators, respectively.

65


Credit Facilities. On March 23, 2016, the Company and certain designated subsidiaries of the Company entered into a $450.0 million five-year letter of credit facility with JPMorgan Chase Bank, N.A. ("JPMorgan") as administrative agent ("Credit Facility"). Upon entering into the Credit Facility, the Company terminated its existing $700.0 million credit agreement, dated April 19, 2012, with JPMorgan as administrative agent. As of September 30, 2016, there were letters of credit outstanding under the Credit Facility of $255.3 million (December 31, 2015$329.9 million). The Credit Facility does not provide for revolving or term loans.
The Credit Facility is collateralized on a several basis by each entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas as collateral agent. So long as the Company is not in default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $100.0 million, but no participating lender is obligated to increase its commitments under the Credit Facility.
The Company is required to pay a fee of 0.40% per annum on the daily stated amount of outstanding letters of credit issued under the Credit Facility. In addition, the Credit Facility requires the Company to pay to the lenders a commitment fee in the amount of 0.125% per annum on the average daily amount of the unused commitments of the lenders. The Credit Facility permits a lender, if requested and in its discretion, to issue a letter of credit pursuant to which it fronts for the other lenders. For such letters of credit, such fronting lenders may receive certain fronting fees from the Company.
The Credit Facility requires the Company's compliance with certain customary restrictive covenants, including a financial covenant that the Company maintain a leverage ratio of no greater than 0.35:1.00 at any time. In addition, each of the Company's regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times.
The Credit Facility also contains customary event of default provisions, including failure to pay any unpaid drawing under a letter of credit under the Credit Facility or interest thereon and failure to pay any fee under the Credit Facility, insolvency events of the Company or any of its subsidiaries (other than certain immaterial subsidiaries), a change in control of the Company, a breach of the representations or covenants in the Credit Facility or the security documents relating thereto and certain defaults by the Company or its subsidiaries under other indebtedness. In the case of an event of default that occurs as a result of an insolvency event of the Company or one of its designated subsidiary borrowers, the commitments of the lenders will automatically terminate and the repayment of outstanding obligations will be automatically accelerated. Upon the occurrence of any other event of default under the Credit Facility, the lenders can terminate their commitments under the Credit Facility, require repayment of any outstanding obligations under the Credit Facility, give notice of non-extension of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any collateral held by the lenders (or any agent on their behalf) under the Credit Facility.
The Company is party to certain uncommitted letter of credit reimbursement agreements ("LOC Agreements") that allow for the issuance of letters of credit in a variety of currencies, including U.S. dollars. The fees paid under the LOC Agreements depend on the amount of the outstanding letters of credit and vary from 0.30% to 0.45% on the principal amount of letters of credit outstanding to a fee negotiated at the time of issuance of the individual letters of credit. The total amount of letters of credit outstanding under the LOC Agreements as of September 30, 2016 was $23.3 million (December 31, 2015 - $11.7 million).
BCRH Credit Agreement. Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCRH 364-day unsecured credit agreement (the "BCRH Credit Agreement"), which permitted BCRH to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company was entitled to receive an annual guarantee fee from BCRH equal to 0.125% of the facility's total capacity. The BCRH Credit Agreement and the related guarantee of the Company expired on April 29, 2016.
As of September 30, 2016, BCRH had no outstanding borrowings under the BCRH Credit Agreement (December 31, 2015 - $13.0 million). With respect to BCRH's outstanding borrowings at December 31, 2015, $4.0 million was repaid on February 2, 2016 and was subject to an annual interest rate of 1.33%, $5.0 million was repaid on February 22, 2016 and was subject to an annual interest rate of 1.48%, and $4.0 million was repaid on March 11, 2016 and was subject to an annual interest rate of 1.51%.
On May 6, 2016, the Company entered into a credit facility agreement with BCRH (the "BCRH Credit Facility"). The BCRH Credit Facility provides BCRH with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCRH Credit Facility bears interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points.  The BCRH Credit Facility contains covenants that limit BCRH's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If BCRH fails to comply with any these covenants, the Company could revoke the BCRH Credit Facility and exercise remedies against BCRH. In addition, in the event of a default in the performance of any of the

66


agreements or covenants under certain management agreements with BCML by BCRH, the Company has the right to terminate the BCRH Credit Facility.
BCGR Credit Agreement. Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of BCGR 364-day unsecured credit agreement (the "BCGR Credit Agreement"), which permits BCGR to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company is entitled to receive an annual guarantee fee from BCGR equal to 0.125% of the facility's total capacity. The BCGR Credit Agreement and the related guarantee of the Company expired on May 12, 2016.
As of September 30, 2016, BCGR had no outstanding borrowings under the BCGR Credit Agreement (December 31, 2015 - $6.0 million). With respect to BCGR's outstanding borrowing at December 31, 2015, $3.0 million was repaid on February 1, 2016 and was subject to an annual interest rate of 1.54%, and $3.0 million was repaid on February 12, 2016 and was subject to an annual interest rate of 1.51%.        
On May 6, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCGR (the "BCGR Credit Facility"). The BCGR Credit Facility provides BCGR with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCGR Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points.  The BCGR Credit Facility contains covenants that limit BCGR's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt.  If BCGR fails to comply with any of these covenants, the Company could terminate the BCGR Credit Facility and exercise remedies against BCGR. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCGR, the Company has the right to terminate the BCGR Credit Facility.
On June 1, 2016, Endurance redeemed all 9,200,000 shares outstanding of its 7.5% Non-Cumulative Preferred Shares, Series B (the "Series B Preferred Shares") at a redemption price of $25.00 per share plus unpaid dividends.
Repurchase agreements. At September 30, 2016, the Company's repurchase agreement obligations of $121.0 million were fully collateralized. The following table presents the fair value of collateral pledged under repurchase agreements by investment category. The remaining contractual maturity of the repurchase agreements at September 30, 2016 is less than 30 days.
 
 
September 30, 2016
Collateral pledged under repurchase agreements
 
 
U.S. government and agencies securities
 
$
25,876

Residential mortgage-backed securities
 
98,427

 
 
$
124,303

Gross amount of recognized liabilities for repurchase agreements
 
$
120,997

Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transaction. In the event of a decline in the fair value of the pledged collateral under these agreements, the Company may be required to transfer cash or additional securities as pledged collateral under these agreements. At the termination of the transactions, the Company and its counterparties are obligated to return the amounts borrowed and the securities provided as collateral, respectively.
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 Company's investment returns as well as seasonality in coupon payment dates for fixed maturity investments, cash flows from the Company's operating activities may vary significantly between periods. The Company expects to generate positive operating cash flows through 2016, absent the occurrence of additional 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, or arrange for additional financing. There can be no assurance that the Company will be successful in executing these strategies.
Off-Balance Sheet Arrangements
Certain of the Company's ongoing obligations to Selective Insurance Group, Inc. in connection with the sale of Montpelier U.S. Insurance Company and the Company's previous guarantee of BCGR's obligations under the BCGR Credit Agreement constitute off-balance sheet arrangements. Excluding these specific transactions, as of September 30, 2016, the Company was not party to any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K, to which an entity unconsolidated with the Company is a party that management believes is reasonably likely to have a current or future

67


effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that the Company believes is material to investors.
Currency and Foreign Exchange
The Company's functional currencies are U.S. dollars for its U.S., Bermuda and Lloyd's operations (including Endurance at Lloyd's, Syndicate 5151 and Endurance Corporate Capital Limited from January 1, 2016 forward), and British Sterling for Endurance U.K. 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. and Endurance Corporate Capital Limited, which are subject to the PRA's 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 and Syndicate 5151's liabilities, Endurance U.K. and Endurance Corporate Capital Limited may be required to hold some of their respective assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience gains or losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company's 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 income (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 Company's 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. In addition, inflation could lead to higher interest rates causing the current unrealized gain position on the Company's fixed income portfolio to decrease or become an unrealized loss position. In response, the Company may choose to hold its fixed income investments to maturity, which would result in the unrealized gains or losses largely amortizing through net investment income.
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 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Information about Market Risk" included in the Company's 2015 Form 10-K.
Item 4.     Controls and Procedures
a)    Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's 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 Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, 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 Company's 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 Company's third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II
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
Before investing in any of our securities, you should carefully consider the risk factors and all other information set forth in our 2015 Annual Report on Form 10-K, as supplemented by the risk factor set forth in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 and the following risk factors and other information in this Form 10-Q. These risks could materially affect our business, results of operations or financial condition and cause the trading price of our securities to decline. You could lose all or part of your investment. The headings used in this section are solely to aid the reader as to the general categories of risk related to investing in the Company. The risk factors listed may apply to more than one category or to the Company generally. Accordingly, the headings used in this section should not be construed as limiting in any manner the general applicability of any of the risk factors included in this section.
The Merger is subject to conditions, including certain conditions that may not be satisfied, or satisfied on a timely basis, if at all. Failure to complete the Merger could have material and adverse effects on the Company.
The completion of the Merger is subject to the satisfaction or waiver of a number of conditions, including the approval by the Company's shareholders and the receipt of required approvals from governmental regulators, which make the completion and timing of the completion of the Merger uncertain. In addition, regulators could impose additional requirements or obligations as conditions for their approvals, which may be burdensome and which may permit SOMPO under the terms of the Merger Agreement to refuse to complete the Merger.
If the Merger is not completed on a timely basis, or at all, the Company's ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Merger, the Company will be subject to a number of risks, including the following:
The Company’s current stock price reflects a market assumption that the Merger will occur. In addition, as a result of the announcement of the Merger Agreement, trading in our common shares has increased substantially. If the Merger is not consummated, the investment goals of our shareholders may be materially different than those of our shareholders on a pre-Merger announcement basis.
Under certain circumstances, the Company may be required to pay a termination fee of $204.9 million and reimburse SOMPO's expenses relating to the Merger up to $15.8 million;
The Company may be required to pay significant costs relating to the Merger, such as legal, accounting, financial advisory and printing fees, whether or not the Merger is completed;
Time and resources committed by the Company's management to matters relating to the Merger could otherwise have been devoted to the Company's existing business or to pursuing other beneficial opportunities;
The Merger may not have been completed as a result of the occurrence of an event, change or other circumstances that have a material adverse effect on the Company’s business;
The manner in which brokers, insurers, cedants and other third parties perceive the Company may be negatively     impacted, which in turn could affect the ability of the Company to compete for or write new business or obtain renewals in the marketplace;
The Company's ratings may be adversely affected, which could have an adverse effect on its business, financial condition and operating results; and
The Company could be subject to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against the Company to perform its obligations under the Merger Agreement.

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The Company is subject to business uncertainties and contractual restrictions while the Merger is pending, which could adversely affect the Company's business and operations.
In connection with the pendency of the Merger, it is possible that some customers, suppliers and other persons with whom the Company has a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with the Company as a result of the Merger, which could negatively affect the Company's revenues, earnings and cash flows, as well as the market price of the Company's ordinary shares, regardless of whether the Merger is completed.
Under the terms of the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to completing the Merger, which may adversely affect its ability to execute certain of its business strategies, including the ability in certain cases to enter into contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. Such limitations could negatively affect the Company's business and operations prior to the completion of the Merger.
Uncertainties associated with the Merger may cause a loss of management and other key employees and disrupt our business relationships, which could adversely affect our business.
Uncertainty about the effect of the Merger on our employees and our customers may have an adverse effect on our business. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed and for a period of time thereafter. Employee retention may be particularly challenging during the pendency of the Merger, as employees of the Company may experience uncertainty about their future roles with the combined company. We face additional uncertainties relating to the Merger, including that our business relationships may be subject to disruption as brokers, insurers, cedants, customers and other third parties attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than the Company, SOMPO or the combined company. If key employees depart or if our existing business relationships suffer, our results of operations may be adversely affected. The adverse effects of such disruptions could be further exacerbated by any delay in the completion of the Merger.
The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire us for greater consideration than what SOMPO has agreed to pay.
The Merger Agreement contains provisions that make it more difficult for us to sell our business to a company other than SOMPO. These provisions include a general prohibition on us soliciting any acquisition proposal or offer for a competing transaction, subject to limited exceptions. If we or SOMPO terminate the Merger Agreement, we may in some circumstances be required to reimburse SOMPO for its incurred out-of-pocket expenses (not to exceed $15.8 million) and, if we subsequently are, or agree to be acquired by another company, pay to SOMPO a termination fee of $204.9 million. Further, our Board of Directors has agreed in the Merger Agreement, subject to limited exceptions, that it will not withdraw or modify in a manner adverse to SOMPO its recommendation that our shareholders approve the Merger. These provisions might discourage a third party that has an interest in acquiring all or a significant part of the Company from considering or proposing an acquisition, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee or the payment of expenses that may become payable in certain circumstances.
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total
Number of
Shares Purchased(1)
 
(b) Average
Price Paid
per Share
 
(c) Total Number
of Shares
Purchased as Part of
Publicly Announced
Plans or  Programs(1) (2)
 
(d) Maximum Number
(or Approximate Dollar
Value) of Shares
that May Yet Be
Purchased Under the
Plans or Programs(1) (2)
July 1, 2016 - July 31, 2016

 
$

 

 
5,000,000
August 1, 2016 - August 31, 2016

 
$

 

 
5,000,000
September 1, 2016 - September 30, 2016

 
$

 

 
5,000,000
Total

 
$

 

 
5,000,000
(1)
Ordinary shares or share equivalents.
(2)
At its meeting on February 25, 2016, the Board of Directors of the Company authorized the repurchase of up to a total of 5,000,000 ordinary shares and share equivalents through February 28, 2018, superseding all previous authorizations.

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Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5.     Other Information
None
Item 6.
Exhibits
(a) The following sets forth those exhibits filed pursuant to Item 601 of Regulation S-K:
Exhibit
Number
  
Description
 
 
 
2.1
 
Agreement and Plan of Merger, dated as of October 5, 2016, by and among Endurance Specialty Holdings Ltd., Sompo Holdings, Inc. and Volcano International Limited. Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on October 5, 2016.
 
 
 
10.1
 
Amended and Restated Employment Agreement, dated October 5, 2016, by and among Endurance Specialty Holdings Ltd., Volcano International Limited and John R. Charman. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on October 5, 2016. **
 
 
 
10.2
 
Amended and Restated Indemnification Agreement, dated October 5, 2016, by and between Endurance Specialty Holdings Ltd. and John R. Charman. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on October 5, 2016. **
 
 
 
10.3
 
Form of Amended and Restated Employment Agreement. Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on October 5, 2016. **
 
 
 
10.4
 
Form of Amended and Restated Indemnification Agreement. Incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on October 5, 2016. **
 
 
 
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.
 
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as at September 30, 2016 (unaudited) and December 31, 2015; (ii) the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2016 and 2015; (iii) the Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2016 and 2015; (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015; and (v) the Notes to the Unaudited Condensed Consolidated Financial Statements.
** Management contract or compensatory plan or arrangement.

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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:
November 7, 2016
 
By:    
 
/s/ John R. Charman
 
 
 
 
 
John R. Charman
 
 
 
 
 
Chief Executive Officer
 
 
 
 
Date:
November 7, 2016
 
By:
 
/s/ Michael J. McGuire
 
 
 
 
 
Michael J. McGuire
 
 
 
 
 
Chief Financial Officer (Principal Financial Officer)


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