Endurance Specialty (ENH) 10-Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the period ended March 31, 2010,

or

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

Commission file number 1-31599

ENDURANCE SPECIALTY HOLDINGS LTD.

(Exact Name of Registrant as Specified in Its Charter)

Bermuda	98-0392908
(State or other jurisdiction	(I.R.S. Employer Identification No.)
of incorporation or organization)

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

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. Yesþ Noo

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). Yeso Noo

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ Accelerated filero Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

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

	Common Shares Outstanding
Description of Class	as of May 4, 2010
Ordinary Shares — $1.00 par value	53,968,176

INDEX

	Page
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2010 (unaudited) and December 31, 2009		2
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2010 and 2009		3
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2010 and 2009		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009		5
Notes to the Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3. Quantitative and Qualitative Disclosures about Market Risk		44
Item 4. Controls and Procedures		45
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		46
Item 1A. Risk Factors		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3. Defaults Upon Senior Securities		46
Item 4. Submission of Matters to a Vote of Security Holders		46
Item 5. Other Information		46
Item 6. Exhibits		47
SIGNATURES		48
Exhibit 31.1
Exhibit 31.2
Exhibit 32

1

ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of United States dollars except share amounts)

	MARCH 31,		DECEMBER 31,
	2010		2009
	(UNAUDITED)
ASSETS
Investments
Fixed maturity investments, available for sale at fair value (amortized cost: $4,732,355 and $4,535,121 at March 31, 2010 and December 31, 2009)	$	4,793,451	$	4,548,618
Short-term investments, available for sale at fair value (amortized cost: $389,971 and $534,736 at March 31, 2010 and December 31, 2009)		389,937		534,678
Preferred equity securities, available for sale at fair value (cost: $7,195 and $6,182 at March 31, 2010 and December 31, 2009)		12,329		11,023
Other investments, under the equity method		368,035		351,352
Total investments		5,563,752		5,445,671
Cash and cash equivalents		668,049		528,944
Premiums receivable, net		935,244		565,348
Deferred acquisition costs		163,639		146,979
Securities lending collateral		128,299		66,913
Prepaid reinsurance premiums		179,603		120,941
Losses recoverable		246,583		467,664
Accrued investment income		28,746		30,367
Goodwill and intangible assets		189,246		191,450
Deferred tax asset		30,502		17,252
Other assets		62,890		85,165
Total assets	$	8,196,553	$	7,666,694
LIABILITIES
Reserve for losses and loss expenses	$	3,138,905	$	3,157,026
Reserve for unearned premiums		1,228,559		832,561
Deposit liabilities		39,729		42,638
Reinsurance balances payable		153,174		220,435
Securities lending payable		128,265		66,968
Debt		528,357		447,664
Other liabilities		158,477		112,119
Total liabilities		5,375,466		4,879,411
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred shares
Series A, non-cumulative — $1.00 par value, 8,000,000 issued and outstanding (2009 — 8,000,000); aggregate liquidation preference $200,000 (2009 — $200,000)		8,000		8,000
Common shares
Ordinary — $1.00 par value, 54,229,674 issued and outstanding (2009 — 55,115,702)		54,230		55,116
Additional paid-in capital		882,684		929,577
Accumulated other comprehensive income		95,413		52,148
Retained earnings		1,780,760		1,742,442
Total shareholders’ equity		2,821,087		2,787,283
Total liabilities and shareholders’ equity	$	8,196,553	$	7,666,694

See accompanying notes to unaudited condensed consolidated financial statements.

2

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 MARCH 31,
	2010			2009
Revenues
Gross premiums written	$	818,869		$	783,306
Ceded premiums written		(115,927	)		(200,391	)
Net premiums written		702,942			582,915
Change in unearned premiums		(337,753	)		(204,640	)
Net premiums earned		365,189			378,275
Net investment income		56,479			64,550
Net realized gains on investment sales		3,544			3,241
Total other-than-temporary impairment losses		(769	)		(12,126	)
Portion of loss recognized in other comprehensive income		(92	)		—
Net impairment losses recognized in earnings		(861	)		(12,126	)
Other underwriting income		295			3,597
Total revenues		424,646			437,537
Expenses
Net losses and loss expenses		232,597			220,136
Acquisition expenses		63,944			68,274
General and administrative expenses		58,965			60,257
Amortization of intangibles		2,588			2,588
Net foreign exchange losses (gains)		5,971			(62	)
Interest expense		7,608			7,555
Total expenses		371,673			358,748
Income before income taxes		52,973			78,789
Income tax benefit (expense)		2,816			(492	)
Net income		55,789			78,297
Preferred dividends		(3,875	)		(3,875	)
Net income available to common and participating common shareholders	$	51,914		$	74,422
Comprehensive income
Net income	$	55,789		$	78,297
Other comprehensive income (loss)
Net unrealized holding losses on investments arising during the period (net of applicable deferred income taxes ($1,579) and $2,804 for the three months ended March 31, 2010 and 2009)		54,268			(12,546	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (net of applicable deferred income taxes Nil and Nil for the three months ended March 31, 2010 and 2009)		92			—
Reclassification adjustment for net realized losses and net impairment losses included in net income		(2,683	)		8,885
Foreign currency translation adjustments		(8,434	)		(3,835	)
Reclassification adjustment for net losses on derivative designated as cash flow hedge included in net income		22			22
Other comprehensive income (loss)		43,265			(7,474	)
Comprehensive income	$	99,054		$	70,823
Per share data
Basic earnings per common share	$	0.95		$	1.30
Diluted earnings per common share	$	0.91		$	1.24
Dividend per common share	$	0.25		$	0.25

See accompanying notes to unaudited condensed consolidated financial statements.

3

ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY

(In thousands of United States dollars)

	THREE MONTHS ENDED
	MARCH 31,
	2010			2009
Preferred shares
Balance, beginning and end of period	$	8,000		$	8,000
Common shares
Balance, beginning of period		55,116			57,203
Issuance of common shares		449			477
Repurchase of common shares		(1,335	)		(207	)
Balance, end of period		54,230			57,473
Additional paid-in capital
Balance, beginning of period		929,577			1,029,363
Issuance of common shares		(235	)		(240	)
Repurchase of common shares and share equivalents		(47,101	)		(8,891	)
Issuance of restricted share units in lieu of dividends		—			2
Public offering and registration costs		(12	)		(26	)
Settlement of equity awards		(3,203	)		(1,415	)
Stock-based compensation expense		3,658			3,980
Balance, end of period		882,684			1,022,773
Accumulated other comprehensive income (loss)
Cumulative foreign currency translation adjustments:
Balance, beginning of period		16,109			4,363
Foreign currency translation adjustments		(8,434	)		(3,835	)
Balance, end of period		7,675			528
Unrealized holding gains (losses) on investments:
Balance, beginning of period		38,247			(134,732	)
Net unrealized holding gains (losses) arising during the period, net of reclassification adjustment		51,585			(3,661	)
Other-than-temporary impairment losses during the period		92			—
Balance, end of period		89,924			(138,393	)
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of period		(2,208	)		(2,296	)
Net change from current period hedging transactions, net of reclassification adjustment		22			22
Balance, end of period		(2,186	)		(2,274	)
Total accumulated other comprehensive income (loss)		95,413			(140,139	)
Retained earnings
Balance, beginning of period		1,742,442			1,245,382
Net income		55,789			78,297
Issuance of restricted share units in lieu of dividends		—			(2	)
Dividends on preferred shares		(3,875	)		(3,875	)
Dividends on common shares		(13,596	)		(14,369	)
Balance, end of period		1,780,760			1,305,433
Total shareholders’ equity	$	2,821,087		$	2,253,540

See accompanying notes to unaudited condensed consolidated financial statements.

4

ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States dollars)

	THREE MONTHS ENDED
	MARCH 31,
	2010			2009
Cash flows provided by operating activities:
Net income	$	55,789		$	78,297
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of net premium (discount) on investments		1,826			(3,335	)
Amortization of other intangibles and depreciation		5,418			5,323
Net realized gains on investment sales		(3,544	)		(3,241	)
Net impairment losses recognized in earnings		861			12,126
Deferred taxes		(14,829	)		(9,189	)
Stock-based compensation expense		3,658			3,980
Equity in earnings of other investments		(16,969	)		(10,454	)
Premiums receivable, net		(369,896	)		(408,232	)
Deferred acquisition costs		(16,660	)		3,200
Prepaid reinsurance premiums		(58,662	)		(133,390	)
Losses recoverable		221,081			211,856
Accrued investment income		1,621			6,363
Other assets		29,107			11,194
Reserve for losses and loss expenses		(18,121	)		(81,082	)
Reserve for unearned premiums		395,998			337,304
Deposit liabilities		(2,909	)		(3,910	)
Reinsurance balances payable		(67,261	)		113,933
Other liabilities		(18,798	)		(2,414	)
Net cash provided by operating activities		127,710			128,329
Cash flows used in investing activities:
Proceeds from sales of fixed maturity investments		844,295			698,392
Proceeds from sales of short term investments		312,358			1,232
Proceeds from sales of preferred equity securities		956			4,288
Proceeds from maturities and calls on fixed maturity investments		168,143			133,462
Proceeds from maturities and calls on short term investments		296,523			68,758
Proceeds from the redemption of other investments		487			8,864
Purchases of fixed maturity investments		(1,149,084	)		(1,077,719	)
Purchases of short term investments		(465,265	)		(98,810	)
Purchases of preferred equity investments		(448	)		—
Purchase of other investments		(202	)		—
Purchases of fixed assets		(451	)		(3,550	)
Change in securities lending collateral received		(61,386	)		(7,381	)
Net cash paid for subsidiary acquisition		(385	)		(244	)
Net cash used in investing activities		(54,459	)		(272,708	)
Cash flows provided by (used in) financing activities:
Issuance of common shares		170			193
Repurchase of common shares		(49,026	)		(9,098	)
Change in securities lending collateral		61,297			7,197
Settlement of equity awards		(3,203	)		(1,415	)
Offering and registration costs paid		(1,035	)		(375	)
Proceeds from issuance of debt		80,962			33
Repayments of debt		(294	)		(154	)
Dividends on preferred shares		(3,875	)		(3,875	)
Dividends on common shares		(13,467	)		(14,637	)
Net cash provided by (used in) financing activities		71,529			(22,131	)
Effect of exchange rate changes on cash and cash equivalents		(5,675	)		(2,462	)
Net increase (decrease) in cash and cash equivalents		139,105			(168,972	)
Cash and cash equivalents, beginning of period		528,944			1,061,994
Cash and cash equivalents, end of period	$	668,049		$	893,022

5

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”) was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its wholly-owned operating subsidiaries:

Operating Subsidiaries	Domicile
Endurance Specialty Insurance Ltd.	Bermuda
Endurance Worldwide Insurance Limited	England
Endurance Reinsurance Corporation of America	Delaware
Endurance American Insurance Company	Delaware
Endurance American Specialty Insurance Company	Delaware
Endurance Risk Solutions Assurance Co.	Delaware
American Agri-Business Insurance Company and ARMtech Insurance Services, Inc.	Texas

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the three month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The unaudited condensed consolidated financial statements include the accounts of Endurance Holdings and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated on consolidation. Management is required to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates. Among other matters, significant estimates and assumptions are used to record premiums written and ceded, 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, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009 contained in Endurance Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “2009 Annual Report on Form 10-K”).

Certain reclassifications have been made for 2009 to conform to the 2010 presentation and have no impact on net income previously reported.

6

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

2. Summary of significant accounting policies

On January 21, 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-6 amends ASC 820 to require a number of additional disclosures regarding fair value measurements. Specifically, the ASU requires entities to disclose the following:

• The amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers. Transfers into each level are to be disclosed separately from transfers out of each level.

• The reasons for transfers in or out of Level 3. If significant, the transfers into Level 3 are disclosed separately from transfers out of Level 3.

• Information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis.

In addition, ASU 2010-6 also amends ASC 820 to clarify certain existing disclosure requirements as follows:

• Reporting entities are required to provide fair values for each class of assets and liabilities. The previous guidance required separate fair value for each major category of assets and liabilities.

• Reporting entities are required to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.

ASU 2010-6 is effective for the first quarter of 2010, except for the requirement to provide level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective beginning the first quarter of 2011. Since this standard impacts disclosure requirements only, its adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.

In June 2009, the FASB issued updated guidance on the accounting for variable interest entities that eliminates the concept of a qualifying special-purpose entity and the quantitative-based risks and rewards calculation for determining which company, if any, has a controlling financial interest in a variable interest entity. The updated guidance requires an analysis of whether a company has the following:

• the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and

• the obligation to absorb the losses that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity.

Additional disclosures are required about a company’s involvement in variable interest entities and an ongoing assessment of whether a company is the primary beneficiary. An entity is required to be re-evaluated as a variable interest entity when the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights to direct the activities that most significantly impact the entity’s economic performance.

The updated guidance is effective for all variable interest entities owned on or formed after January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations or financial condition.

For a detailed discussion of the Company’s other significant accounting and reporting policies, please refer to the 2009 Annual Report on Form 10-K.

3. Investments

Composition of Net Investment Income and of Invested Assets

The components of net investment income for the three months ended March 31, 2010 and 2009 are as follows:

	2010			2009
Available for sale investments	$	43,490		$	56,453
Other investments		16,969			10,455
Cash and cash equivalents		92			397
	$	60,551		$	67,305
Investment expenses		(4,072	)		(2,755	)
Net investment income	$	56,479		$	64,550

The following table summarizes the composition of the available for sale portfolio by investment ratings assigned by rating agencies at March 31, 2010 and December 31, 2009. In some cases, where bonds are unrated, the rating of the issuer has been applied.

	March 31, 2010					December 31, 2009
Ratings	Fair Value		Percentage			Fair Value		Percentage
U.S. government and agencies securities	$	849,363		16.3	%	$	774,996		15.2	%
AAA / Aaa		3,064,669		59.0	%		3,388,723		66.5	%
AA / Aa		376,283		7.2	%		219,746		4.3	%
A / A		638,021		12.3	%		473,779		9.3	%
BBB		59,453		1.2	%		46,646		1.0	%
Below BBB		206,708		4.0	%		189,188		3.7	%
Not rated		1,220		0.0	%		1,241		0.0	%
Total	$	5,195,717		100.0	%	$	5,094,319		100.0	%

Contractual maturities of available for sale securities are shown below as of March 31, 2010 and December 31, 2009. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

7

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

3. Investments, cont’d.

	March 31, 2010				December 31, 2009
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due within one year	$	622,072	$	624,137	$	683,505	$	684,381
Due after one year through five years		1,868,492		1,897,073		1,762,035		1,788,265
Due after five years through ten years		537,717		540,797		448,728		448,026
Due after ten years		101,932		108,919		143,634		153,247
Residential mortgage-backed securities
Agency mortgage-backed securities		800,371		832,073		896,179		923,422
Non-agency mortgage-backed securities		287,250		261,450		292,359		256,748
Commercial mortgage-backed securities
Agency mortgage-backed securities		30,952		32,264		31,628		32,851
Non-agency mortgage-backed securities		576,553		589,993		543,406		529,911
Asset-backed securities		304,182		309,011		274,565		277,468
Total	$	5,129,521	$	5,195,717	$	5,076,039	$	5,094,319

At March 31, 2010 and December 31, 2009, the Company held insurance enhanced bonds (corporate, asset-backed and municipal securities), in the amount of $31.0 million and $35.7 million, respectively, which represented approximately 0.6% and 0.7% of our available for sale portfolio. At March 31, 2010, the overall credit quality of the insured bond portfolio had an average rating of “Baa” from Moody’s and “BBB” from Standard & Poor’s. The overall credit quality of the financial guarantors had an average rating of “Caa” by Moody’s and “C” by Standard & Poor’s. The financial guarantors of the Company’s insurance enhanced bonds at March 31, 2010 include Financial Guarantee Insurance Company ($14.8 million), Ambac Financial Group, Inc. ($5.7 million), Assured Guaranty Municipal Corp. ($6.6 million), National Public Finance Guarantee Corp. ($3.5 million), and Syncora Holdings Ltd. ($0.3 million).

In addition to the Company’s available for sale investment portfolio, the Company invests in a portfolio of alternative investments and high yield loan funds (the “Funds”). The Funds invest largely in senior secured distressed debt, derivatives, equity long and short positions, senior secured bank debt and high yield securities and are included in the Company’s balance sheet under other investments. At March 31, 2010 and December 31, 2009, the Company had invested, net of capital returned, a total of $295.2 million and $295.5 million, respectively, in the Funds. At March 31, 2010 and December 31, 2009, the carrying value of the Funds was $368.0 million and $351.4 million, respectively. Certain of the Funds are subject to redemption restriction provisions (see Note 9).

Net Realized Gains on Investment Sales

Realized gains on investment sales are recognized in earnings using the first in and first out method. The analysis of net realized gains on investment sales for the three months ended March 31, 2010 and 2009 are as follows:

	2010			2009
Gross realized gains on investment sales	$	9,523		$	20,898
Gross realized losses on investment sales		(5,979	)		(17,657	)
Net realized investment losses	$	3,544		$	3,241

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)

3.	Investments, cont’d.
	Unrealized Gains and Losses and Other-than-temporary Impairments

The amortized cost, fair value and related gross unrealized gains and losses and other-than-temporary impairment (“OTTI”) losses on the Company’s securities classified as available for sale at March 31, 2010 and December 31, 2009 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized					Non-Credit
March 31, 2010	Cost		Gains		Losses			Fair Value		OTTI(2)
U.S. government and agencies securities	$	843,202	$	12,049	$	(5,888	)	$	849,363		—
U.S. state and municipal securities		64,573		2,743		(73	)		67,243		—
Foreign government securities		143,947		3,439		(40	)		147,346		—
Government guaranteed corporate securities		775,518		5,737		(403	)		780,852		—
Corporate securities		905,807		20,471		(2,422	)		923,856		—
Residential mortgage-backed securities
Agency mortgage-backed securities		800,371		32,710		(1,008	)		832,073		—
Non-agency mortgage-backed securities		287,250		2,323		(28,123	)		261,450		(41,509	)
Commercial mortgage-backed securities
Agency mortgage-backed securities		30,952		1,312		—			32,264		—
Non-agency mortgage-backed securities(1)		576,553		18,176		(4,736	)		589,993		(109	)
Asset-backed securities		304,182		6,825		(1,996	)		309,011		—
Total fixed maturity investments	$	4,732,355	$	105,785	$	(44,689	)	$	4,793,451	$	(41,618	)
Short-term investments		389,971		4		(38	)		389,937		—
Preferred equity securities		7,195		5,134		—			12,329		—
Total	$	5,129,521	$	110,923	$	(44,727	)	$	5,195,717	$	(41,618	)

(1)	Balances include amounts related to collateralized debt obligations held with total fair values of $8.0 million.
(2)	Represents total OTTI recognized in accumulated other comprehensive income (loss) and does not include the change in fair value subsequent to the impairment measurement date. At March 31, 2010, the gross unrealized loss related to securities for which a non-credit OTTI was recognized in accumulated other comprehensive income (loss) was $16.2 million.

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)

3. Investments, cont’d.

			Gross		Gross					Non-
	Amortized		Unrealized		Unrealized					Credit
December 31, 2009	Cost		Gains		Losses			Fair Value		OTTI(2)
U.S. government and agencies securities	$	773,454	$	12,113	$	(10,571	)	$	774,996	$	—
U.S. state and municipal securities		83,947		5,697		—			89,644		—
Foreign government securities		142,134		4,179		(42	)		146,271		—
Government guaranteed corporate securities		909,341		4,901		(673	)		913,569		—
Corporate securities		588,108		18,384		(2,754	)		603,738		—
Residential mortgage-backed securities
Agency mortgage-backed securities		896,179		29,133		(1,890	)		923,422		—
Non-agency mortgage-backed securities		292,359		2,019		(37,630	)		256,748		(41,811	)
Commercial mortgage-backed securities
Agency mortgage-backed securities		31,628		1,223		—			32,851		—
Non-agency mortgage-backed securities(1)		543,406		7,194		(20,689	)		529,911		(109	)
Asset-backed securities		274,565		5,866		(2,963	)		277,468		—
Total fixed maturity investments	$	4,535,121	$	90,709	$	(77,212	)	$	4,548,618	$	(41,920	)
Short-term investments		534,736		7		(65	)		534,678		—
Preferred equity securities		6,182		4,841		—			11,023		—
Total	$	5,076,039	$	95,557	$	(77,277	)	$	5,094,319	$	(41,920	)

(1)	Balances include amounts related to collateralized debt obligations held with total fair values of $6.7 million.
(2)	Represents total OTTI recognized in accumulated other comprehensive income (loss) and does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2009, the gross unrealized loss related to securities for which a non-credit OTTI was recognized in accumulated other comprehensive income (loss) was $22.0 million.

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.

The following tables summarize, for all available for sale securities in an unrealized loss position at March 31, 2010 and December 31, 2009, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

	Less than 12 months					12 months or greater					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
March 31, 2010	Losses(1)			Value		Losses(1)			Value		Losses(1)			Value
U.S. government and agencies securities	$	(4,134	)	$	296,932	$	(1,754	)	$	22,238	$	(5,888	)	$	319,170
U.S. state and municipal securities		(73	)		9,347		—			—		(73	)		9,347
Foreign government securities		(40	)		30,614		—			—		(40	)		30,614
Government guaranteed corporate securities		(403	)		164,930		—			—		(403	)		164,930
Corporate securities		(1,926	)		360,692		(496	)		14,615		(2,422	)		375,307
Residential mortgage-backed securities
Agency mortgage-backed securities		(1,008	)		84,903		—			15		(1,008	)		84,918
Non-agency mortgage-backed securities		(5,040	)		62,852		(23,083	)		176,838		(28,123	)		239,690
Commercial mortgage-backed securities
Agency mortgage-backed securities		—			—		—			—		—			—
Non-agency mortgage-backed securities		(506	)		55,256		(4,230	)		59,710		(4,736	)		114,966
Asset-backed securities		(135	)		38,767		(1,861	)		24,654		(1,996	)		63,421
Total fixed maturity investments	$	(13,265	)	$	1,104,293	$	(31,424	)	$	298,070	$	(44,689	)	$	1,402,363
Short-term investments		(38	)		21,810		—			—		(38	)		21,810
Preferred equity securities		—			—		—			—		—			—
Total	$	(13,303	)	$	1,126,103	$	(31,424	)	$	298,070	$	(44,727	)	$	1,424,173

⁽¹⁾ Gross unrealized losses include unrealized losses on non-OTTI and OTTI securities recognized in accumulated other comprehensive income (loss) at March 31, 2010.

As of March 31, 2010, 436 available for sale securities were in an unrealized loss position. Of those, 170 securities had been in a continuous unrealized loss position for twelve months or greater.

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.

	Less than 12 months					12 months or greater					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
December 31, 2009	Losses(1)			Value		Losses(1)			Value		Losses(1)			Value
U.S. government and agencies securities	$	(10,571	)	$	311,829	$	—		$	—	$	(10,571	)	$	311,829
U.S. state and municipal securities		—			—		—			—		—			—
Foreign government securities		(42	)		22,939		—			—		(42	)		22,939
Government guaranteed corporate securities		(673	)		244,473		—			—		(673	)		244,473
Corporate securities		(1,948	)		200,145		(806	)		18,649		(2,754	)		218,794
Residential mortgage-backed securities
Agency mortgage-backed securities		(1,871	)		177,585		(19	)		4,162		(1,890	)		181,747
Non-agency mortgage-backed securities		(6,928	)		57,310		(30,702	)		181,356		(37,630	)		238,666
Commercial mortgage-backed securities
Agency mortgage-backed securities		—			—		—			—		—			—
Non-agency mortgage-backed securities		(2,069	)		69,136		(18,620	)		204,273		(20,689	)		273,409
Asset-backed securities		(522	)		34,481		(2,441	)		28,282		(2,963	)		62,763
Total fixed maturity investments	$	(24,624	)	$	1,117,898	$	(52,588	)	$	436,722	$	(77,212	)	$	1,554,620
Short-term investments		(65	)		14,770		—			—		(65	)		14,770
Preferred equity securities		—			—		—			—		—			—
Total	$	(24,689	)	$	1,132,668	$	(52,588	)	$	436,722	$	(77,277	)	$	1,569,390

⁽¹⁾ Gross unrealized losses include unrealized losses on non-OTTI and OTTI securities recognized in accumulated other comprehensive income (loss) at December 31, 2009.

As of December 31, 2009, 410 available for sale securities were in an unrealized loss position. Of those, 210 securities had been in a continuous unrealized loss position for twelve months or greater.

The analysis of OTTI for the three months ended March 31, 2010 and 2009 are as follows:

	2010			2009
Total other-than-temporary impairment losses	$	(769	)	$	(12,126	)
Portion of loss recognized in other comprehensive income (loss)		(92	)		—
Net impairment losses recognized in earnings	$	(861	)	$	(12,126	)

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.

The $0.9 million of OTTI losses recognized by the Company in the first quarter of 2010 relating to specific credit events occurred primarily due to reductions in expected recovery values on mortgage-backed securities during the period, along with certain credit related downgrades in corporate securities. At March 31, 2010, the Company had not made any decisions to sell securities in an unrealized loss position and determined that it was unlikely that the Company would be required to sell securities in an unrealized loss position.

The following table provides a roll-forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income (loss) for the three months ended March 31, 2010:

Beginning balance at January 1, 2010	$	(13,122	)
Addition for the amount related to the credit loss for which an other-than-temporary impairment was previously recognized		(92	)
Reductions for securities sold during the period		41
Ending balance at March 31, 2010	$	(13,173	)

For the three months ended March 31, 2009, the Company recorded $12.1 million of OTTI losses which included losses related to both credit and non-credit related factors.

Securities Lending

The Company also participates in a securities lending program whereby fixed maturity investments are loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The borrowers of the Company’s securities provide the Company with collateral, typically cash, which the Company separately maintains. The Company invests such cash collateral in other securities. In the first quarter of 2008, the Company restricted future investment of cash collateral in its securities lending program to overnight repurchase agreements. Previously, the Company allowed investments in U.S. Treasuries, securities of U.S. government agencies, mortgage-backed securities, asset-backed securities and corporate fixed maturity securities. At March 31, 2010, the cash collateral was invested in senior credit card and auto asset-backed securities, bank notes, debentures and overnight repurchase agreements. Securities with an estimated fair value of $127.0 million and $65.7 million were on loan under the program at March 31, 2010 and December 31, 2009, respectively. The Company was liable for cash collateral under the Company’s control of $126.7 million and $67.0 million at March 31, 2010 and December 31, 2009, respectively. Non-cash collateral in the form of U.S. government and agency securities of $1.6 million was held at March 31, 2010. As of March 31, 2010 and December 31, 2009, the fair value of the investments purchased with the cash collateral received from the borrower was $126.7 million and $66.9 million. The investments purchased with the cash collateral had an average credit quality rating of “Aa1” by Moody’s and “AAA” by Standard & Poor’s at March 31, 2010. All securities on loan are issued on a term or overnight basis and are subject to daily recall at the Company’s discretion.

Variable Interest Entities

Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities (“VIE”). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the 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 is involved in the normal course of business with VIEs primarily as a passive investor in residential and commercial mortgage-backed securities and private equity limited partnerships issued by third party VIEs. The Company determined that it was not the primary beneficiary for any of these investments as of March 31, 2010. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded partnership commitments.

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)

4. Fair value measurement

The Company determines the fair value of its fixed income investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs.

Current accounting guidance establishes three levels as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Quoted prices for similar assets in markets that are active, quoted prices for identical or similar assets in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own view about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Valuation inputs by security type may include the following:

• Government and agencies securities — These securities are generally priced by pricing services or index providers. The pricing services or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate option adjusted spreads, daily interest rate data and market/sector news. The Company generally classifies the fair values of government and agencies securities in Level 2.

• Government guaranteed corporate securities — These securities are generally priced by pricing services or index providers. The pricing service or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical spread models which may incorporate inputs from the U.S treasury curve or LIBOR. The Company generally classifies the fair values of its government guaranteed corporate securities in Level 2.

• Corporate securities — These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its corporate securities in Level 2.

• Preferred equity securities — These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its preferred equity securities in Level 2.

• Structured securities including agency and non-agency, residential and commercial, mortgage and asset-backed securities — These securities are generally priced by broker/dealers. Broker/dealers may use current market trades for securities with similar qualities. If no such trades are available, inputs such as bid and offer, prepayment speeds, the U.S. treasury curve, swap curve and cash settlement may be used in a discounted cash flow model to determine the fair value of a security. The Company generally classifies the fair values of its structured securities in Level 2.

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)

4. Fair value measurement, cont’d.

The following tables set forth the Company’s available for sale investments categorized by the level within the hierarchy in which the fair value measurements fall, on a recurring basis at March 31, 2010 and December 31, 2009:

			Fair Value Measurements at
			March 31, 2010
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
	Total at		Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
U.S. government and agencies securities	$	849,363	$	44,735	$	804,628	$	—
U.S. state and municipal securities		67,243		—		67,243		—
Foreign government securities		147,346		—		147,346		—
Government guaranteed corporate securities		780,852		—		780,852		—
Corporate securities		923,856		—		923,737		119
Residential mortgage-backed securities
Agency mortgage-backed securities		832,073		—		832,073		—
Non-agency mortgage-backed securities		261,450		—		261,268		182
Commercial mortgage-backed securities
Agency mortgage-backed securities		32,264		—		32,264		—
Non-agency mortgage-backed securities		589,993		—		583,576		6,417
Asset-backed securities		309,011		—		309,011		—
Total fixed maturity investments	$	4,793,451	$	44,735	$	4,741,998	$	6,718
Short-term investments		389,937		550		389,387		—
Preferred equity securities		12,329		—		12,329		—
Total	$	5,195,717	$	45,285	$	5,143,714	$	6,718

During the quarter ended March 31 2010, $45.3 million of fixed maturity and short-term investments were acquired and classified within Level 1 as they represented current issue or on the run U.S. treasury securities. As a result of the new U.S. treasury securities issued, the $18.4 million of Level 1 securities at December 31, 2009 were transferred out of Level 1 to Level 2 as they no longer qualified as on the run securities.

During the quarter ended March 31 2010, $1.1 million of fixed maturity investments were transferred from Level 2 to Level 3. The reclassifications were largely related to high yield commercial mortgage-backed securities for which observable inputs were no longer available at March 31, 2010.

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)

4. Fair value measurement, cont’d.

During the quarter ended March 31 2010, $0.3 million of certain fixed maturities were transferred into Level 2 from Level 3. The reclassifications were largely related to high yield commercial mortgage-backed securities for which observable inputs became available.

			Fair Value Measurements at
			December 31, 2009
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
	Total at		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
U.S. government and agencies securities	$	774,996	$	—	$	774,996	$	—
U.S. state and municipal securities		89,644		—		89,644		—
Foreign government securities		146,271		—		146,271		—
Government guaranteed corporate securities		913,569		—		913,569		—
Corporate securities		603,738		—		603,621		117
Residential mortgage-backed securities
Agency mortgage-backed securities		923,422		—		923,422		—
Non-agency mortgage-backed securities		256,748		—		256,741		7
Commercial mortgage-backed securities
Agency mortgage-backed securities		32,851		—		32,851		—
Non-agency mortgage-backed securities		529,911		—		524,481		5,430
Asset-backed securities		277,468		—		277,468		—
Total fixed maturity investments	$	4,548,618	$	—	$	4,543,064	$	5,554
Short-term investments		534,678		18,442		516,236		—
Preferred equity securities		11,023		—		11,023		—
Total	$	5,094,319	$	18,442	$	5,070,323	$	5,554

Level 3 assets represented less than 0.13% and 0.11% of the Company’s total available for sale assets at March 31, 2010 and December 31, 2009, respectively.

There were no material changes in the Company’s valuation techniques for the three months ended March 31, 2010.

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)

4. Fair value measurement, cont’d.

The following tables present the securities lending collateral reinvested by the Company in connection with its securities lending program, categorized by the level within the hierarchy in which the fair value measurements fall, on a recurring basis at March 31, 2010 and December 31, 2009, respectively:

			Fair Value Measurements at March 31, 2010
			Quoted Prices		Significant
			in Active		Other		Significant
	Total at		Markets for		Observable		Unobservable
	March 31,		Identical Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Securities lending collateral	$	128,299	$	—	$	128,299	$	—

			Fair Value Measurements at December 31, 2009
			Quoted Prices		Significant
			in Active		Other		Significant
	Total at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
Securities lending collateral	$	66,913	$	—	$	66,913	$	—

The following table presents a reconciliation of the beginning and ending balances for all available for sale investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2010:

	Three months ended
	March 31, 2010
Level 3, beginning of period	$	5,554
Total net realized gains included in earnings		1
Total net realized and unrealized losses included in earnings		(472	)
Change in unrealized gains included in other comprehensive income (loss)		1,039
Change in unrealized losses included in other comprehensive income (loss)		(153	)
Purchases		41
Sales		(69	)
Transfers in to Level 3		1,111
Transfers out of Level 3		(334	)
Level 3, end of period	$	6,718

Level 3 securities are primarily comprised of non-agency commercial mortgaged-backed securities. Losses on Level 3 securities in the amount of $0.3 million, representing realized losses due to other-than-temporary impairments, were included in net impairment losses recognized in earnings for the three months ended March 31, 2010 and were attributable to the change in unrealized gains or losses related to fixed income investments still held at March 31, 2010.

At March 31, 2010 and December 31, 2009, the carrying value of the Company’s other investments was $368.0 million and $351.4 million, respectively, which approximates fair value.

At March 31, 2010 and December 31, 2009, the carrying value of the Company’s senior notes was $528.2 million and $447.4 million and the fair value was $526.3 million and $439.1 million, respectively.

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)

5. Earnings per share

The two-class method utilized by the Company is an earnings allocation formula that determines earnings per share for the holders of Endurance Holdings’ ordinary and class A shares (also referred to as “common shares”) and participating common shares, which includes unvested restricted shares which receive cash dividends, according to dividends declared (or accumulated) and participation rights in undistributed earnings. Net income available to common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company’s common and participating common shares. The remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. The Company’s unvested restricted shares, which receive cash dividends, are considered participating common shares.

Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. The weighted average number of common shares includes the fully vested, unreleased or unsettled restricted shares and restricted share units.

Diluted earnings per common share are based on the weighted average number of common shares and dilutive potential common shares outstanding during the period of calculation using the two-class method.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2010 and 2009:

	2010			2009
Numerator:
Net income available to common and participating common shareholders	$	51,914		$	74,422
Less amount allocated to participating common shareholders		(936	)		(1,385	)
Net income allocated to common shareholders	$	50,978		$	73,037
Denominator:
Weighted average shares — basic
Outstanding		53,403,677			56,258,821
Vested restricted share units		8,069			43,127
Weighted average shares — basic		53,411,746			56,301,948
Share equivalents:
Warrants		1,897,301			2,037,403
Options		972,486			667,871
Restricted share units		14,928			—
Weighted average shares — diluted		56,296,461			59,007,222
Basic earnings per common share	$	0.95		$	1.30
Diluted earnings per common share	$	0.91		$	1.24

⁽¹⁾ Represents earnings attributable to holders of unvested restricted shares issued under the Company’s stock compensation plans that are considered participating.

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)

5. Earnings per share, cont’d.

Endurance Holdings declared a dividend of $0.484375 per Series A preferred share on February 11, 2010 (2009 — $0.484375). The preferred share dividend was paid on March 15, 2010 to shareholders of record on March 1, 2010. Endurance Holdings also declared a dividend of $0.25 per common share on February 11, 2010 (2009 — $0.25). The dividend was paid on March 31, 2010 to shareholders of record on March 17, 2010.

	THREE MONTHS ENDED
	MARCH 31,
	2010		2009
Dividends declared per preferred share	$	0.484375	$	0.484375
Dividends declared per common share	$	0.25	$	0.25

6. Debt

On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior Notes due July 15, 2034, which were originally issued on July 15, 2004. On the closing of this additional issuance, the Company had a total par value of $335.0 million of the 7% Senior Notes outstanding. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than their date of issue, their initial purchase price to the public and their first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with, the previously issued 7% Senior Notes. Endurance intends to use the proceeds from the additional 7% Senior Notes for general corporate purposes.

The 7% Senior Notes are senior unsecured obligations of the Company and rank equally with all of the Company’s existing and future unsecured and unsubordinated debt. The 7% Senior Notes are also effectively junior to claims of creditors of the Company’s subsidiaries, including policyholders, trade creditors, debt holders and taxing authorities.

7. Stock-based employee compensation and other stock plans

The Company has a stock-based employee compensation plan, which provides the Company with the ability to grant options to purchase the Company’s ordinary shares, share appreciation rights, restricted shares, share bonuses and other equity incentive awards to key employees.

No options were granted, exercised, expired or vested during the quarters ended March 31, 2010 and 2009. There were no unrecognized stock-based compensation expenses related to unvested stock options at March 31, 2010 and 2009.

During the quarter ended March 31, 2010, the Company granted an aggregate of 506,454 (2009 — 283,605) restricted shares and restricted share units with weighted average grant date fair values of $19.4 million (2009 — $6.4 million). During the quarter ended March 31, 2010, the aggregate fair value of restricted shares and restricted share units that vested was $7.5 million (2009 — $7.1 million). For the quarter ended March 31, 2010, compensation costs recognized in earnings for all restricted shares and restricted share units were $3.8 million (2009 — $4.0 million). At March 31, 2010, compensation costs not yet recognized related to unvested restricted shares and restricted share units was $22.1 million (2009 — $17.0 million).

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)

7. Stock-based employee compensation and other stock plans, cont’d.

The Company also has an Employee Share Purchase Plan under which employees of Endurance Holdings and certain of its subsidiaries may purchase Endurance Holdings’ ordinary shares. For the quarter ended March 31, 2010, total expenses related to the Company’s Employee Share Purchase Plan were approximately $43,800 (2009 — $57,200).

8. 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

• Professional Lines

• Casualty

• Property

• Healthcare Liability

• Workers’ Compensation

Reinsurance segment lines of business

• Catastrophe

• Casualty

• Property

• Aerospace and Marine

• Surety and Other Specialty

Management measures 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 directly incurred by the segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses.

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)

8. Segment reporting, cont’d.

The following table provides a summary of segment revenues, results and reserves for losses and loss expenses for the three months ended March 31, 2010:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	464,341		$	354,528		$	818,869
Ceded premiums written		(115,400	)		(527	)		(115,927	)
Net premiums written		348,941			354,001			702,942
Net premiums earned		145,676			219,513			365,189
Other underwriting (loss) income		(2	)		297			295
		145,674			219,810			365,484
Expenses
Net losses and loss expenses		86,084			146,513			232,597
Acquisition expenses		17,426			46,518			63,944
General and administrative expenses		30,121			28,844			58,965
		133,631			221,875			355,506
Underwriting income (loss)	$	12,043		$	(2,065	)	$	9,978
Net loss ratio		59.0	%		66.8	%		63.7	%
Acquisition expense ratio		12.0	%		21.2	%		17.5	%
General and administrative expense ratio		20.7	%		13.1	%		16.1	%
Combined ratio		91.7	%		101.1	%		97.3	%
Reserve for losses and loss expenses	$	1,601,640		$	1,537,265		$	3,138,905

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)

8. Segment reporting, cont’d.

The following table provides a summary of segment revenues, results and reserves for losses and loss expenses for the three months ended March 31, 2009:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	522,214		$	261,092		$	783,306
Ceded premiums written		(199,784	)		(607	)		(200,391	)
Net premiums written		322,430			260,485			582,915
Net premiums earned		180,674			197,601			378,275
Other underwriting income		2,959			638			3,597
		183,633			198,239			381,872
Expenses
Net losses and loss expenses		98,804			121,332			220,136
Acquisition expenses		24,841			43,433			68,274
General and administrative expenses		29,759			30,498			60,257
		153,404			195,263			348,667
Underwriting income	$	30,229		$	2,976		$	33,205
Net loss ratio		54.7	%		61.4	%		58.2	%
Acquisition expense ratio		13.7	%		22.0	%		18.1	%
General and administrative expense ratio		16.5	%		15.4	%		15.9	%
Combined ratio		84.9	%		98.8	%		92.2	%
Reserve for losses and loss expenses	$	1,576,803		$	1,577,571		$	3,154,374

The following table reconciles total segment results to income before income taxes for the three months ended March 31, 2010 and 2009:

	2010			2009
Total underwriting income	$	9,978		$	33,205
Net investment income		56,479			64,550
Net foreign exchange (losses) gains		(5,971	)		62
Net realized investment gains		3,544			3,241
Net impairment losses recognized in earnings		(861	)		(12,126	)
Amortization of intangibles		(2,588	)		(2,588	)
Interest expense		(7,608	)		(7,555	)
Income before income taxes	$	52,973		$	78,789

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)

8. Segment reporting, cont’d.

The following table provides gross and net premiums written by line of business for the three months ended March 31, 2010 and 2009:

	For the three months ended						For the three months ended
	March 31, 2010						March 31, 2009
	Gross			Net			Gross		Net
	premiums			premiums			premiums		premiums
Business Segment	written			written			written		written
Insurance
Agriculture	$	350,199		$	268,107		$	378,410	$	223,303
Professional Lines		33,508			27,602			35,137		29,622
Casualty		34,228			21,038			30,624		17,880
Property		26,523			14,088			27,751		17,487
Healthcare Liability		20,316			18,523			19,713		17,209
Workers’ Compensation		(433	)		(417	)		30,579		16,929
Total Insurance		464,341			348,941			522,214		322,430
Reinsurance
Catastrophe		122,669			122,759			109,449		109,449
Casualty		107,974			107,263			75,392		75,169
Property		64,522			64,522			34,788		34,788
Aerospace and marine		18,066			18,031			12,226		12,130
Surety and other specialty		41,297			41,426			29,237		28,949
Total Reinsurance		354,528			354,001			261,092		260,485
Total	$	818,869		$	702,942		$	783,306	$	582,915

9. Commitments and contingencies

Concentrations of credit risk.The Company’s reinsurance recoverables at March 31, 2010 and December 31, 2009 amounted to $246.6 million and $467.7 million, respectively. At March 31, 2010, substantially all reinsurance recoverables were due from the U.S. government or from reinsurers rated A- or better by A.M. Best or Standard & Poors.

Major production sources.The following table shows the percentage of net premiums written generated through the Company’s largest brokers for the periods ended March 31, 2010 and 2009, respectively:

Broker	2010			2009
Aon Benfield		17.1	%		18.4	%
Marsh & McLennan Companies, Inc.		17.4	%		14.5	%
Willis Companies		6.1	%		6.7	%
Total of largest brokers		40.6	%		39.6	%

Letters of credit.As of March 31, 2010, the Company had issued letters of credit of $472.7 million (December 31, 2009 — $605.3 million) under its credit facility in favor of certain ceding companies.

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)

9. Commitments and contingencies, cont’d.

Investment commitments.As of March 31, 2010 and December 31, 2009, the Company had pledged cash and cash equivalents and fixed maturity investments of $173.0 million and $158.5 million, respectively, in favor of certain ceding companies to collateralize obligations. As of March 31, 2010 and December 31, 2009, the Company had also pledged $518.0 million and $664.0 million of its fixed maturity investments as collateral for $472.7 million and $605.3 million in letters of credit outstanding under its credit facility, respectively. In addition, at March 31, 2010 and December 31, 2009, cash and fixed maturity investments with fair values of $366.4 million and $361.6 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $10.6 million and $12.4 million were on deposit with Canadian regulators, respectively.

The Company was subject to certain commitments with respect to other investments at March 31, 2010 and December 31, 2009. The Company is generally subject to redemption restriction provisions of between one to five years from the date of acquisition and rolling redemption restrictions on a one or two year basis thereafter. Due to redemption restrictions, the Company is prohibited from requesting redemptions during 2010 of $76.9 million (December 31, 2009 — $72.1 million) of its other investments held at March 31, 2010. In addition, as of March 31, 2010, the Company was committed to investing a further $1.7 million (December 31, 2009 — $1.7 million) in various investment funds classified as other investments.

Reinsurance commitments. In the ordinary course of business, the Company enters into reinsurance agreements which may include terms that could require the Company to collateralize certain of its obligations as a result of certain triggering events, as defined in such agreements.

Employment agreements.The Company has entered into employment agreements with certain officers that provide for 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 March 31, 2010 are as follows:

Twelve Months Ended March 31,	Amount
2011	$	10,942
2012		11,026
2013		11,054
2014		7,719
2015		4,799
2016 and thereafter		14,376
	$	59,916

Total rent expense under operating leases for the three months ended March 31, 2010 was $2.5 million (2009 — $2.7 million).

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)

9. 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 finally settled by arbitration.

25

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 month period ended March 31, 2010 of Endurance Specialty Holdings Ltd. (“Endurance Holdings”) and its wholly-owned subsidiaries (collectively, the “Company”). This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q (this “Form 10-Q”) as well as the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2009, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in Endurance Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “2009 Annual Report on Form 10-K”).

Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to the 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” below for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the “Risk Factors” set forth in the 2009 Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Overview

Endurance Holdings was organized as a Bermuda holding company on June 27, 2002 and has seven wholly-owned operating subsidiaries:

• Endurance Specialty Insurance Ltd. (“Endurance Bermuda”), domiciled in Bermuda with branch offices in Zurich and Singapore;

• Endurance Worldwide Insurance Limited (“Endurance U.K.”), domiciled in England;

• Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware;

• Endurance American Insurance Company (“Endurance American”), domiciled in Delaware;

• Endurance American Specialty Insurance Company (“Endurance American Specialty”), domiciled in Delaware;

• Endurance Risk Solutions Assurance Co. (“Endurance Risk Solutions”), domiciled in Delaware; and

• American Agri-Business Insurance Company, domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together “ARMtech”).

26

The Company writes specialty lines of property and casualty insurance and reinsurance on a global basis. We define specialty lines as those lines of insurance and reinsurance that require dedicated, specialized underwriting skills and resources in order to be profitably underwritten. The Company’s portfolio of specialty lines of business is organized into two business segments, Insurance and Reinsurance.

In the Insurance segment, the Company writes agriculture, professional lines, casualty, property, healthcare liability and workers’ compensation insurance. In the Reinsurance segment, the Company writes catastrophe, casualty, property, aerospace and marine and surety and other specialty reinsurance.

The 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.

Application of Critical Accounting Estimates

The Company’s 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. For a detailed discussion of the Company’s critical accounting estimates, please refer to the 2009 Annual Report on Form 10-K. There were no material changes in the application of the Company’s critical accounting estimates subsequent to the 2009 Annual Report on Form 10-K. 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.

27

Consolidated Results of Operations — For the Three Month Periods Ended March 31, 2010 and 2009

The following is a discussion and analysis of the Company’s consolidated results of operations for the three months ended March 31, 2010 and 2009, which are summarized below:

	Three Months Ended
	March 31,			March 31,
	2010			2009			Change(1)
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written	$	818,869		$	783,306			4.5	%
Ceded premiums written		(115,927	)		(200,391	)		(42.1	%)
Net premiums written		702,942			582,915			20.6	%
Net premiums earned		365,189			378,275			(3.5	%)
Net investment income		56,479			64,550			(12.5	%)
Net realized gains on investment sales		3,544			3,241			9.4	%
Net impairment losses recognized in earnings		(861	)		(12,126	)		(92.9	%)
Other underwriting income		295			3,597			(91.8	%)
Total revenues		424,646			437,537			(2.9	%)
Expenses
Losses and loss expenses		232,597			220,136			5.7	%
Acquisition expenses		63,944			68,274			(6.3	%)
General and administrative expenses		58,965			60,257			(2.1	%)
Amortization of intangibles		2,588			2,588			—
Net foreign exchange losses (gains)		5,971			(62	)	NM		(2)
Interest expense		7,608			7,555			0.7	%
Income tax (benefit) expense		(2,816	)		492		NM		(2)
Net income	$	55,789		$	78,297			(28.4	%)
Net loss ratio		63.7	%		58.2	%		5.5
Acquisition expense ratio		17.5	%		18.1	%		(0.6	)
General and administrative expense ratio		16.1	%		15.9	%		0.2
Combined ratio		97.3	%		92.2	%		5.1

(1)	With respect to ratios, changes show increase or decrease in percentage points.
(2)	Not meaningful.

Premiums

Gross premiums written in the three months ended March 31, 2010 were $818.9 million, an increase of $35.6 million, or 4.5%, compared to the same period in 2009. Net written premiums in the three months ended March 31, 2010 were $702.9 million, an increase of $120.0 million, or 20.6%. The increase in net premiums written was attributable to growth across the Reinsurance segment together with an increase in premium retention in the agriculture line of the Insurance segment. Partially offsetting the growth in net premiums written in the first quarter of 2010 compared to the same period in 2009 was a decline in net premiums written in the Insurance segment’s workers’ compensation line as the Company ceased writing this business during the first quarter of 2009.

Net premiums earned for the three months ended March 31, 2010 were $365.2 million, a decrease of $13.1 million, or 3.5%, from the first quarter of 2009. The decrease in net premiums earned resulted principally from the reduced levels of net written premiums recorded through the 2009 fiscal year compared with prior periods.

28

Net Investment Income

Endurance’s net investment income of $56.5 million decreased 12.5% or $8.1 million for the quarter ended March 31, 2010 as compared to the same period in 2009. Investment income generated by the Company’s fixed maturity investments declined by $13.0 million in the current period compared with the same period in 2009 due to lower reinvestment rates during the current quarter. During the first quarter of 2010, the Company’s alternative investments and high yield funds, included in other investments generated a positive return of $17.0 million compared to a positive return of $10.5 million in the first quarter of 2009. The Company’s cash and cash equivalents and investments including net pending investment trades held at March 31, 2010 increased 13.1% compared to March 31, 2009 as a result of positive net operating cash flows throughout 2009 and the first quarter of 2010. Investment expenses, including investment management fees, for the first quarter of 2010 were $4.1 million compared to $2.8 million for the same period in 2009. The increase in investment expenses was due to the addition of a new asset manager during the current period, from a larger investment portfolio and increased monitoring activity conducted in the current period compared with the same period in 2009.

The annualized net earned yield and total return of the investment portfolio for the three months ended March 31, 2010 and 2009 and market yield and portfolio duration as of March 31, 2010 and 2009 were as follows:

	Three Months Ended
	March 31,			March 31,
	2010			2009
Annualized net earned yield(1)		3.82	%		4.63	%
Total return on investment portfolio(2)		1.73	%		0.95	%
Market yield(3)		2.78	%		5.00	%
Portfolio duration in years(4)		2.35			2.06

(1)	The actual net earned income from the investment portfolio after adjusting for expenses and accretion and amortization from the purchase price divided by the average book value of assets.
(2)	Includes realized and unrealized gains and losses.
(3)	The internal rate of return of the security based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) with its projected cash flows. Includes only cash and cash equivalents and fixed maturity investments held by the Company’s investment managers.
(4)	Includes only cash and cash equivalents and fixed maturity investments held by the Company’s investment managers.

During the first quarter of 2010, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 45 basis point range, with a high of 2.68% and a low of 2.23%. Investment grade corporate and agency structured security spreads narrowed approximately 29 and 1 basis points, respectively, during the quarter ended March 31, 2010. During the quarter ended March 31, 2010, the Company reduced its exposures to certain short term and government guaranteed corporate issues, and through the reinvestment of sales proceeds, portfolio returns and operating cash flows, increased its allocation to corporate securities. The duration of the fixed income portfolio, which includes fixed maturity investments, short term investments and preferred equity securities, has increased compared to March 31, 2009 primarily due to the decreased allocation to short term investments and shorter duration government guaranteed corporate securities.

29

Net Realized Gains on Investment Sales

Our investment portfolio is managed to generate attractive economic returns and income while providing the Company with liquidity. Movements in financial markets and interest rates influence the timing and recognition of net realized investment gains and losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale during the three months ended March 31, 2010 were $1,157.6 million compared to $703.9 million during the three months ended March 31, 2009. Realized investment gains and losses for the three months ended March 31, 2010 and 2009 were as follows:

	Three Months Ended
	March 31,			March 31,
	2010			2009
	(U.S. dollars in thousands)
Gross realized gains on investment sales	$	9,523		$	20,898
Gross realized losses on investment sales		(5,979	)		(17,657	)
Net realized gains on investment sales	$	3,544		$	3,241

Net Impairment Losses Recognized in Earnings

During the three months ended March 31, 2010, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The Company considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at March 31, 2010. The Company did not identify any such securities meeting these criteria. As such, the Company performed various analyses and reviews, which are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in our 2009 Annual Report on Form 10-K, to determine whether the investments in an unrealized loss position were other-than-temporarily impaired as a result of credit related factors or non-credit related factors. Net impairment losses recognized in earnings for the three months ended March 31, 2010 and 2009 were as follows:

	Three Months Ended
	March 31,			March 31,
	2010			2009
	(U.S. dollars in thousands)
Total other-than-temporary impairment losses	$	(769	)	$	(12,126	)
Portion of loss recognized in other comprehensive income (loss)		(92	)		—
Net impairment losses recognized in earnings	$	(861	)	$	(12,126	)

The $0.9 million of other-than-temporary impairment (“OTTI”) losses recognized by the Company in the first quarter of 2010 relating to specific credit events occurred primarily due to reductions in expected recovery values on mortgage-backed securities during the period, along with certain credit related downgrades in corporate securities.

For the first quarter ended March 31, 2009, the Company recorded $12.1 million of OTTI losses in earnings. This amount included a portion related to credit losses and a portion related to non-credit related factors. Non-credit-related factors included market and sector related factors, including limited liquidity and credit spread widening.

30

Net Foreign Exchange Losses (Gains)

During the first quarter of 2010, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange losses of $6.0 million compared to foreign exchange gains of $0.1 million for the same period of 2009. The net foreign exchange losses resulted from the strengthening of the U.S. dollar compared to other currencies during the first quarter of 2010. The Company also had net unrealized foreign exchange gains of $5.0 million (2009 — $0.1 million) from the revaluation of its foreign currency invested assets included in the change in net unrealized holding gains on investments within accumulated other comprehensive income (loss).

Net Losses and Loss Expenses

The Company’s reported net losses and loss expenses are characterized by various factors and are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. For the three months ended March 31, 2010, the Chilean earthquake and European Windstorm Xynthia adversely affected the Company’s net loss ratio in the Reinsurance segment. The Company recorded losses, net of reinstatement premiums and other loss sensitive accruals, of $65.0 million in relation to the two events. The net losses from the Chilean earthquake and windstorm Xynthia added 17.8 percentage points to the Company’s net loss ratio for the first quarter of 2010. During the three months ended March 31, 2009, there were no significant catastrophic events that impacted the Company’s net loss ratio.

Losses from claims related to prior accident years were lower than expected, resulting in the reserves for losses and loss expenses held by the Company for those accident years being moderately redundant. During the quarters ended March 31, 2010 and 2009, the Company’s previously estimated ultimate losses for prior accident years were reduced by $38.6 million and $39.3 million, respectively. The overall net reduction in the Company’s estimated losses for prior accident years experienced in the first quarter of 2010 occurred in all lines of business in the Insurance segment and in the short tail and other 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 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 small decrease in the acquisition expense ratio for the three months ended March 31, 2010 compared to the same period of 2009 was primarily due to the Company exiting the Insurance segment’s workers’ compensation line in 2009, which carried a relatively high acquisition expense ratio.

General and Administrative Expenses

Both the Company’s general and administrative expenses and expense ratio for the first quarter of 2010 were in line with those of the same period in 2009. At March 31, 2010, the Company had a total of 783 employees as compared to 776 employees at March 31, 2009.

31

Net Income

The Company’s net income for the three months ended March 31, 2010 of $55.8 million, a decline against net income of $78.3 million recorded for the three months ended March 31, 2009. The decrease of $22.5 million between the periods was a result of higher loss and loss expenses recorded relating to the Chilean earthquake and Windstorm Xynthia, contracting net premiums earned and a reduction in net investment income, offset by reduced impairment losses recognized on investments.

Reserve for Losses and Loss Expenses

In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the key lines of business within each business segment are aggregated based on their potential expected length of loss emergence. The period over which loss emergence occurs is typically referred to as the tail. The Company has classified its lines of business as either having a “short,” “long” or “other” tail pattern. The Company views short tail business as that for which development typically emerges within a period of several calendar quarters while long tail business would emerge over many years. The Company’s only short tail line of business in the Insurance segment is its property line. The Company’s long tail lines of business in the Insurance segment are casualty, healthcare liability, workers’ compensation and professional lines. The Company’s short tail lines of business in the Reinsurance segment include catastrophe, property, aerospace and marine and surety. The Company’s long tail line of business in the Reinsurance segment is the casualty line of business. Within the Company’s Insurance and Reinsurance segments, the Company writes certain specialty lines of business for which the loss emergence is considered unique in nature and thus, has been included as “other” in the tables below.

As of March 31, 2010, the Company had accrued losses and loss expenses reserves of $3.1 billion (December 31, 2009 — $3.2 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 three month periods ended March 31, 2010 and 2009, the Company’s net paid losses and loss expenses were $19.5 million and $77.0 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 2009 Annual Report on Form 10-K, the Company incorporates a variety of actuarial methods and judgments in its reserving process. Two key inputs in the various actuarial methods employed by the Company are initial expected loss ratios and expected loss reporting patterns. These key inputs impact the potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company’s business segments. The Company’s loss and loss expense reserves consider and reflect, in part, deviations resulting from differences between expected loss and actual loss reporting as well as judgments relating to the weights applied to the reserve levels indicated by the actuarial methods. Expected loss reporting patterns are based upon internal and external historical data and assumptions regarding claims reporting trends over a period of time that extends beyond the 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 table 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 2009 Annual Report on Form 10-K.

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Losses and loss expenses for the three months ended March 31, 2010 are summarized as follows:

	Incurred related to:					Total incurred
	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	6,576	$	(5,913	)	$	663
Long tail		60,915		(1,441	)		59,474
Other		36,272		(10,325	)		25,947
Total Insurance		103,763		(17,679	)		86,084
Reinsurance:
Short tail		123,586		(19,546	)		104,040
Long tail		41,868		1,376			43,244
Other		1,974		(2,745	)		(771	)
Total Reinsurance		167,428		(20,915	)		146,513
Totals	$	271,191	$	(38,594	)	$	232,597

Losses and loss expenses for the three months ended March 31, 2010 included $38.6 million in favorable development of reserves relating to prior accident years. This favorable development benefited the Company’s reported net loss ratio by approximately 10.6 percentage points. This net reduction in estimated losses for prior accident years resulted primarily from lower than expected claims emergence across all lines of business included within the Insurance segment and in the short tail and other lines of business in the Reinsurance segment.

For the three months ended March 31, 2010, the Company did not materially alter the two key inputs utilized to establish reserve for losses and loss expenses (initial expected loss ratios and loss reporting patterns) related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses for those reserve categories were within the range of possible results anticipated by the Company.

Insurance

Short Tail Insurance.For the three months ended March 31, 2010, the favorable loss emergence in the short tail insurance reserve category was primarily due to lower than expected claims reported related to the property line of business.

Long Tail Insurance.For the three months ended March 31, 2010, the modest amount of favorable loss emergence in the long tail insurance reserve category was due to lower than expected loss activity, primarily within the casualty and professional lines of business.

Other Insurance.Lower than anticipated agriculture claims settlements for the 2009 crop year resulted in a reduction in prior years estimated loss and loss expenses within this reserve category for the three months ended March 31, 2010.

Reinsurance

Short Tail Reinsurance.For the three months ended March 31, 2010, favorable loss emergence in the short tail reinsurance reserve category was primarily due to lower than expected claims reported within the property, surety, and aerospace lines of business.

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Long Tail Reinsurance. For the three months ended March 31, 2010, the Company recorded a minimal amount of unfavorable loss emergence in the long tail reinsurance reserve category. This was primarily due to slightly higher than expected claims reported within the casualty line of business.

Other Reinsurance.There was a modest amount of favorable prior year loss reserve development related to this reserve category for the three months ended March 31, 2010 primarily due to favorable loss settlement activity within certain specialty lines of business including special accounts and personal accident.

Losses and loss expenses for the three months ended March 31, 2009 are summarized as follows:

	Incurred related to:					Total incurred
	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	15,308	$	(13,419	)	$	1,889
Long tail		76,412		(12,654	)		63,758
Other		43,882		(10,725	)		33,157
Total Insurance		135,602		(36,798	)		98,804
Reinsurance:
Short tail		86,521		(4,983	)		81,538
Long tail		34,064		4,697			38,761
Other		3,267		(2,234	)		1,033
Total Reinsurance		123,852		(2,520	)		121,332
Totals	$	259,454	$	(39,318	)	$	220,136

Losses and loss expenses for the three months ended March 31, 2009 included $39.3 million in favorable development of reserves relating to prior accident years. This favorable development benefited the Company’s reported net loss ratio by approximately 10.4 percentage points. This net reduction in estimated losses for prior accident years resulted primarily from lower than expected claims emergence across all lines of business included within the Insurance segment and in the short tail and other lines of business in the Reinsurance segment.

For the three months ended March 31, 2009, the Company did not materially alter the two key inputs utilized to establish its reserve for losses and loss expenses (initial expected loss ratios and loss reporting patterns) for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses for those reserve categories were within the range of possible results anticipated by the Company.

Insurance

Short Tail Insurance.For the three months ended March 31, 2009, the favorable loss emergence in the short tail insurance reserve category was primarily due to lower than expected claims reported related to the property line of business.

Long Tail Insurance.For the three months ended March 31, 2009, favorable loss emergence in the long tail insurance reserve category was due to lower than expected loss activity, primarily within the healthcare liability, professional lines and casualty lines of business.

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Other Insurance.Lower than anticipated agriculture claims settlements for the 2008 crop year resulted in a reduction in prior years estimated loss and loss expenses within this reserve category for the three months ended March 31, 2009.

Reinsurance

Short Tail Reinsurance.For the three months ended March 31, 2009, the Company recorded a modest amount of favorable loss emergence in the short tail reinsurance reserve category. This was due to lower than expected claims reported within the surety, aerospace, and catastrophe lines of business partially offset by the higher than expected loss activity within the property line of business.

Long Tail Reinsurance. For the three months ended March 31, 2009, the Company recorded a modest amount of unfavorable loss emergence in the long tail reinsurance reserve category. This was primarily due to higher than expected claims reported within the casualty line of business.

Other Reinsurance.There was a modest amount of favorable prior year loss reserve development related to this reserve category for the three months ended March 31, 2009 primarily due to favorable loss settlement activity within certain specialty lines of business including special accounts and personal accident contracts.

Reserves for losses and loss expenses were comprised of the following at March 31, 2010:

					Reserve for
	Case		IBNR		losses and loss
	Reserves		Reserves		expenses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	24,754	$	29,876	$	54,630
Long tail		284,110		1,144,881		1,428,991
Other		57,347		60,672		118,019
Total Insurance		366,211		1,235,429		1,601,640
Reinsurance:
Short tail		333,455		318,724		652,179
Long tail		240,149		581,665		821,814
Other		7,693		55,579		63,272
Total Reinsurance		581,297		955,968		1,537,265
Totals	$	947,508	$	2,191,397	$	3,138,905

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Reserves for losses and loss expenses were comprised of the following at December 31, 2009:

					Reserve for
	Case		IBNR		losses and loss
	Reserves		Reserves		expenses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	30,371	$	30,709	$	61,080
Long tail		277,148		1,141,658		1,418,806
Other		182,838		17,266		200,104
Total Insurance		490,357		1,189,633		1,679,990
Reinsurance:
Short tail		338,161		266,219		604,380
Long tail		256,668		551,622		808,290
Other		7,759		56,607		64,366
Total Reinsurance		602,588		874,448		1,477,036
Totals	$	1,092,945	$	2,064,081	$	3,157,026

Underwriting results by operating segments

The determination of the 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 segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by the segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the segment to which they apply.

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Insurance

The following table summarizes the underwriting results and associated ratios for the Company’s Insurance segment for the three months ended March 31, 2010 and 2009.

	Three Months Ended
	March 31,			March 31,
	2010			2009			Change(1)
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	464,341		$	522,214			(11.1	%)
Ceded premiums written		(115,400	)		(199,784	)		(42.2	%)
Net premiums written		348,941			322,430			8.2	%
Net premiums earned		145,676			180,674			(19.4	%)
Other underwriting income		(2	)		2,959		NM		(2)
		145,674			183,633			(20.7	%)
Expenses
Losses and loss expenses		86,084			98,804			(12.9	%)
Acquisition expenses		17,426			24,841			(29.8	%)
General and administrative expenses		30,121			29,759			1.2	%
		133,631			153,404			(12.9	%)
Underwriting income	$	12,043		$	30,229			(60.2	%)
Net loss ratio		59.0	%		54.7	%		4.3
Acquisition expense ratio		12.0	%		13.7	%		(1.7	)
General and administrative expense ratio		20.7	%		16.5	%		4.2
Combined ratio		91.7	%		84.9	%		6.8

(1)	With respect to ratios, changes show increase or decrease in percentage points.
(2)	Not meaningful.

Premiums.Gross premiums written for the first quarter of 2010 in the Insurance segment decreased by $57.9 million over the first quarter of 2009. Gross and net premiums written for each line of business in the Insurance segment for the three months ended March 31, 2010 and 2009 were as follows:

	Three Months Ended
	March 31, 2010						March 31, 2009
	Gross			Net			Gross		Net
	Premiums			Premiums			Premiums		Premiums
	Written			Written			Written		Written
	(U.S. dollars in thousands)
Agriculture	$	350,199		$	268,107		$	378,410	$	223,303
Professional Lines		33,508			27,602			35,137		29,622
Casualty		34,228			21,038			30,624		17,880
Property		26,523			14,088			27,751		17,487
Healthcare Liability		20,316			18,523			19,713		17,209
Workers’ Compensation		(433	)		(417	)		30,579		16,929
Total	$	464,341		$	348,941		$	522,214	$	322,430

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The increase in the Insurance segment’s net premiums written for the three months ended March 31, 2010 compared to 2009 was driven by growth in agriculture net premiums written of $44.8 million. The Company decreased its ceded premiums through the federally sponsored crop insurance program as well as discontinued a third party reinsurance program. The increase in net premiums written due to reduced cessions was partially offset by a decline in gross premiums recorded compared to the prior year period as reduced commodity prices resulted in a decline in rates. Agriculture insurance writings are seasonal in nature with the majority of net premiums written recorded in the first and third quarters of the year. In addition, net premiums written in the Insurance segment decreased due to the Company’s exit in the first quarter of 2009 from the workers’ compensation line which contributed net premiums written of $16.9 million in the first quarter of 2009.

The net premiums earned by the Company in the Insurance segment in the three months ended March 31, 2010 decreased compared to 2009, primarily due to the Company exiting the workers’ compensation line early in 2009.

Net Losses and Loss Expenses.The increase in the net loss ratio in the Company’s Insurance segment for the three months ended March 31, 2010 compared to the same period in 2009 reflected lower levels of favorable prior year loss reserve development in 2010. During the first quarter of 2010, the Company’s previously estimated loss and loss expense reserve for the Insurance segment for prior accident years was reduced by $17.7 million, which decreased the net loss ratio by 12.1 percentage points, as compared to reductions of $36.8 million, which decreased the net loss ratio by 20.4 percentage points, for the three months ended March 31, 2009. The agriculture, casualty, property and workers’ compensation lines of business all experienced net reductions in estimated losses for prior accident years in the three months ended March 31, 2010 as claims have not materialized or were settled for lower amounts than were originally estimated. The current year accident ratio decreased by 4.0 percentage points for the three months ended March 31, 2010 compared to the same period in 2009 due to reductions in losses in the agriculture, casualty and property lines of business.

Acquisition Expenses.The Company’s acquisition expense ratio in the Insurance segment for the three months ended March 31, 2010 reduced to 12.0% from 13.7% for the three months ended March 31, 2009 as a result of the Company exiting the workers’ compensation line in 2009, which had higher associated commission expenses.

General and Administrative Expenses.General and administrative expenses in the Insurance segment for the first quarter of 2010 were in line with the same period in 2009. The general and administrative expense ratio increased between periods by 4.2 percentage points as a result of a decline in net premiums earned in the first quarter of 2010 compared to the same period in 2009.

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Reinsurance

The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance segment for the three months ended March 31, 2010 and 2009.

	Three Months Ended
	March 31,			March 31,
	2010			2009			Change(1)
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	354,528		$	261,092			35.8	%
Ceded premiums written		(527	)		(607	)	(13.2		%)
Net premiums written		354,001			260,485			35.9	%
Net premiums earned		219,513			197,601			11.1	%
Other underwriting income		297			638		(53.4		%)
		219,810			198,239			10.9	%
Expenses
Losses and loss expenses		146,513			121,332			20.8	%
Acquisition expenses		46,518			43,433			7.1	%
General and administrative expenses		28,844			30,498			(5.4	%)
		221,875			195,263			13.6	%
Underwriting (loss) income	$	(2,065	)	$	2,976		NM		(2)
Ratios
Loss ratio		66.8	%		61.4	%		5.4
Acquisition expense ratio		21.2	%		22.0	%		(0.8	)
General and administrative expense ratio		13.1	%		15.4	%		(2.3	)
Combined ratio		101.1	%		98.8	%		2.3

(1)	With respect to ratios, changes show increase or decrease in percentage points.
(2)	Not meaningful.

Premiums.In the first quarter of 2010, gross premiums written in the Reinsurance segment increased by 35.8% over the first quarter of 2009. Gross and net premiums written for each line of business in the Reinsurance segment for the three months ended March 31, 2010 and 2009 were as follows:

	Three Months Ended
	March 31, 2010				March 31, 2009
	Gross		Net		Gross		Net
	Premiums		Premiums		Premiums		Premiums
	Written		Written		Written		Written
	(U.S. dollars in thousands)
Catastrophe	$	122,669	$	122,759	$	109,449	$	109,449
Casualty		107,974		107,263		75,392		75,169
Property		64,522		64,522		34,788		34,788
Aerospace and Marine		18,066		18,031		12,226		12,130
Surety and other specialty		41,297		41,426		29,237		28,949
Total	$	354,528	$	354,001	$	261,092	$	260,485

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Net premiums written in the Reinsurance segment for the first quarter of 2010 were $354.0 million compared to $260.5 million of premiums written in the same period in 2009. The increase in net premiums written in the Reinsurance segment for the current quarter compared to the same period in 2009 was primarily due to growth in premiums related to the casualty, property, catastrophe and agriculture lines. The casualty line of business experienced increased premiums recorded on renewal business, a significant positive premium adjustment and new premiums generated from both new and existing client relationships. The growth in premiums in the property, catastrophe and agriculture lines was generated by new business, partially offset in some areas by declines in rates.

Net premiums earned by the Company in the Reinsurance segment for the three months ended March 31, 2010 increased compared to the first quarter of 2009, due to the growth in gross premiums written in this business segment in more recent periods.

Losses and Loss Expenses.The net loss ratio in the Company’s Reinsurance segment for the three months ended March 31, 2010 increased compared to the first quarter of 2009 as a result of catastrophe losses incurred in the period related to the Chilean earthquake and Windstorm Xynthia. The Company recorded losses, net of reinstatement premiums and other loss sensitive accruals, of $65.0 million in relation to the two events. The net losses from the Chilean earthquake and Windstorm Xynthia added 29.6 percentage points to the Reinsurance segment’s net loss ratio for the first quarter of 2010. During the three months ended March 31, 2009, there were no significant catastrophic events. The Company recorded $20.9 million or 9.5 percentage points of favorable prior year loss reserve development in the first quarter of 2010 compared to $2.5 million or 1.3 percentage points in the same quarter last year. During the first quarter of 2010, more favorable loss reserve development emanated from this segment’s short tail line of business compared to the first quarter of 2009, due to lower than expected claims within the property, surety, and aerospace lines of business.

Acquisition Expenses.The Company’s acquisition expense ratio in the Reinsurance segment decreased for the first quarter of 2010 as compared to the first quarter of 2009. The decrease in the acquisition expense ratio for the first quarter was generally due to lower profit commissions.

General and Administrative Expenses.The general and administrative expense ratio experienced by the Reinsurance segment in the three months ended March 31, 2010 decreased from the same period in 2009 primarily as a result of the growth in overall premiums earned.

Liquidity and Capital Resources

Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries. Endurance Holdings relies primarily on dividends and other permitted distributions from its insurance subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its ordinary shares and Series A Preferred Shares. There are restrictions on the payment of dividends by the Company’s insurance subsidiaries as described in more detail below.

The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance 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 March 31, 2010, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $612 million (December 31, 2009 — $610 million) without prior regulatory approval based upon the Bermuda insurance and corporate regulations.

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Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance and ARMtech is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2009, Endurance U.S. Reinsurance, Endurance American and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends at March 31, 2010 without the prior approval of the applicable insurance regulator. At March 31, 2010, Endurance Risk Solutions and ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $3.8 million and $0.6 million, respectively, without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.

Under the jurisdiction of the United Kingdom’s Financial Services Authority (“FSA”), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The FSA regulatory requirements imposed no explicit restrictions on Endurance U.K.’s ability to pay a dividend, but Endurance U.K. would have to notify the FSA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At March 31, 2010, Endurance U.K. did not have profits available for distributions.

The Company’s aggregate invested assets, including fixed maturity investments, short term investments, preferred equity securities, other investments, cash and cash equivalents and pending securities transactions, as of March 31, 2010 totaled $6.2 billion compared to aggregate invested assets of $6.0 billion as of December 31, 2009. The increase in invested assets since December 31, 2009 resulted from collections of premiums on insurance policies and reinsurance contracts, investment income and the issuance of debt offset by losses and loss expenses paid, interest and dividends paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid and repurchases of the Company’s ordinary shares. Cash flows from operations for the three months ended March 31, 2010 showed little change compared to the same period in 2009.

As of March 31, 2010 and December 31, 2009, the Company had pledged cash and cash equivalents and fixed maturity investments of $173.0 million and $158.5 million, respectively, in favor of certain ceding companies to collateralize obligations. As of March 31, 2010 and December 31, 2009, the Company had also pledged $518.0 million and $664.0 million of its fixed maturity investments as collateral for $472.7 million and $605.3 million in letters of credit outstanding under its credit facility, respectively. In addition, at March 31, 2010 and December 31, 2009, cash and fixed maturity investments with fair values of $366.4 million and $361.6 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $10.6 million and $12.4 million were on deposit with Canadian regulators, respectively.

On March 23, 2010, the Company issued an additional $85.0 million principal amount of its 7% Senior Notes due July 15, 2034, which were originally issued on July 15, 2004. On the closing of this additional issuance, the Company had a total par value of $335 million of the 7% Senior Notes outstanding. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than their date of issue, their initial purchase price to the public and their first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with, the previously issued 7% Senior Notes. Endurance intends to use the proceeds from the additional 7% Senior Notes for general corporate purposes.

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The 7% Senior Notes are senior unsecured obligations of the Company and rank equally with all of the Company’s existing and future unsecured and unsubordinated debt. The 7% Senior Notes are also effectively junior to claims of creditors of the Company’s subsidiaries, including policyholders, trade creditors, debt holders and taxing authorities.

Under the Company’s amended and restated credit facility, the Company and its subsidiaries have access to a revolving line of credit of up to $1.175 billion which expires May 8, 2012. As of March 31, 2010, there were no borrowings under this line of credit and letters of credit outstanding under the facility were $472.7 million.

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 continue to generate positive operating cash flows through 2010, absent the occurrence of one or more significant catastrophic events. In the event that paid losses accelerate beyond the ability to fund such payments from operating cash flows, the Company would use its cash balances available, liquidate a portion of its investment portfolio, access its existing credit facility, exercise its variable equity forward contract or arrange for additional financing. However, there can be no assurance that the Company will be successful in executing these strategies.

Currency and Foreign Exchange

The Company’s functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all operations is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K, which is subject to the United Kingdom’s Financial Services Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.’s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the 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.

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.

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Cautionary Statement Regarding Forward-Looking Statements

Some of the statements contained herein, and certain statements that the Company may make in press releases or that Company officials may make orally, may include forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us in general and the insurance and reinsurance sectors specifically, both as to underwriting and investment matters. Statements which include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “seek,” “will,” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.

All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:

• the effects of competitors’ pricing policies, and of changes in laws and regulations on competition, including those regarding contingent commissions, industry consolidation and development of competing financial products;

• greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices have anticipated;

• greater frequency or severity of loss activity, as a result of changing climate conditions primarily rising global temperatures;

• changes in market conditions in the agriculture industry, which may vary depending upon demand for agricultural products, weather, commodity prices, natural disasters, technological advances in agricultural practices, changes in U.S. and foreign legislation and policies related to agricultural products and producers;

• termination of or changes in the terms of the U.S. multiple peril crop insurance program and termination or changes to the U.S. farm bill, including modifications to the Standard Reinsurance Agreement put in place by the risk Management Agency of the U.S. Department of Agriculture;

• decreased demand for property and casualty insurance or reinsurance or increased competition due to an increase in capacity of property and casualty insurers and reinsurers;

• changes in the availability, cost or quality of reinsurance or retrocessional coverage;

• the inability to renew business previously underwritten or acquired;

• the inability to obtain or maintain financial strength or claims-paying ratings by one or more of our subsidiaries;

• our ability to effectively integrate acquired operations and to continue to expand our business;

• uncertainties in our reserving process, including the potential for adverse development of our loss reserves or failure of our loss limitation methods;

• Endurance Holdings or Endurance Bermuda becomes subject to income taxes in jurisdictions outside of Bermuda;

• changes in tax regulations or laws applicable to us, our subsidiaries, brokers or customers;

• state, federal and foreign regulations that impede our ability to charge adequate rates and efficiently allocate capital;

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• changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including the implementation of Solvency II by the European Commission;

• reduced acceptance of our existing or new products and services;

• loss of business provided by any one of a few brokers on whom we depend for a large portion of our revenue, and our exposure to the credit risk of our brokers;

• assessments by states for high risk or otherwise uninsured individuals;

• the impact of acts of terrorism and acts of war;

• the effects of terrorist related insurance legislation and laws;

• loss of key personnel;

• political stability of Bermuda;

• changes in the political environment of certain countries in which we operate or underwrite business;

• changes in accounting regulation, policies or practices;

• our investment performance;

• the valuation of our invested assets and the determination of impairments of those assets, if any;

• the breach of our investment guidelines by our independent third party investment managers or the inability of those guidelines to mitigate investment risk;

• the need for additional capital in the future which may not be available or only available on unfavorable terms;

• development in the world’s financial and capital markets and our access to such markets;

• potential government intervention in our industry as a result of recent events;

• continued illiquidity in the credit markets worldwide and in the United States in particular; and

• changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates, and other factors.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in our 2009 Annual Report on Form 10-K, including the risk factors set forth in Item 1A thereof. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Information about Market Risk” included in the Company’s 2009 Annual Report on Form 10-K.

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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 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 first 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

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our 2009 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

							(d) Maximum Number
					(c) Total Number		(or Approximate Dollar
	(a) Total				of Shares		Value) of Shares
	Number of		(b) Average		Purchased as Part of		that May Yet Be
	Shares		Price Paid		Publicly Announced		Purchased Under the
Period	Purchased(1)		per Share		Plans or Programs(1)(2)		Plans or Programs(1)(2)
January 1, 2010 – January 31, 2010		685,000	$	36.56		685,000		5,728,635
February 1, 2010 – February 28, 2010		479,653	$	35.70		479,653		5,248,982
March 1, 2010 – March 31, 2010		170,000	$	36.85		170,000		5,078,982
Total		1,334,653	$	36.29		1,334,653		5,078,982

(1)	Ordinary shares or share equivalents.
(2)	At its meeting on November 4, 2009, the Board of Directors of the Company authorized the repurchase of up to a total of 8,000,000 ordinary shares and share equivalents through November 4, 2011, superceding all previous authorizations.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit
Number		Description
	4.1	Third Supplemental Indenture, by and between Endurance Specialty Holdings Ltd. and The Bank of New York Mellon, formerly known as the Bank of New York, dated March 26, 2010. Incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on March 29, 2010.
	10.1	Underwriting Agreement, by and between Endurance Specialty Holdings Ltd. and Banc of America Securities LLC, as representative of the several underwriters named therein, dated March 23, 2010. Incorporated herein by reference to Exhibit 1.1 to the Current Report on Form 8-K filed on March 29, 2010.
	10.2	Non-Executive Chairman Employment Agreement, dated February 26, 2010, by and between the Company and Mr. Kenneth J. LeStrange. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March 1, 2010.**
	10.3	Non-Executive Chairman Indemnification Agreement, dated February 26, 2010, by and between the Company and Mr. Kenneth J. LeStrange. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 1, 2010.**
	10.4	Amended and Restated Employment Agreement, dated February 18, 2010, by and between the Company and Mr. David Cash. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 23, 2010.**
	10.5	Amended and Restated Employment Agreement, dated February 18, 2010, by and between the Company and Mr. William Jewett. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on February 23, 2010.**
	10.6	Form of Indemnification Agreement, dated February 18, 2010, by and between the Company and Messrs. David Cash and William Jewett. Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on February 23, 2010.**
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
	32	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** 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: May 7, 2010	By:	/s/ David S. Cash
		David S. Cash
		Chief Executive Officer
Date: May 7, 2010	By:	/s/ Michael J. McGuire
		Michael J. McGuire
		Chief Financial Officer (Principal Financial Officer)

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