The Company's Aerospace and Other Specialty Lines business segment is comprised primarily of the insurance and reinsurance of Aerospace lines, and a limited number of other reinsurance programs such as surety, marine, energy, personal accident, terrorism and others. Aerospace includes aviation hull, aircraft liability and aircraft products coverage, and satellite launch and in-orbit coverage. The following table summarizes the underwriting results, associated ratios and the reserve for losses and loss expenses for the Aerospace and Other Specialty Lines business segment for the nine months ended September 30, 2004 and 2003, respectively.
Significant transactions and events
On March 9, 2004, certain of the Company's founding shareholders consummated a secondary public offering of the Company's ordinary shares, par value $1.00 per share. Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as joint bookrunning managers, together with Credit Suisse First Boston LLC, Deutsche Bank Securities Inc., JP Morgan Securities Inc. and Wachovia Capital Markets, LLC, as the representatives of the underwriters. The ordinary shares sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (Registration No. 333-112258) that was declared effective by the Securities and Exchange Commission on March 3, 2004. Of the ordinary shares registered under the Registration Statement, 8,850,000 were sold at a price to the public of $34.85 per share. The underwriters had an option, exercisable until April 2, 2004, to acquire up to an additional 1,327,500 ordinary shares registered on the Registration Statement to cover over-allotments. On March 12, 2004, the underwriters exercised this option to purchase an additional 944,500 ordinary shares at a price of $34.85 per share. All of the ordinary shares were sold by certain founding shareholders and neither the Company nor any of its officers or directors received any proceeds from the offering.
On May 21, 2004, the Company repurchased 2,036,834 of its ordinary shares owned by Lightyear Capital, initial investors at the formation of the Company. The purchase price was $31.779 per share, representing a 1% discount to the closing price for the ordinary shares on May 21, 2004. The purchase price totaled $64.7 million. The Company used existing cash on hand to fund the repurchase. The Company also announced a share repurchase program under which the Company may repurchase up to 2 million additional ordinary shares or share equivalents. The repurchases will be accomplished in open market or privately negotiated transactions, from time to time, depending on market conditions. The share repurchase program is currently authorized to continue until May 2006.
On June 15, 2004, the Company filed an unallocated universal Shelf Registration Statement on Form S-3 (Registration No. 333-116505) that was declared effective by the Securities and Exchange Commission on June 30, 2004. The Shelf Registration Statement permits the Company to issue, in one or more offerings, up to $500 million of debt, equity, trust preferred securities or a combination of the above. In addition to the $500 million of securities eligible to be sold from time to time by the Company, the Shelf Registration Statement also registers for possible future sales up to 38,069,699 ordinary shares beneficially owned by certain of the Company's founding shareholders. The registration of the founding shareholders' ordinary shares does not obligate these shareholders to offer or sell any of these shares. The Company has not been asked to assist in any offerings of ordinary shares by the founding shareholders at this time, nor will the Company receive any proceeds from any sale of shares by the selling shareholders.
On July 15, 2004, the Company issued $250 million principal amount of 7% Senior Notes pursuant to a prospectus supplement to the Shelf Registration Statement. The Senior Notes were offered by the underwriters at a price of 99.108% of their principal amount, providing an effective yield to investors of 7.072%, and, unless previously redeemed, will mature on July 15, 2034. On July 15, 2004, the Company used a portion of the net proceeds from the offering to repay the $103 million term loan outstanding under its bank credit facility.
The 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 Senior Notes are also effectively junior to claims of creditors of the Company's subsidiaries, including policyholders, trade creditors, debt holders and taxing authorities.
The indenture governing the Senior Notes contains certain customary covenants, including:
 | |
| • | limitations on liens on the stock of restricted subsidiaries; |
| |
| • | restrictions as to the disposition of the stock of restricted subsidiaries; and |
| |
| • | limitations on consolidation, merger, amalgamation and sale of assets. |
In addition, the following events constitute an event of default under the indenture governing the Senior Notes:
44
| |
| • | a default in payment of principal or any premium under the Senior Notes when due; |
| |
| • | a default for 30 days in payment of any interest under the Senior Notes; |
| |
| • | a failure to observe or perform any other covenant or agreement in the Senior Notes or indenture, other than a covenant or agreement included solely for the benefit of a different series of debt securities, after 90 days written notice of the failure; |
| |
| • | certain events of bankruptcy, insolvency or reorganization; or |
| |
| • | a continuing default, for more than 30 days after the Company receives notice of the default, under any other indenture, mortgage, bond, debenture, note or other instrument, under which the Company or its restricted subsidiaries may incur recourse indebtedness for borrowed money in an aggregate principal amount exceeding $50,000,000, if the default resulted in the acceleration of that indebtedness, and such acceleration has not been waived or cured. |
Where an event of default occurs and is continuing, either the indenture trustee or the holders of not less than 25% in principal amount of the Senior Notes, may declare the principal and accrued interest of the Senior Notes to be due and payable immediately. If an event of default occurs involving certain events of bankruptcy, insolvency or reorganization, all unpaid principal of all the Senior Notes then outstanding, and interest accrued thereon, if any, shall be due and payable immediately, without any declaration or other act on the part of the indenture trustee or any holder of the Senior Notes.
On August 6, 2004, the Company and its lenders replaced its existing letter of credit and revolving credit facility with a new three-year $850 million letter of credit and revolving credit facility. The full amount of the new credit facility may be used to issue letters of credit or for revolving credit borrowings. Up to $412.5 million of borrowings or letter of credit issuances under the credit facility may be secured by a portion of the investment portfolio of the individual borrower under the credit facility. The new credit facility expires on August 6, 2007. The lenders under the new credit facility are Bank of America, N.A., Barclays Bank PLC, Calyon, Comerica Bank, Commerzbank AG, Credit Suisse First Boston, Deutsche Bank AG, Goldman Sachs Credit Partners L.P., HSBC Bank USA, National Association, ING Bank N.V., JPMorgan Chase Bank, Lloyds TSB Bank plc, Merrill Lynch Bank USA, The Bank of New York, The Bank of Nova Scotia, The Bank of N.T. Butterfield & Son Limited, The Royal Bank of Scotland plc, and Wachovia Bank, National Association. The administrative agent is JPMorgan Chase Bank. The administrative agent is JPMorgan Chase Bank.
As of August 6, 2004, the Company had no revolving loans and $233.4 million of letters of credit outstanding under the new credit facility.
Proceeds of the revolving credit facility may be used by the Company or its subsidiaries for general corporate and working capital purposes and repurchases of its outstanding ordinary or class A shares and warrants to purchase its ordinary or class A shares. The Company cannot use more than $500 million of the proceeds for equity repurchases. The credit facility also provides for the issuance of standby letters of credit, of which up to $412.5 million may be secured by a portion of the investment portfolio of the individual borrower under the facility. Endurance Holdings guaranteed the obligations of those of its subsidiaries that are parties to the credit facility.
The interest rate for revolving loans under the credit facility is either (i) the higher of (a) the Federal Funds Effective Rate plus ½% of 1% and (b) the prime commercial lending rate of JPMorgan Chase Bank or (ii) LIBOR. For letters of credit issued on an unsecured basis, the Company is required to pay a fee ranging from 0.40% to 0.70% on the daily stated amount of such letters of credit. For letters of credit issued on a secured basis, the Company is required to pay a fee ranging from 0.20% to 0.30% on the daily stated amount of such letters of credit. In each case, the applicable fee is determined based upon the ratio of the Company's outstanding indebtedness to total capital, which is referred to as the Company's leverage ratio. If the Company fails to timely repay any revolving loan or timely reimburse any lender for a drawing under a letter of credit, the Company is obligated to pay interest on the unpaid or unreimbursed amount at the applicable rate, plus 2.0%.
The credit facility requires the Company to pay to the lenders a facility fee that ranges from 0.10% to 0.175% of the total commitments outstanding under the credit facility depending on the
45
Company's leverage ratio. The Company must also pay the lenders a utilization fee that ranges from 0.125% to 0.25% of the total amount of revolving loans outstanding when the aggregate amount of those loans is equal to 50% of the aggregate lending commitments outstanding under the credit facility.
The credit facility requires that the outstanding principal of revolving loans be repaid in full on August 6, 2007.
The credit facility requires the Company's compliance with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a leverage ratio (no greater than 0.35:1.00 at any time), a consolidated tangible net worth (no less than $1.25 billion at any time), and unencumbered cash and investment grade assets in excess of the greater of $400 million or the Company's outstanding debt and letters of credit. In addition, each of the Company's regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the Company's credit facility restrict the declaration or payment of dividends if the Company is already in default or the payment or declaration would cause a default under the terms of the loan facilities. The credit facility also includes other covenants restricting such activities as:
| |
| • | changes in business; |
| |
| • | consolidation or merger with another entity; |
| |
| • | disposal of assets; |
| |
| • | incurrence of additional indebtedness; |
| |
| • | incurrence of liens on our property; |
| |
| • | issuance of preferred or preference equity securities; |
| |
| • | dissolution or liquidation; |
| |
| • | transactions with affiliates; and |
| |
| • | changes of control. |
It is an event of default under the credit facility if there occurs any one of the following:
| |
| • | a failure of the Company to pay principal when due, interest or fees within three business days or other amounts under the credit facility following notice or demand; |
| |
| • | a representation made by the Company is untrue in any material respect; |
| |
| • | a failure by the Company to perform its covenants; |
| |
| • | a default in connection with other indebtedness in excess of $30 million; |
| |
| • | bankruptcy; |
| |
| • | a material ERISA violation; |
| |
| • | an adverse judgment in excess of $30 million; |
| |
| • | suspension of one or more insurance licenses, with the suspension having a material adverse effect on the Company; |
| |
| • | cessation of the Endurance Holdings guarantee; |
| |
| • | a failure of the lenders to have a first priority perfected security interest in the collateral; or |
| |
| • | a change in control of the Company. |
Upon the occurrence of an event of default under the credit facility, the lenders can terminate their commitments under the revolving credit facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the credit facility.
46
Given that the Company's Senior Notes (described above) and the credit facility contain cross default provisions, this may result in the holders of the Senior Notes and the lenders under the credit facility declaring such debt due and payable and an acceleration of all debt due under both the Senior Notes and the revolving credit facility. If this were to occur, the Company may not have liquid funds sufficient at that time to repay any or all of such indebtedness.
As of September 30, 2004, the Company had invested $77.5 million in investments in other ventures. At its meeting in May 2004, the Company's Board of Directors approved the investment of up to $100 million (less than 3% of the Company's current invested assets) with performance incentive based alternative investment managers.
During the three months ended September 30, 2004, the Company repurchased 356,800 ordinary shares at an average price of $32.84 per share. Under the previously announced share repurchase program, the Company is authorized to repurchase up to an additional 1,643,200 ordinary shares and share equivalents. The repurchases will be accomplished in open market or privately negotiated transactions, from time to time, depending on market conditions. The share repurchase program is currently authorized to continue until May 2006.
Endurance U.S. entered into a Renewal Rights Purchase Agreement, dated as of October 1, 2004, pursuant to which Endurance U.S. will acquire a majority of the surety reinsurance business of XL Reinsurance America Inc. ("XL Re America") on a prospective basis. Endurance U.S. will pay XL Re America a commission on the surety reinsurance business renewed by Endurance U.S. Endurance U.S. is not obligated to pay any commission prior to the renewal of the business or any minimum amount of commission. In addition, Endurance U.S. will assist XL Re America with the ongoing management of the current in force and expired surety reinsurance portfolio.
The Company has entered into contingent commission arrangements with the largest brokers in the industry, including Marsh & McLennan, Aon, Willis and Benfield. The Company has accrued contingent commissions in accordance with the terms of existing agreements with brokers through September 30, 2004. To date, the Company has not been subpoenaed in connection with any governmental organization's investigation, including the New York Attorney General, and, to our knowledge, the Company is not under investigation by the New York Attorney General or any other governmental organization. Based upon the internal reviews the Company conducted to date, the Company believes it has not engaged in the anti-competitive practices alleged by the New York Attorney General in its complaint against Marsh & McLennan. To validate these initial findings, the Company is conducting on-going confirmatory reviews.
Liquidity and capital resources
Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries, including Endurance Bermuda, Endurance U.K. and Endurance U.S. Endurance Holdings relies primarily on dividends and other permitted distributions from its insurance subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its common shares. There are restrictions on the payment of dividends by Endurance Bermuda, Endurance U.K. and Endurance U.S. to Endurance Holdings, which are described in more detail below.
The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda's assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. As of September 30, 2004, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $302.8 million without prior regulatory approval based upon insurance and Bermuda Companies Act regulations.
The Company has agreed with the New York Insurance Department not to take a dividend from Endurance U.S. until December 2004 without prior regulatory approval. In addition, Endurance U.S.
47
and Endurance U.K. are each subject to significant regulatory restrictions limiting their ability to pay dividends. Accordingly, the Company does not currently intend to seek a dividend from Endurance U.S. or Endurance U.K.
The Company's aggregate invested assets as of September 30, 2004 totaled $3.8 billion compared to aggregate invested assets of $2.7 billion as of December 31, 2003. The increase in invested assets since December 31, 2003 resulted from collections of premiums on insurance policies and reinsurance contracts and investment income, offset by loss and loss expenses paid, acquisition expenses paid, reinsurance premiums paid and general and administrative expenses paid.
On an ongoing basis, the Company expects its internally generated funds, together with borrowings available under its credit facilities, capital from its notes offering and capital base established by its initial public offering and the private placement, to be sufficient to operate its business. However, there can be no assurance that the Company will not incur additional indebtedness in order to implement its business strategy or pay claims.
Currency
The Company's functional currency is U.S. dollars for Endurance Bermuda and Endurance U.S. and British Sterling for Endurance U.K. The reporting currency for all entities is U.S. dollars. 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. Endurance U.K. is subject to the United Kingdom's Financial Services Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.'s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. 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.
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.
Reserve for losses and loss expenses
As of September 30, 2004, the Company had accrued losses and loss expense reserves of $1.45 billion. This amount represents the Company's actuarial best estimate of the ultimate liability for payment of losses and loss expenses. During the three month period ended September 30, 2004, the Company paid losses and loss expenses of $49.9 million.
As of September 30, 2004, the Company had been notified of a moderate number of claims and potential claims under its insurance policies and reinsurance contracts. Of these notifications, management expects some of the claims to penetrate layers in which the Company provides coverage and case reserves have been established for these expected losses. 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 currently a 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. Such adjustments, if any, are recorded in earnings in the period in which they are determined. See "Critical Accounting Policies — Reserve for Losses and Loss Expenses." included in the 2003 Annual Report on Form 10-K.
48
Incurred losses for the three months ended September 30, 2004 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Property per
Risk
Treaty
Reinsurance | | Property
Catastrophe
Reinsurance | | Casualty
Treaty
Reinsurance | | Property
Individual
Risk | | Casualty
Individual
Risk | | Aerospace
& Other
Specialty
Lines | | Total |
| | | (in thousands) |
| Incurred related to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current year | | $ | 123,533 | | | $ | 59,528 | | | $ | 67,408 | | | $ | 20,057 | | | $ | 42,398 | | | $ | 46,264 | | | $ | 359,188 | |
| Prior years | | | (18,047 | ) | | | (17,643 | ) | | | (5,401 | ) | | | (3,082 | ) | | | (1,851 | ) | | | (4,909 | ) | | | (50,933 | ) |
| Total Incurred Losses | | $ | 105,485 | | | $ | 41,885 | | | $ | 62,007 | | | $ | 16,975 | | | $ | 40,547 | | | $ | 41,355 | | | $ | 308,255 | |
|
Incurred losses for the three months ended September 30, 2004 include approximately $50.9 million in positive development of reserves relating to the prior accident years. The positive loss reserve development experienced during the three months ended September 30, 2004 benefited the Company's reported loss ratio by 12.4 percentage points.
During the three months ended September 30, 2004, the reduction in the Company's initial estimated losses for prior accident years was experienced most significantly in the property per risk treaty reinsurance segment, where the initial estimate was reduced by approximately $18.0 million; and the property catastrophe treaty reinsurance segment, where the initial estimate was also reduced by approximately $17.6 million. The balance of the $50.9 million was experienced across all the remaining business segments.
The above net reduction in estimated losses for prior accident years reflects lower than expected emergence of catastrophic and attritional losses.
Reserves for losses and loss expenses are comprised of the following at September 30, 2004:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Property per
Risk
Treaty
Reinsurance | | Property
Catastrophe
Reinsurance | | Casualty
Treaty
Reinsurance | | Property
Individual
Risk | | Casualty
Individual
Risk | | Aerospace
& Other
Specialty
Lines | | Total |
| | | (in thousands) |
| Case Reserves | | $ | 117,585 | | | $ | 19,473 | | | $ | 59,650 | | | $ | 20,998 | | | $ | 5,000 | | | $ | 60,641 | | | $ | 283,347 | |
| IBNR | | | 241,376 | | | | 83,715 | | | | 347,130 | | | | 45,543 | | | | 261,909 | | | | 185,942 | | | | 1,165,615 | |
| Reserve for Losses and Loss Expenses | | $ | 358,961 | | | $ | 103,188 | | | $ | 406,780 | | | $ | 66,541 | | | $ | 266,909 | | | $ | 246,583 | | | $ | 1,448,962 | |
|
Cautionary statement regarding forward-looking statements and risks
Some of the statements contained herein, and certain statements that the Company may make in a press release or that Company officials may make orally may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us in general and the insurance and reinsurance sectors specifically, both as to underwriting and investment matters. Statements which include the words "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. The Company believes that these factors include, but are not limited to, the following:
| |
| - | the effects of competitors' pricing policies, and of recent governmental action and changes in laws and regulations on competition, including those regarding contingent commissions, industry consolidation and development of competing financial products; |
| |
| - | the impact of acts of terrorism and acts of war; |
| |
| - | the effects of terrorist related insurance legislation and laws; |
49
| |
| - | greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than the Company's underwriting, reserving or investment practices have anticipated; |
| |
| - | decreased level of demand for property and casualty insurance or reinsurance or increased competition due to an increase in capacity of property and casualty reinsurers; |
| |
| - | the inability to obtain or maintain financial strength or claims-paying ratings by one or more of the Company's subsidiaries; |
| |
| - | uncertainties in the Company's reserving process; |
| |
| - | Endurance Holdings or Endurance Bermuda becomes subject to income taxes in the United States or the United Kingdom; |
| |
| - | changes in regulations or tax laws applicable to us, the Company's subsidiaries, brokers or customers; |
| |
| - | acceptance of the Company's products and services, including new products and services; |
| |
| - | the inability to renew business previously underwritten or acquired; |
| |
| - | changes in the availability, cost or quality of reinsurance or retrocessional coverage; |
| |
| - | loss of key personnel; |
| |
| - | political stability of Bermuda; |
| |
| - | changes in accounting policies or practices; and |
| |
| - | changes in general economic conditions, including inflation, foreign currency exchange rates and other factors which could affect the Company's investment portfolio. |
On October 14, 2004, the New York Attorney General's Office filed a civil complaint against Marsh Inc. and Marsh & McLennan Companies, Inc. (collectively, "Marsh") alleging, among other things, that Marsh and certain insurance companies participated in anti-competitive practices in connection with the process of placing and underwriting certain classes of business insurance. We cannot predict the effect that any investigation of the New York Attorney General or any other regulatory authority related to such anti-competitive practices in the insurance industry or contingent commissions arrangements with brokers generally will have on the industry or our business. The receipt of a subpoena in connection with any governmental organization's investigation, including the investigation of the New York Attorney General, and the related negative publicity, fines and penalties or rating agency actions could have a material adverse effect on our business, results of operations and financial condition. In addition, since we assume a degree of credit risk associated with brokers with respect to most of our insurance and reinsurance business, our results of operations could be adversely affected in the event that the credit quality of Marsh or our other brokers is severely impacted by the current investigations or changes to current contingent commission practices.
The foregoing review of important factors and risks should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in the 2003 Annual Report on Form 10-K. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
50
Item 3. Quantitative and Qualitative Information about Market Risk
The Company believes that it is principally exposed to four types of market risk: interest rate risk, equity risk, foreign currency risk and credit risk. With the exception of the following, the Company believes that 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 2003 Annual Report on Form 10-K.
Interest Rate Risk. The Company's investments in other ventures are exposed to interest rate risk. To the extent that the securities underlying these investments are fixed maturities, fluctuations in interest rates have a direct impact on the market valuation of these investments.
Equity Risk. The Company's investments in other ventures are exposed to equity risk. To the extent that the securities underlying these investments are equity securities, fluctuations in the equity markets have a direct impact on the market valuation of these investments.
The Company's investment in other ventures at September 30, 2004 was $78.6 million which represents 2.4% of the Company's invested assets.
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.
51
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings generally arising in the normal course of its business. The Company does not believe that the eventual outcome of any such proceeding will have a material effect on its financial condition or business. The Company's subsidiaries are regularly engaged in the investigation and the defense of claims arising out of the conduct of their business. Pursuant to the Company's insurance and reinsurance arrangements, disputes are generally required to be finally settled by arbitration.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(d) Use of Proceeds from Registered Securities
On March 5, 2003, the Company consummated the initial public offering of its ordinary shares, $1.00 par value per share. The managing underwriters were Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Credit Suisse First Boston LLC and Deutsche Bank Securities Inc. The ordinary shares sold in the offering were registered under the Securities Act of 1933, as amended on a Registration Statement on Form S-1 (Registration No. 333-102026) that was declared effective by the U.S. Securities and Exchange Commission on February 27, 2003. Of the ordinary shares registered under the Registration Statement, 9,600,000 were sold at a price to the public of $23.00 per share. All of the ordinary shares were sold by the Company and there were no selling shareholders in the offering. The offering terminated without the sale of 1,440,000 ordinary shares registered on the Registration Statement. The aggregate gross proceeds from the ordinary shares sold by the Company were $220.8 million. The estimated aggregate net proceeds to the Company from the offering were approximately $201.5 million after deducting an aggregate of $15.5 million in underwriting discounts and commissions paid to the underwriters and an estimated $3.8 million in other direct expenses incurred in connection with the offering.
None of the proceeds from the offering were paid, directly or indirectly, to any of the Company's officers or directors or any of their associates, or to any persons owning ten percent or more of the Company's outstanding ordinary shares or to any of the Company's affiliates. Upon consummation of the offering, the Company applied $50.6 million of the net proceeds of the offering to the repayment of principal under the Company's term loan facility. On June 12, 2003, the Company contributed $50 million to the capital of its subsidiary, Endurance Specialty Insurance Ltd., for further contribution to its United States subsidiary, Endurance Reinsurance Corporation of America. On September 27, 2003, the Company used $38.4 million of the next proceeds of the offering for the scheduled repayment of principal under the Company's term loan facility. In July 2004, the Company invested the remaining net proceeds of the offering in alternative investment vehicles and on September 1, 2004, contributed such investments to the capital of its subsidiary, Endurance Specialty Insurance Ltd.
52
(e) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
| | | | | | | | | | | | | | | | | | |
| ISSUER PURCHASES OF EQUITY SECURITIES |
| Period | | (a) Total
Number of
Shares (or
Units)
Purchased (1) | | (b) Average
Price Paid
per Share
(or Unit) | | (c) Total Number
of Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (1) (2) | | (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or Units)
that May Yet Be
Purchased Under the
Plans or Programs (1) (2) |
| July 1, 2004 – July 31, 2004 | | | 72,000 | | | $ | 32.86 | | | | 72,000 | | | | 1,928,000 | |
| August 1, 2004 – August 31, 2004 | | | 269,800 | | | $ | 33.21 | | | | 269,800 | | | | 1,658,200 | |
| September 1, 2004 – September 30, 2004 | | | 15,000 | | | $ | 32.47 | | | | 15,000 | | | | 1,643,200 | |
| Total | | | 356,800 | | | $ | 32.84 | | | | 356,800 | | | | 1,643,200 | |
|
| |
| (1) | Ordinary shares or share equivalents. |
| |
| (2) | On May 24, 2004, the Company initiated a share repurchase program. Under this program, the Company will repurchase up to 2,000,000 of its ordinary shares and share equivalents. The repurchases will be accomplished in open market or privately negotiated transactions, from time to time, depending on market conditions. The share repurchase program is currently authorized to continue until May 2006. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
The following sets forth those exhibits filed pursuant to Item 601 of Regulation S-K:
| | | | | | |
Exhibit
Number | | Description |
| 10.1 | | Form of Option Agreement |
| 10.2 | | Form of Restricted Share Unit Agreement |
| 10.3 | | Credit Agreement, dated as of August 6, 2004, among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, as Administrative Agent.* |
| 10.4 | | Pledge and Security Agreement, dated as of August 6, 2004, by and among the Company, various designated subsidiary borrowers, The Bank of New York, as Collateral Agent and Custodian and JPMorgan Chase Bank, as Administrative Agent.** |
| 10.5 | | Account Control Agreement, dated as of August 6, 2004, by and among the Company, Endurance Specialty Insurance Ltd., Endurance U.S. Holdings Corp., Endurance Worldwide Holdings Limited, Endurance Worldwide Insurance Limited and The Bank of New York, as Custodian.*** |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
|
53
| | | | | | |
Exhibit
Number | | Description |
| 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. |
|
| |
| * | Incorporate herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 |
| |
| ** | Incorporate herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 |
| |
| *** | Incorporate herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 |
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | |
| Date: November 12, 2004 | | By: /s/ Kenneth J. LeStrange
Kenneth J. LeStrange
Chairman of the Board, Chief Executive Officer,
President |
| Date: November 12, 2004 | | By: /s/ James R. Kroner
James R. Kroner
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer) |
|
55
![[X]](https://capedge.com/proxy/10-Q/0000950136-04-003890/xbox.gif){kind=small}
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act![[ ]](https://capedge.com/proxy/10-Q/0000950136-04-003890/ebox.gif){kind=small}
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934