appropriate method of accounting for these quota share contracts requires significant judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses.
Under the deposit method of accounting, revenues and expenses from reinsurance contracts are not recognized as written premium and incurred losses. Instead, the profits or losses from these contracts are recognized net as other underwriting income or investment income over the contract or expected claim payment periods. Income or loss associated with contracts determined to transfer only significant timing risk is recognized as a component of net investment income over the estimated claim settlement period. Income or loss associated with contracts determined to transfer only significant underwriting risk is recognized as other underwriting income over the contract risk period.
For internal management reporting purposes, underwriting results by segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written. The following table reconciles the Company's underwriting results by segment and income before income taxes to the Company's financial statement presentation.
On April 18, 2005, the Company amended its existing Credit Agreement among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent (the "Amended Agreement") in order to (i) allow for the issuance of multi-currency letters of credit, (ii) allow for the "fronting" of letters of credit by banks that are participants in the Amended Agreement, (iii) extend the maturity of the facility, and (iv) increase the size of the facility to $925 million from $850 million. The remaining principal terms of the Company's existing Credit Agreement, described previously in the 2004 Annual Report on Form 10-K, as amended, are unchanged.
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 ordinary 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 March 31, 2005, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $456 million without prior regulatory approval based upon insurance and Bermuda Companies Act regulations.
Endurance U.S. is subject to regulation by the State of New York Insurance Department. Dividends may only be declared or distributed out of earned surplus. At March 31, 2005, Endurance U.S. did not have earned surplus; therefore Endurance U.S. is precluded from declaring or distributing any dividend during 2005 without the prior approval of the Superintendent of the State of New York Insurance Department.
Endurance U.K. is subject to regulation by the United Kingdom Financial Services Authority (the "FSA"). U.K. company law prohibits Endurance U.K. from declaring a dividend to its shareholders unless it has "profits available for distribution." The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the United Kingdom insurance regulatory laws impose no statutory restrictions on a general insurer's ability to declare a dividend, the FSA strictly controls the maintenance of each insurance company's solvency margin within its jurisdiction. Any such payment or proposal could result in regulatory intervention. In addition, the FSA requires authorized insurance companies to notify the FSA in advance of any significant dividend payment. At March 31, 2005, Endurance U.K. did not have profits available for distribution and could not pay a dividend.
On April 18, 2005, the Company amended its existing Credit Agreement among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent. See "—Significant transactions and events" above.
The Company's aggregate invested assets as of March 31, 2005 totaled $4.1 billion compared to aggregate invested assets of $3.9 billion as of December 31, 2004. The increase in invested assets since December 31, 2004 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 and capital base established by its initial public offering, its original private placement and its 7% Notes due 2034 to be sufficient to operate its business. However, there can be no assurance that the Company will not incur additional indebtedness or issue additional equity in order to implement its business strategy or pay claims.
Quantitative and qualitative information about market risk
There have been no material changes in market risk from the information provided under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations— Quantitative and Qualitative Information about Market Risk" included in the 2004 Annual Report on Form 10-K, as amended.
27
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 March 31, 2005, the Company had accrued losses and loss expense reserves of $1.7 billion. This amount represents the Company's actuarial best estimate of the ultimate liability for payment of losses and loss expenses related to loss events as of March 31, 2005. During the three month period ended March 31, 2005, the Company paid losses and loss expenses of $89.9 million.
As of March 31, 2005, the Company had been notified of a 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. The overall loss reserves were established by the Company's actuaries and reflect management's best estimate of ultimate losses and loss expenses. See "Critical Accounting Policies—Reserve for Losses and Loss Expenses" included in the 2004 Annual Report on Form 10-K, as amended.
Incurred losses for the three months ended March 31, 2005 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 | | Deposit
Accounting(1) | | Total |
| | | (in thousands) | |
| Incurred related to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current year | | $ | 73,431 | | | $ | 15,916 | | | $ | 81,067 | | | $ | 36,855 | | | $ | 49,715 | | | $ | 45,953 | | | $ | (5,877 | ) | | | 297,060 | |
| Prior years | | | (28,900 | ) | | | (5,146 | ) | | | (1,929 | ) | | | 2,477 | | | | (12,265 | ) | | | (238 | ) | | | — | | | | (46,001 | ) |
| Total Incurred Losses | | $ | 44,531 | | | $ | 10,770 | | | $ | 79,138 | | | $ | 39,332 | | | $ | 37,450 | | | $ | 45,715 | | | $ | (5,877 | ) | | $ | 251,059 | |
|
| |
| (1) | This column reconciles the Company's incurred losses by segment to the Company's financial statement presentation. See "Deposit Accounting" above for further discussion. |
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Incurred losses for the three months ended March 31, 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 | | $ | 63,008 | | | $ | 10,201 | | | $ | 71,112 | | | $ | 12,448 | | | $ | 38,943 | | | $ | 45,669 | | | $ | 241,381 | | |
| Prior years | | | (2,392 | ) | | | (7,288 | ) | | | (1,827 | ) | | | (6,294 | ) | | | (371 | ) | | | (1,200 | ) | | | (19,372 | ) | |
| Total Incurred Losses | | $ | 60,616 | | | $ | 2,913 | | | $ | 69,285 | | | $ | 6,154 | | | $ | 38,572 | | | $ | 44,469 | | | $ | 222,009 | | |
|
Incurred losses for the three months ended March 31, 2005 include approximately $46.0 million in favorable development of reserves relating to the prior accident years. The favorable loss reserve development experienced during the three months ended March 31, 2005 benefited the Company's reported loss ratio by approximately 10.5 percentage points.
During the three months ended March 31, 2005, 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 $28.9 million; the Casualty Individual Risk segment, where the initial estimate was reduced by approximately $12.3 million; and the Property Catastrophe Reinsurance segment, where the initial estimate was reduced by approximately $5.1 million.
The above 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 March 31, 2005:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Property
perRisk
Treaty
Reinsurance | | Property
Catastrophe
Reinsurance | | Casualty
Treaty
Reinsurance | | Property
Individual
Risk | | Casualty
Individual
Risk | | Aerospace
& Other
Specialty
Lines | | Deposit
Accounting(1) | | Total |
| | | (in thousands) | |
| Case Reserves | | $ | 166,599 | | | $ | 41,414 | | | $ | 90,878 | | | $ | 56,368 | | | $ | 5,002 | | | $ | 87,815 | | | $ | (240 | ) | | $ | 447,836 | |
| IBNR | | | 215,865 | | | | 28,508 | | | | 447,159 | | | | 44,090 | | | | 332,545 | | | | 196,591 | | | | (5,637 | ) | | | 1,259,121 | |
| Reserve for Losses and Loss Expenses | | $ | 382,464 | | | $ | 69,922 | | | $ | 538,037 | | | $ | 100,458 | | | $ | 337,547 | | | $ | 284,406 | | | $ | (5,877 | ) | | $ | 1,706,957 | |
|
| |
| (1) | This column reconciles the Company's reserves for losses and loss expenses by segment to the Company's financial statement presentation. See "Deposit Accounting" above for further discussion. |
Reserves for losses and loss expenses are comprised of the following at March 31, 2004:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Property
perRisk
Treaty
Reinsurance | | Property
Catastrophe
Reinsurance | | Casualty
Treaty
Reinsurance | | Property
Individual
Risk | | Casualty
Individual
Risk | | Aerospace
& Other
Specialty
Lines | | Total |
| | | (in thousands) | |
| Case Reserves | | $ | 66,083 | | | $ | 29,322 | | | $ | 40,926 | | | $ | 14,081 | | | $ | — | | | $ | 44,782 | | | $ | 195,194 | |
| IBNR | | | 161,090 | | | | 33,723 | | | | 260,718 | | | | 25,675 | | | | 191,045 | | | | 151,873 | | | | 824,124 | |
| Reserve for Losses and Loss Expenses | | $ | 227,173 | | | $ | 63,045 | | | $ | 301,644 | | | $ | 39,756 | | | $ | 191,045 | | | $ | 196,655 | | | $ | 1,019,318 | |
|
Cautionary statement regarding forward-looking statements
Some of the statements contained herein, and certain statements that the Company may make in a press release or that Company officials may make orally may include forward-looking statements
29
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 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; |
| |
| — | 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; |
| |
| — | the impact of the investigations of the New York Attorney General and other regulators on the industry and the Company in particular; and |
| |
| — | changes in general economic conditions, including inflation, foreign currency exchange rates and other factors which could affect the Company's investment portfolio. |
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 the 2004 Annual Report on Form 10-K, as amended. 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 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
30
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.
31
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.
Endurance Holdings, Endurance U.S. and three employees of one of Endurance Holdings' subsidiaries have been named in a lawsuit filed on November 18, 2004 in the Court of Common Pleas in Hamilton County, Ohio. The suit alleges misappropriation of trade secrets from the employees' former employer, Great American Insurance Company, and related entities and asserts other related claims. On December 22, 2004, we and the other defendants filed motions to dismiss the lawsuit for lack of personal jurisdiction over the defendants. These motions are pending.
On January 5, 2005, Endurance U.S. received a subpoena from the Office of the Attorney General of the State of New York (the "NYAG") in connection with its investigation into contingent commission arrangements with brokers. Although the subpoena was addressed to Endurance U.S., it called for the production of documents from all affiliates of Endurance Holdings. Among other things, the subpoena seeks documents concerning efforts by any insurance broker to exclude or limit an insurance company's access to the insurance market and documents concerning efforts or requests by any insurance broker to manipulate bids or price quotes, or submit false or inflated bids or price quotes in insurance markets. We have provided the NYAG with an initial set of documents responsive to the subpoena.
Item 2. Changes in Securities
(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) |
| January 1, 2005 – January 31, 2005 | | | — | | | $ | — | | | | — | | | | 3,193,200 | |
| February 1, 2005 – February 28, 2005 | | | 138,400 | | | | 35.85 | | | | 138,400 | | | | 3,054,800 | |
| March 1, 2005 – March 31, 2005 (3) | | | 617,414 | | | | 35.25 | | | | 617,414 | | | | 2,437,386 | |
| Total | | | 755,814 | | | $ | 35.36 | | | | 755,814 | | | | 2,437,386 | |
|
| |
| (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. On February 17, 2005 the Company extended this program by a further 2,000,000 shares and authorized the program through February 2007. |
| |
| (3) | Includes the purchase of 350,000 ordinary shares from an initial investor at a price of $34.6775 per share on March 4, 2005. |
Item 3. Defaults Upon Senior Securities
None
32
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) The following sets forth those exhibits filed pursuant to Item 601 of Regulation S-K:
| | | | | | |
Exhibit
Number | | Description |
| 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 O.K. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
33
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: May 9, 2005 | | By: | | /s/ Kenneth J. LeStrange |
| | | Kenneth J. LeStrange
Chairman of the Board, Chief Executive Officer,
President |
| Date: May 9, 2005 | | By: | | /s/ James R. Kroner |
| | | James R. Kroner
Chief Financial Officer (Principal Financial Officer) |
|
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act![[ ]](https://capedge.com/proxy/10-Q/0000950136-05-002634/ebox.gif){kind=small}
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934