bid, performance, payment, maintenance and supply bonds, commercial surety bonds, trade surety bonds, permit bonds, court bonds and public official bonds. The Company writes surety business through its Aerospace and Other Specialty Lines segment.
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 and reserves for losses and loss expenses. For a detailed discussion of the Company’s critical accounting estimates, please refer to the 2005 Annual Report on Form 10-K. There were no material changes in the application of the Company’s critical accounting estimates subsequent to that report. 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.
Consolidated results of operations — for the three month periods ended March 31, 2006 and 2005
Results of operations for the three months ended March 31, 2006 and 2005 were as follows:
Table of ContentsPremiums. Gross premiums written during the quarter ended March 31, 2006 were lower than gross premiums written during the same period in 2005 due primarily to declines within the Property Per Risk Treaty Reinsurance segment of $37.6 million, Casualty Treaty Reinsurance segment of $67.1 million and Aerospace and Other Specialty Lines segment of $25.6 million. Declines in gross premiums written resulted from a combination of factors, including the shifting of renewal dates out of the first quarter of 2006, the nonrenewal of contracts where pricing, terms and conditions no longer met the Company’s requirements and the nonrenewal of a significant contract within our aerospace line. These declines were offset by modest increases in the Company’s Property Individual Risk and Casualty Individual Risk segments. Declines in gross premiums written for the three months ended March 31, 2006 over those noted in the same period of 2005 were offset by certain adjustments to previously booked premium estimates due to updated information received from brokers and clients.
The Company entered into contracts with gross premiums written of $99.1 million and $85.6 million for the three months ended March 31, 2006 and 2005, respectively, which the Company determined required the application of deposit accounting. These contracts were written within the Company’s Property Per Risk Treaty Reinsurance, Property Catastrophe Reinsurance, Casualty Treaty Reinsurance and Aerospace and Other Specialty Lines segments, but were excluded from gross premiums written and accounted for as deposit liabilities. See ‘‘Deposit Accounting’’ below for further discussion. Including the effects of deposit accounting, gross premiums written during the three months ended March 31, 2006 declined approximately 18.7% from the same period in 2005. Excluding the effects of deposit accounting, the Company’s gross premiums written would have declined by 14.9% from the same period in 2005.
Premiums ceded increased by $25.1 million for the three month period ended March 31, 2006 over the same period in 2005 due to the continued growth of Endurance U.S. Insurance. Endurance U.S. Insurance began writing business late in 2005 and uses strategic retrocessional coverage to manage its risk exposures.
Net premiums earned decreased in the three months ended March 31, 2006 compared to the same period of 2005 as a result of declines in the overall gross premiums written and due to the increase in ceded business as a result of growth in the Company’s U.S. insurance business.
Net Investment Income. Net investment income was derived primarily from interest earned on fixed maturity investments partially offset by investment management fees and other investment expenses. The increase in net investment income was principally due to an increase in invested assets from March 31, 2005 to March 31, 2006 of approximately 24.7%, which was invested during a rising interest rate environment, and the strong performance of the Company’s investments in other ventures. The increase in invested assets resulted from positive net operating cash flows and from capital initiatives in the fourth quarter of 2005. Investment expenses for the three months ended March 31, 2006 were $1.9 million compared to investment expenses of $1.4 million for the same period in 2005.
The net earned yield (which is the actual net earned income from the investment portfolio after adjusting for accretion and amortization from the purchase price divided by the average book value of assets) and total return of the investment portfolio (which includes realized and unrealized gains and losses) for the three months ended March 31, 2006 were 4.95% and 0.43%, respectively. For the three months ended March 31, 2005, the net earned yield and total return were 3.98% and (1.00)%, respectively. The yield on the benchmark five year U.S. Treasury bond has fluctuated in a range of 56 basis points from a low of 4.27% to a high of 4.83% during the quarter. The Company has increased its cash position to 11.1% as of March 31, 2006 up from 9.5% at December 31, 2005. Interest rates continue to be volatile and have risen since year end. The portfolio has become more defensive in nature with a greater allocation to cash and a shorter duration of 2.66 years, down from 2.72 years at December 31, 2005 and 2.91 years at March 31, 2005. Overall, the net earned yield of the portfolio has increased due to investments made during the last twelve months, the repositioning of some of the Company’s portfolio into higher yielding sectors, and strong returns generated by investments in other ventures.
19
Table of ContentsA portion of the Company’s fixed maturities were in an unrealized loss position at March 31, 2006. The Company evaluates these investments to determine whether such securities values are other-than-temporarily-impaired given the length of time the security has been impaired, the expected maturity of the investment, the significance of the decline, the liquidity, business prospects and overall financial condition of the issuer and the Company’s intent and ability to hold the investment to recovery. With respect to securities where the decline in value is determined to be temporary, a subsequent decision may be made to sell that security and realize a loss. Such a sale would not contradict the Company’s determination that the decline was temporary because subsequent decisions to sell a security are made within the context of overall risk management, new information and the assessment of such security’s value relative to comparable securities. While the Company’s external investment managers may, at a given point in time, believe the preferred course of action is to hold securities until such losses are recovered, the dynamic nature of portfolio management may result in a subsequent decision by the Company to sell the security and realize the loss, based upon a change in market and other factors discussed above. The Company believes these subsequent decisions are consistent with the classification of its investment portfolio as ‘‘available for sale.’’
During the three months ended March 31, 2006, the Company identified 15 fixed maturity securities with a fair market value of $67.7 million which were considered to be other-than-temporarily-impaired. Consequently, the cost of such securities was written down to fair value, and the Company recognized a realized loss of $2.1 million on these securities.
Losses and Loss Expenses. For the three months ended March 31, 2006, the Company experienced a slight decrease in the net loss ratio over that reported in the same period in 2005. The Company increased its overall reserves for the quarter ended March 31, 2006 to reflect a number of catastrophe events that occurred in the quarter, including widespread tornados, windstorms and flooding in the U.S., Europe and Australia, while at the same time recording net favorable loss development on its prior accident years.
For the three months ended March 31, 2006, a portion of the loss reserves held by the Company for all prior accident years proved to be moderately redundant. Consequently, the Company experienced favorable development of $42.5 million on previously estimated ultimate losses compared to favorable development of $46.0 million experienced during the three month period ended March 31, 2005. This reduction in the Company’s estimated losses for prior years was experienced most significantly in the Property Per Risk Treaty Reinsurance and Property Individual Risk segments. During the three months ended March 31, 2006, the Company increased the amount of reserves for Hurricanes Katrina, Rita and Wilma (the ‘‘2005 Hurricanes’’) by $35.0 million, which was more than offset by favorable 2005 accident year development within the property and specialty lines. In addition, certain reallocations between the reportable segments of the Company in relation to the 2005 Hurricanes were made which reflects the actual reporting and payment of claims versus the Company’s estimates by 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 arises, 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. See ‘‘Reserve for Losses and Loss Expenses’’ for further discussion.
Acquisition Expenses. The decrease in the acquisition expense ratio was due to Endurance U.S. Insurance writing and ceding premiums on which commissions were earned and offset against acquisition expenses.
General and Administrative Expenses. The general and administrative expense ratio for the three months ended March 31, 2006 increased compared to the general and administrative expense ratio for the three months ended March 31, 2005. The growth in the absolute levels of general and
20
Table of Contentsadministrative expenses principally reflected the development of Endurance U.S. Insurance. Endurance U.S. Insurance had 58 employees at March 31, 2006 compared to 20 at March 31, 2005. At March 31, 2006, the Company had 399 employees compared to 320 employees at March 31, 2005.
Underwriting results by operating segments
The determination of the Company’s business segments was based on the Company’s method of monitoring the performance of its underwriting operations. For internal management reporting purposes, underwriting results by segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written; however, for financial statement presentation purposes, management determined that a small number of reinsurance contracts written for the three months ended March 31, 2006 and 2005 were more appropriately accounted for as deposit liabilities. See ‘‘Deposit Accounting’’ below for further discussion. Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company’s historic combined ratios may not be indicative of future underwriting performance. The Company does not manage its assets by segment; accordingly, investment income and total assets are not allocated to the individual segments. General and administrative expenses incurred by segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated based on each segment’s proportional share of gross premiums written. Group reinsurance protection purchased and any subsequent recoveries are allocated to segments based on the underlying exposures covered.
21
Table of ContentsThe following table summarizes the underwriting results, associated ratios and reserve for losses and loss expenses for the Company’s six business segments for the three month period ended March 31, 2006.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Property Per
Risk Treaty
Reinsurance | | Property
Catastrophe
Reinsurance | | Casualty
Treaty
Reinsurance | | Property
Individual
Risk | | Casualty
Individual
Risk | | Aerospace
and Other
Specialty
Lines | | Deposit
Accounting(1) | | Totals |
| | | (in thousands, except for ratios) |
| Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross premiums written | | $ | 122,480 | | | $ | 100,804 | | | $ | 205,469 | | | $ | 28,574 | | | $ | 51,583 | | | $ | 161,620 | | | $ | (99,149 | ) | | $ | 571,381 | |
| Net premiums written | | | 122,480 | | | | 100,804 | | | | 203,466 | | | | 10,690 | | | | 46,002 | | | | 158,716 | | | | (99,149 | ) | | | 543,009 | |
| Net premiums earned | | | 98,109 | | | | 53,398 | | | | 151,047 | | | | 21,058 | | | | 69,368 | | | | 83,983 | | | | (56,757 | ) | | | 420,206 | |
| Other underwriting income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,071 | | | | 2,071 | |
| | | | 98,109 | | | | 53,398 | | | | 151,047 | | | | 21,058 | | | | 69,368 | | | | 83,983 | | | | (54,686 | ) | | | 422,277 | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses | | | 40,435 | | | | 32,705 | | | | 85,960 | | | | (5,461 | ) | | | 47,068 | | | | 69,298 | | | | (31,273 | ) | | | 238,732 | |
Acquisition
expenses | | | 20,097 | | | | 7,811 | | | | 42,521 | | | | 1,291 | | | | 3,355 | | | | 19,267 | | | | (20,571 | ) | | | 73,771 | |
| General and administrative expenses | | | 7,449 | | | | 6,573 | | | | 11,836 | | | | 3,777 | | | | 5,531 | | | | 9,132 | | | | — | | | | 44,298 | |
| | | | 67,981 | | | | 47,089 | | | | 140,317 | | | | (393 | ) | | | 55,954 | | | | 97,697 | | | | (51,844 | ) | | | 356,801 | |
| Underwriting income (loss) | | $ | 30,128 | | | $ | 6,309 | | | $ | 10,730 | | | $ | 21,451 | | | $ | 13,414 | | | $ | (13,714 | ) | | $ | (2,842 | ) | | $ | 65,476 | |
| Net loss ratio | | | 41.2 | % | | | 61.2 | % | | | 56.9 | % | | | (25.9 | %) | | | 67.9 | % | | | 82.5 | % | | | 55.1 | % | | | 56.8 | % |
| Acquisition expense ratio | | | 20.5 | % | | | 14.6 | % | | | 28.2 | % | | | 6.1 | % | | | 4.8 | % | | | 22.9 | % | | | 36.2 | % | | | 17.6 | % |
| General and administrative expense ratio | | | 7.6 | % | | | 12.3 | % | | | 7.8 | % | | | 17.9 | % | | | 8.0 | % | | | 10.9 | % | | | — | | | | 10.5 | % |
| Combined ratio | | | 69.3 | % | | | 88.1 | % | | | 92.9 | % | | | (1.9 | %) | | | 80.7 | % | | | 116.3 | % | | | 91.3 | % | | | 84.9 | % |
|
| |
| (1) | Reconciles the Company's underwriting results by segment to the Company's financial statement presentation. See ‘‘Deposit Accounting’’ below for further discussion. |
22
Table of ContentsThe following table summarizes the underwriting results and associated ratios for the Company’s six business segments for the three month period ended March 31, 2005.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Property Per
Risk Treaty
Reinsurance | | Property
Catastrophe
Reinsurance | | Casualty
Treaty
Reinsurance | | Property
Individual
Risk | | Casualty
Individual
Risk | | Aerospace
and Other
Specialty
Lines | | Deposit
Accounting(1) | | Totals |
| | | (in thousands, except for ratios) |
| Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross premiums written | | $ | 171,290 | | | $ | 110,690 | | | $ | 251,543 | | | $ | 23,374 | | | $ | 47,690 | | | $ | 183,526 | | | $ | (85,622 | ) | | $ | 702,491 | |
| Net premiums written | | | 171,290 | | | | 110,690 | | | | 249,783 | | | | 23,149 | | | | 47,781 | | | | 182,107 | | | | (85,622 | ) | | | 699,178 | |
| Net premiums earned | | | 118,585 | | | | 58,899 | | | | 118,044 | | | | 27,197 | | | | 60,464 | | | | 65,065 | | | | (10,656 | ) | | | 437,598 | |
| Other underwriting income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 171 | | | | 171 | |
| | | | 118,585 | | | | 58,899 | | | | 118,044 | | | | 27,197 | | | | 60,464 | | | | 65,065 | | | | (10,485 | ) | | | 437,769 | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses | | | 44,531 | | | | 10,770 | | | | 79,138 | | | | 39,332 | | | | 37,450 | | | | 45,715 | | | | (5,877 | ) | | | 251,059 | |
Acquisition
expenses | | | 32,423 | | | | 7,296 | | | | 29,753 | | | | 3,470 | | | | 4,625 | | | | 12,920 | | | | (3,712 | ) | | | 86,775 | |
| General and administrative expenses | | | 6,616 | | | | 4,806 | | | | 9,304 | | | | 2,224 | | | | 3,093 | | | | 7,503 | | | | — | | | | 33,546 | |
| | | | 83,570 | | | | 22,872 | | | | 118,195 | | | | 45,026 | | | | 45,168 | | | | 66,138 | | | | (9,589 | ) | | | 371,380 | |
| Underwriting income (loss) | | $ | 35,015 | | | $ | 36,027 | | | $ | (151 | ) | | $ | (17,829 | ) | | $ | 15,296 | | | $ | (1,073 | ) | | $ | (896 | ) | | $ | 66,389 | |
| Net loss ratio | | | 37.6 | % | | | 18.3 | % | | | 67.0 | % | | | 144.6 | % | | | 61.9 | % | | | 70.3 | % | | | 55.2 | % | | | 57.4 | % |
| Acquisition expense ratio | | | 27.3 | % | | | 12.4 | % | | | 25.2 | % | | | 12.8 | % | | | 7.6 | % | | | 19.9 | % | | | 34.8 | % | | | 19.8 | % |
| General and administrative expense ratio | | | 5.6 | % | | | 8.2 | % | | | 7.9 | % | | | 8.2 | % | | | 5.1 | % | | | 11.5 | % | | | — | | | | 7.7 | % |
| Combined ratio | | | 70.5 | % | | | 38.9 | % | | | 100.1 | % | | | 165.6 | % | | | 74.6 | % | | | 101.7 | % | | | 90.0 | % | | | 84.9 | % |
|
| |
| (1) | Reconciles the Company's underwriting results by segment to the Company's financial statement presentation. See ‘‘Deposit Accounting’’ below for further discussion. |
23
Table of ContentsProperty Per Risk Treaty Reinsurance
The Company’s Property Per Risk Treaty Reinsurance business segment reinsures individual property risks of ceding companies on a treaty basis. The Company’s property per risk reinsurance contracts cover claims from individual insurance policies written by its ceding company clients and include both personal lines and commercial lines exposures. The following table summarizes the underwriting results and associated ratios for the Property Per Risk Treaty Reinsurance business segment for the three months ended March 31, 2006 and 2005, respectively.
| | | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | |
| | | March 31,
2006 | | March 31,
2005 | | Change(1) |
| | | (in thousands, except for ratios) | | |
| Revenues | | | | | | | | | | | | |
| Gross premiums written | | $ | 122,480 | | | $ | 171,290 | | | | (28.5 | %) |
| Net premiums written | | | 122,480 | | | | 171,290 | | | | (28.5 | %) |
| Net premiums earned | | | 98,109 | | | | 118,585 | | | | (17.3 | %) |
| Expenses | | | | | | | | | | | | |
| Losses and loss expenses | | | 40,435 | | | | 44,531 | | | | (9.2 | %) |
| Acquisition expenses | | | 20,097 | | | | 32,423 | | | | (38.0 | %) |
| General and administrative expenses | | | 7,449 | | | | 6,616 | | | | 12.6 | % |
| | | | 67,981 | | | | 83,570 | | | | (18.7 | %) |
| Underwriting income | | $ | 30,128 | | | $ | 35,015 | | | | (14.0 | %) |
| Net loss ratio | | | 41.2 | % | | | 37.6 | % | | | 3.6 | |
| Acquisition expense ratio | | | 20.5 | % | | | 27.3 | % | | | (6.8 | ) |
| General and administrative expense ratio | | | 7.6 | % | | | 5.6 | % | | | 2.0 | |
| Combined ratio | | | 69.3 | % | | | 70.5 | % | | | (1.2 | ) |
|
| |
| (1) | With respect to ratios, changes show increase or decrease in percentage points. |
Premiums. The decrease in gross premiums written for the three months ended March 31, 2006 was primarily due to the nonrenewal of contracts where pricing, terms and conditions no longer met the Company’s requirements as well as decreased participation levels on certain treaties in order to manage aggregate exposures. Gross premiums written of $52.6 million were not renewed, and there were no significant new contracts bound in the three months ended March 31, 2006 compared to the three months ended March 31, 2005. Premiums earned in the three months ended March 31, 2006 decreased as a result of the decline in gross premiums written in comparison with the three months ended March 31, 2005.
Losses and Loss Expenses. The net loss ratio for the three months ended March 31, 2006 increased from the same period in 2005 due to a higher net loss ratio used for the initial estimate of reserves within this segment. The increase for 2006 was offset by favorable development on the segment’s prior year loss reserves of $30.7 million as compared to favorable development of $28.9 million for the three months ended March 31, 2005. Favorable development primarily related to the 2004 accident year was offset by unfavorable development on the 2005 Hurricanes of $16.8 million.
Acquisition Expenses. The acquisition expense ratio for the three months ended March 31, 2006 decreased by 6.8 points from the same period in 2005. As a result of the increase in the segment’s net loss ratio during the three months ended March 31, 2006, certain sliding scale commissions were reduced, which contributed to the decline in the acquisition expense ratio.
General and Administrative Expenses. The increase in general and administrative expenses for 2006 reflected the growth in corporate expenses allocated to the segments.
24
Table of ContentsProperty Catastrophe Reinsurance
The Company’s Property Catastrophe Reinsurance business segment reinsures catastrophic perils for ceding companies on a treaty basis. The Company’s property catastrophe reinsurance contracts provide protection for most catastrophic losses that are covered in the underlying insurance policies written by its ceding company clients. Protection under property catastrophe treaties is provided on an occurrence basis, allowing the Company’s ceding company clients to combine losses that have been incurred in any single event from multiple underlying policies. The following table summarizes the underwriting results and associated ratios for the Property Catastrophe Reinsurance business segment for the three months ended March 31, 2006 and 2005, respectively.
| | | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | |
| | | March 31,
2006 | | March 31,
2005 | | Change(1) |
| | | (in thousands, except for ratios) | | |
| Revenues | | | | | | | | | | | | |
| Gross premiums written | | $ | 100,804 | | | $ | 110,690 | | | | (8.9 | %) |
| Net premiums written | | | 100,804 | | | | 110,690 | | | | (8.9 | %) |
| Net premiums earned | | | 53,398 | | | | 58,899 | | | | (9.3 | %) |
| Expenses | | | | | | | | | | | | |
| Losses and loss expenses | | | 32,705 | | | | 10,770 | | | | 203.7 | % |
| Acquisition expenses | | | 7,811 | | | | 7,296 | | | | 7.1 | % |
| General and administrative expenses | | | 6,573 | | | | 4,806 | | | | 36.8 | % |
| | | | 47,089 | | | | 22,872 | | | | 105.9 | % |
| Underwriting income | | $ | 6,309 | | | $ | 36,027 | | | | (82.5 | %) |
| Net loss ratio | | | 61.3 | % | | | 18.3 | % | | | 43.0 | |
| Acquisition expense ratio | | | 14.6 | % | | | 12.4 | % | | | 2.2 | |
| General and administrative expense ratio | | | 12.3 | % | | | 8.1 | % | | | 4.2 | |
| Combined ratio | | | 88.2 | % | | | 38.8 | % | | | 49.4 | |
|
| |
| (1) | With respect to ratios, changes show increase or decrease in percentage points. |
Premiums. Gross premiums written for the three months ended March 31, 2006 decreased as a result of business that was not renewed where pricing, terms and conditions no longer met the Company’s requirements as well as decreased participation levels on certain treaties in order to manage aggregate exposures. Nonrenewals totaled $36.0 million while the Company was able to attract new business of $24.7 million during the three months ended March 31, 2006.
Losses and Loss Expenses. The increase in the net loss ratio for the three months ended March 31, 2006 reflects net unfavorable development of $10.1 million for the three months ended March 31, 2006 as compared to favorable development of $5.1 million in the same period in 2005. The unfavorable development for the three months ended March 31, 2006 primarily relates to net unfavorable development of $15.0 million on the 2005 accident year due to flooding in Switzerland and an explosion at an oil depot partially offset by favorable development of $6.9 million related to the 2005 Hurricanes. In addition, the overall level of catastrophe events in the first quarter of 2006 was higher than was experienced in the same period of 2005 related to widespread tornados, windstorms and flooding within the U.S., Europe and Australia. The Company established reserves to reflect these events.
Acquisition Expenses. The increase in the acquisition expense ratio for the three months ended March 31, 2006 was a result of the changing profile of business written.
General and Administrative Expenses. The increase in general and administrative expenses for 2006 reflected the growth in corporate expenses allocated to the segments.
25
Table of ContentsCasualty Treaty Reinsurance
The Company’s Casualty Treaty Reinsurance business segment reinsures third party liability exposures from ceding companies on a treaty basis. The exposures that the Company reinsures include automobile liability, professional liability, directors’ and officers’ liability, umbrella liability and workers’ compensation. The following table summarizes the underwriting results and associated ratios for the Casualty Treaty Reinsurance business segment for the three months ended March 31, 2006 and 2005, respectively.
| | | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | |
| | | March 31,
2006 | | March 31,
2005 | | Change(1) |
| | | (in thousands, except for ratios) | | |
| Revenues | | | | | | | | | | | | |
| Gross premiums written | | $ | 205,469 | | | $ | 251,543 | | | | (18.3 | %) |
| Net premiums written | | | 203,466 | | | | 249,783 | | | | (18.5 | %) |
| Net premiums earned | | | 151,047 | | | | 118,044 | | | | 28.0 | % |
| Expenses | | | | | | | | | | | | |
| Losses and loss expenses | | | 85,960 | | | | 79,138 | | | | 8.6 | % |
| Acquisition expenses | | | 42,521 | | | | 29,753 | | | | 42.9 | % |
| General and administrative expenses | | | 11,836 | | | | 9,304 | | | | 27.2 | % |
| | | | 140,317 | | | | 118,195 | | | | 18.7 | % |
| Underwriting income (loss) | | $ | 10,730 | | | $ | (151 | ) | | NM(2) |
| Net loss ratio | | | 56.9 | % | | | 67.0 | % | | | (10.1 | ) |
| Acquisition expense ratio | | | 28.2 | % | | | 25.2 | % | | | 3.0 | |
| General and administrative expense ratio | | | 7.8 | % | | | 7.9 | % | | | (0.1 | ) |
| Combined ratio | | | 92.9 | % | | | 100.1 | % | | | (7.2 | ) |
|
| |
| (1) | With respect to ratios, changes show increase or decrease in percentage points. |
| |
| (2) | Not meaningful. |
Premiums. Gross premiums written decreased for the quarter ended March 31, 2006 compared to the same period in 2005 due to a combination of factors including:
| | |
| • | the non-renewal of three large workers’ compensation contracts, which resulted in a net decrease in gross premiums written of $23.2 million including the effects of premium adjustments and extension premiums received for these contracts. One of these contracts is expected to renew later in 2006; |
| | |
| • | renewals at lower rates, including $35.7 million due to the deterioration of pricing and terms and nonrenewals within our U.S. based business; and |
| | |
| • | increased ceding company retentions on certain workers’ compensation catastrophe business. |
Offsetting these declines during the three months ended March 31, 2006, the Company entered into a large new European based casualty treaty contract, which resulted in additional premiums of approximately $25 million. The increase in net premiums earned resulted from premium adjustments which were booked for contracts nearing the end of the policy term primarily related to the workers’ compensation contracts noted above.
Losses and Loss Expenses. Claims may not be reported for many years in the lines of business included in this segment. Increased uncertainty exists regarding the development of reserves due to the long tail nature of this business. The decrease in the net loss ratio above was primarily a result of net favorable development on prior loss reserves for the three months ended March 31, 2006 of $8.4 million as compared to favorable development for the same period of 2005 of $1.9 million. During the three months ended March 31, 2006, $1.4 million of unfavorable development was noted on the 2005 Hurricanes.
26
Table of ContentsAcquisition Expenses. The increase in the acquisition expense ratio was due to acquisition expenses incurred in relation to premium adjustments recorded within the three months ended March 31, 2006. As a result of the decrease in the segments net loss ratio during the first quarter of 2006, certain sliding scale commissions were increased, which also contributed to the increase in the acquisition expense ratio.
General and Administrative Expenses. The increase in general and administrative expenses for 2006 reflected the growth in corporate expenses allocated to the segments. The allocated expenses increased due to an increase in the overall growth of the Company.
Property Individual Risk
The Company’s Property Individual Risk business segment is comprised of the insurance and facultative reinsurance of commercial properties. The policies written in this segment provide coverage for one insured per policy. The types of risks insured are generally commercial properties with sufficiently large values to require multiple insurers and reinsurers to accommodate their insurance capacity needs. The following table summarizes the underwriting results and associated ratios for the Property Individual Risk business segment for the three months ended March 31, 2006 and 2005, respectively.
| | | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | |
| | | March 31,
2006 | | March 31,
2005 | | Change(1) |
| | | (in thousands, except for ratios) | | |
| Revenues | | | | | | | | | | | | |
| Gross premiums written | | $ | 28,574 | | | $ | 23,374 | | | | 22.2 | % |
| Net premiums written | | | 10,690 | | | | 23,149 | | | | (53.8 | %) |
| Net premiums earned | | | 21,058 | | | | 27,197 | | | | (22.6 | %) |
| Expenses | | | | | | | | | | | | |
| Losses and loss expenses | | | (5,461 | ) | | | 39,332 | | | NM(2) |
| Acquisition expenses | | | 1,291 | | | | 3,470 | | | | (62.8 | %) |
| General and administrative expenses | | | 3,777 | | | | 2,224 | | | | 69.8 | % |
| | | | (393 | ) | | | 45,026 | | | NM(2) |
| Underwriting income (loss) | | $ | 21,451 | | | $ | (17,829 | ) | | NM(2) |
| Net loss ratio | | | (25.9 | %) | | | 144.6 | % | | | (170.5 | ) |
| Acquisition expense ratio | | | 6.1 | % | | | 12.8 | % | | | (6.7 | ) |
| General and administrative expense ratio | | | 17.9 | % | | | 8.2 | % | | | 9.7 | |
| Combined ratio | | | (1.9 | %) | | | 165.6 | % | | | (167.5 | ) |
|
| |
| (1) | With respect to ratios, changes show increase or decrease in percentage points. |
| |
| (2) | Not meaningful. |
Premiums. The increase in gross premiums written for the three months ended March 31, 2006 was due to the net increase in premiums written on certain U.S. working layer policies offset by nonrenewals and pricing pressures in our worldwide sourced business. The Company wrote gross premiums of $19.1 million due to the expansion of its ability to write business on a non-admitted basis within the U.S. Offsetting this expansion, gross premiums written decreased as a result of pricing pressures and a deterioration of terms and conditions that resulted in policies that were not renewed of $9.5 million during the first quarter of 2006. Net premiums earned declined in 2006 due to the increase in the amount of business on which the Company cedes a portion of the gross premiums written in order to strategically manage its overall risk exposures.
Losses and Loss Expenses. The current year losses of $18.3 million recorded for the three months ended March 31, 2006 were more than offset by the favorable development on prior accident
27
Table of Contentsyears of $23.7 million. The 2005 accident year accounted for $22.8 million of this favorable development, $10.6 million of which was related to the 2005 Hurricanes. In addition, the decrease in the net loss ratio for the first quarter of 2006 resulted from the absence of losses during this period as compared to the significant losses recorded for the same period in 2005.
Acquisition Expenses. The decrease in the acquisition expense ratio was due to Endurance U.S. Insurance writing and ceding premiums on which commissions were earned and offset against acquisition expenses in 2006.
General and Administrative Expenses. The general and administrative expense ratio increased for the first quarter of 2006 due to the growth in Endurance U.S. Insurance, increased corporate expenses and overall higher staffing levels.
Casualty Individual Risk
The Company’s Casualty Individual Risk business segment is comprised of the insurance and facultative reinsurance of third party liability exposures. This includes third party general liability insurance, directors’ and officers’ liability insurance, errors and omissions insurance and employment practices liability insurance, all written for a wide range of industry groups, as well as medical professional liability insurance which is written for large institutional healthcare providers. The following table summarizes the underwriting results and associated ratios for the Casualty Individual Risk business segment for the three months ended March 31, 2006 and 2005, respectively.
| | | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | |
| | | March 31,
2006 | | March 31,
2005 | | Change(1) |
| | | (in thousands, except for ratios) | | |
| Revenues | | | | | | | | | | | | |
| Gross premiums written | | $ | 51,583 | | | $ | 47,690 | | | | 8.2 | % |
| Net premiums written | | | 46,002 | | | | 47,781 | | | | (3.7 | %) |
| Net premiums earned | | | 69,368 | | | | 60,464 | | | | 14.7 | % |
| Expenses | | | | | | | | | | | | |
| Losses and loss expenses | | | 47,068 | | | | 37,450 | | | | 25.7 | % |
| Acquisition expenses | | | 3,355 | | | | 4,625 | | | | (27.5 | %) |
| General and administrative expenses | | | 5,531 | | | | 3,093 | | | | 78.8 | % |
| | | | 55,954 | | | | 45,168 | | | | 23.9 | % |
| Underwriting income | | $ | 13,414 | | | $ | 15,296 | | | | (12.3 | %) |
| Net loss ratio | | | 67.9 | % | | | 61.9 | % | | | 6.0 | |
| Acquisition expense ratio | | | 4.8 | % | | | 7.6 | % | | | (2.8 | ) |
| General and administrative expense ratio | | | 8.0 | % | | | 5.2 | % | | | 2.8 | |
| Combined ratio | | | 80.7 | % | | | 74.7 | % | | | 6.0 | |
|
| |
| (1) | With respect to ratios, changes show increase or decrease in percentage points. |
Premiums. The net increase in gross premiums written for the three months ended March 31, 2006 resulted from new business written within the primary casualty lines of $7.5 million and increased pricing on renewal premiums within the healthcare line of $2.1 million. Offsetting these increases was declines in the excess general liability line of $5.7 million due to the shifting of renewal dates for the three months ended March 31, 2006 as compared to the same period in 2005. The professional lines remained relatively consistent for the three months ended March 31, 2006 and 2005. The increase in net premiums earned resulted from increased gross premiums written within the first quarter of 2006 and the continued earning of excess general liability premiums written in prior years.
Losses and Loss Expenses. The Company has received only a limited number of notices of potential losses for this segment, very few of which have yet reached a level that would result in the
28
Table of ContentsCompany paying a claim. The six point increase in the reported loss ratio between the three months ended March 31, 2006 and 2005 was the result of prior period favorable development being $8.2 million higher in 2005. The Company reduced expected losses related to prior underwriting periods by $4.1 million in the three months ended March 31, 2006 largely related to the 2005 accident year as compared to favorable development recorded in the same period last year of $12.3 million largely related to the 2003 underwriting year.
Acquisition Expenses. For the three months ended March 31, 2006, the acquisition expense ratio decreased due to Endurance U.S. Insurance writing and ceding premiums on which commissions were earned and offset against acquisition expenses.
General and Administrative Expenses. The increase in the general and administrative expense ratio was a result of start-up expenses incurred by Endurance U.S. Insurance as well as a general increase in corporate expenses allocated to all segments for the period ended March 31, 2006.
Aerospace and Other Specialty Lines
The Company’s Aerospace and Other Specialty Lines business segment is comprised of the insurance and reinsurance of aerospace lines, and a number of other specialty lines including surety, agriculture, marine and energy, personal accident and others. Aerospace risks include aviation hull, aircraft liability and aircraft products coverage, and satellite launch and in-orbit coverage. The following table summarizes the underwriting results and associated ratios for the Aerospace and Other Specialty Lines business segment for the three months ended March 31, 2006 and 2005, respectively.
| | | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | |
| | | March 31,
2006 | | March 31,
2005 | | Change(1) |
| | | (in thousands, except for ratios) | | |
| Revenues | | | | | | | | | | | | |
| Gross premiums written | | $ | 161,620 | | | $ | 183,526 | | | | (11.9 | %) |
| Net premiums written | | | 158,716 | | | | 182,107 | | | | (12.8 | %) |
| Net premiums earned | | | 83,983 | | | | 65,065 | | | | 29.1 | % |
| Expenses | | | | | | | | | | | | |
| Losses and loss expenses | | | 69,298 | | | | 45,715 | | | | 51.6 | % |
| Acquisition expenses | | | 19,267 | | | | 12,920 | | | | 49.1 | % |
| General and administrative expenses | | | 9,132 | | | | 7,503 | | | | 21.7 | % |
| | | | 97,697 | | | | 66,138 | | | | 47.7 | % |
| Underwriting income (loss) | | $ | (13,714 | ) | | $ | (1,073 | ) | | NM(2) |
| Net loss ratio | | | 82.5 | % | | | 70.3 | % | | | 12.2 | |
| Acquisition expense ratio | | | 22.9 | % | | | 19.9 | % | | | 3.0 | |
| General and administrative expense ratio | | | 10.9 | % | | | 11.5 | % | | | (0.6 | ) |
| Combined ratio | | | 116.3 | % | | | 101.7 | % | | | 14.6 | |
|
| |
| (1) | With respect to ratios, changes show increase or decrease in percentage points. |
| |
| (2) | Not meaningful. |
Premiums. The decrease in gross premiums written for the three months ended March 31, 2006 was largely a result of a decrease in gross premiums written within the aerospace line due to the Company not renewing a large aviation contract that contributed $48.7 million to gross premiums written in the first quarter of 2005. Offsetting the decline in gross premiums written was a net increase in business of $8.5 million recorded within the marine and energy line and approximately $25 million in the agriculture line as a result of new business outpacing nonrenewals and improved pricing on renewed business for the three months ended March 31, 2006 as compared to the same period in 2005.
29
Table of ContentsThe increase in premiums earned resulted from the continued earning of premiums written in prior years and certain premium adjustments that were earned based on the portion of the contract expired at the time it was recorded.
Losses and Loss Expenses. The increase in the net loss ratio for the first quarter of 2006 resulted from unfavorable development related to the 2005 accident year of $22.1 million, which includes unfavorable development on the 2005 Hurricanes of approximately $34 million, primarily within the marine and energy line. Favorable development of $9.6 million was experienced within this segment in relation to the 2003 and 2004 accident years during the first quarter of 2006. The resulting net prior year unfavorable loss development of $12.0 million impacted the loss ratio by 14.3 percentage points for the three months ended March 31, 2006 compared to no development on prior loss reserves for the same period in 2005.
Acquisition Expenses. The increase in the acquisition expense ratio resulted from an increase in the acquisition costs associated with the surety line of business for the three months ended March 31, 2006. This increase was due to a large commission expense recorded as a result of a premium adjustment in the first quarter of 2006.
General and Administrative Expenses. General and administrative expenses increased in line with the increased corporate overhead allocation for the three months ended March 31, 2006. The general and administrative expense ratio for the first quarter of 2006 is down slightly as a result of the increase in net premiums earned for this period.
Deposit accounting
During the three months ended March 31, 2006 and 2005, the Company entered into reinsurance contracts with $99.1 million and $85.6 million, respectively, of premiums that, in management’s judgment, were most appropriately accounted for as deposits under the deposit accounting provisions of SOP 98-7. While not underwritten as finite risk reinsurance, these contracts contain adjustable features, primarily sliding scale ceding commissions and profit share commissions that may cause the amount or variability of risk assumed by the Company to differ from that of its ceding company counterpart. These contracts often contain significant exposures, particularly catastrophic, start-up and other risks, that although they have a low probability of occurrence, could produce material losses. Consequently, these contracts were accounted for as contracts which either transfer only significant timing risk or transfer only significant underwriting risk. The determination of the appropriate method of accounting for these 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 gross premium written and losses and loss expenses. 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 for the three months ended March 31, 2006.
30
Table of Contents
| | | | | | | | | | | | | | |
| | | Underwriting
Results by
Segment | | Deposit
Accounting | | Totals |
| | | (in thousands, except for ratios) |
| Underwriting income | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | |
| Gross premiums written | | $ | 670,530 | | | $ | (99,149 | ) | | $ | 571,381 | |
| Net premiums written | | | 642,158 | | | | (99,149 | ) | | | 543,009 | |
| Net premiums earned | | | 476,963 | | | | (56,757 | ) | | | 420,206 | |
| Other underwriting income | | | — | | | | 2,071 | | | | 2,071 | |
| | | | 476,963 | | | | (54,686 | ) | | | 422,277 | |
| Expenses | | | | | | | | | | | | |
| Losses and loss expenses | | | 270,005 | | | | (31,273 | ) | | | 238,732 | |
| Acquisition expenses | | | 94,342 | | | | (20,571 | ) | | | 73,771 | |
| General and administrative expenses | | | 44,298 | | | | — | | | | 44,298 | |
| | | | 408,645 | | | | (51,844 | ) | | | 356,801 | |
| Underwriting income | | $ | 68,318 | | | $ | (2,842 | ) | | $ | 65,476 | |
| Net investment income | | | 63,334 | | | | (1,430 | ) | | | 61,904 | |
| Interest expense | | | (7,526 | ) | | | — | | | | (7,526 | ) |
| Amortization of intangibles | | | (1,158 | ) | | | — | | | | (1,158 | ) |
| Net foreign exchange gains | | | 2,886 | | | | — | | | | 2,886 | |
| Net realized losses on sales of investments | | | (3,330 | ) | | | — | | | | (3,330 | ) |
| Income before income taxes | | $ | 122,524 | | | $ | (4,272 | ) | | $ | 118,252 | |
| Net loss ratio | | | 56.6 | % | | | 55.1 | % | | | 56.8 | % |
| Acquisition expense ratio | | | 19.8 | % | | | 36.2 | % | | | 17.6 | % |
| General and administrative expense ratio | | | 9.3 | % | | | — | | | | 10.5 | % |
| Combined ratio | | | 85.7 | % | | | 91.3 | % | | | 84.9 | % |
|
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., Endurance U.S. Reinsurance and Endurance U.S. Insurance. 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., Endurance U.S. Reinsurance and Endurance U.S. Insurance 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, and 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, 2006, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $548 million without prior regulatory approval based upon insurance and Bermuda Companies Act regulations.
Endurance U.S. Reinsurance 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, 2006,
31
Table of ContentsEndurance U.S. Reinsurance did not have earned surplus; therefore, Endurance U.S. Reinsurance is precluded from declaring or distributing any dividend during 2006 without the prior approval of the Superintendent of the State of New York Insurance Department.
Endurance U.S. Insurance is subject to regulation by the State of Delaware Department of Insurance. Dividends are limited to the greater of 10% of policyholders’ surplus or net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At March 31, 2006, Endurance U.S. Insurance did not have earned surplus; therefore, Endurance U.S. Insurance is precluded from declaring or distributing dividends during 2006 without the prior approval of the Delaware Insurance Commissioner. Any dividends paid by Endurance U.S. Insurance are paid to Endurance U.S. Reinsurance and are then subject to Endurance U.S. Reinsurance’s dividend limitations.
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 U.K. 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, 2006, Endurance U.K. did not have profits available for distribution and could not pay a dividend.
The Company's aggregate cash and invested assets as of March 31, 2006 totaled $5.1 billion compared to $5.0 billion as of December 31, 2005. The increase in cash and invested assets since December 31, 2005 resulted from collections of premiums on insurance policies and reinsurance contracts, and investment income, offset by losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid and general and administrative expenses paid. The decline in cash flows from operations for the three months ended March 31, 2006 as compared to the same period in 2005 was primarily a result of claims payment activity during the first quarter of 2006 related to the 2005 Hurricanes. During the first three months ended March 31, 2006, the Company paid claims of $163.5 million as compared to $89.9 million in the same period of 2005.
On an ongoing basis, the Company expects its funds to be sufficient to operate its business. 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 to pay claims.
On February 16, 2006, Endurance Holdings declared quarterly dividends of $0.25 per share payable on its ordinary shares and $0.484375 per share payable on its 7.75% Non-Cumulative Preferred Shares, Series A. The dividend on Endurance Holdings’ outstanding ordinary shares was paid on March 31, 2006 to the ordinary shareholders of record on March 17, 2006, and the dividend on Endurance’s Series A Preferred Shares was paid on March 15, 2006 to the Series A Preferred shareholders of record on March 1, 2006.
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 Company’s 2005 Annual Report on Form 10-K.
Currency
The Company’s functional currency is U.S. dollars for Endurance Bermuda, Endurance U.S. Reinsurance and Endurance U.S. Insurance 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
32
Table of Contentsthe capitalization of Endurance U.K. Endurance U.K. is subject to the FSA’s rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.'s 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, 2006, the Company had accrued losses and loss expenses reserves of $2.7 billion. This amount represents management’s best estimate of the ultimate liability for payment of losses and loss expenses related to loss events as of March 31, 2006. During the three month periods ended March 31, 2006 and 2005, the Company paid losses and loss expenses of $163.5 million and $89.9 million, including deposit accounting adjustments, respectively.
As of March 31, 2006, 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. In addition, 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 2005 Annual Report on Form 10-K for further details.
Incurred losses for the three months ended March 31, 2006 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 | | $ | 71,151 | | | $ | 22,605 | | | $ | 94,340 | | | $ | 18,285 | | | $ | 51,177 | | | $ | 57,248 | | | $ | (33,533 | ) | | $ | 281,273 | |
| Prior years | | | (30,716 | ) | | | 10,100 | | | | (8,380 | ) | | | (23,746 | ) | | | (4,109 | ) | | | 12,050 | | | | 2,260 | | | | (42,541 | ) |
| Total Incurred Losses | | $ | 40,435 | | | $ | 32,705 | | | $ | 85,960 | | | $ | (5,461 | ) | | $ | 47,068 | | | $ | 69,298 | | | $ | (31,273 | ) | | $ | 238,732 | |
|
| |
| (1) | Reconciles the Company's incurred losses by segment to the Company's financial statement presentation. See ‘‘Deposit accounting’’ above for further discussion. |
33
Table of ContentsIncurred 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) | Reconciles the Company's incurred losses by segment to the Company's financial statement presentation. See ‘‘Deposit accounting’’ above for further discussion. |
Incurred losses for the three months ended March 31, 2006 include approximately $42.5 million in favorable development of reserves, including deposit accounting adjustments, relating to the prior accident years. The favorable loss reserve development experienced during the three months ended March 31, 2006 benefited the Company's reported loss ratio by approximately 10.1 percentage points.
During the three months ended March 31, 2006, the reduction in the Company's initial estimated losses for prior accident years, after deposit accounting adjustments, was experienced most significantly in the Property Per Risk Treaty Reinsurance segment, where the initial estimate was reduced by approximately $29.3 million and the Property Individual Risk segment, where the initial estimate was reduced by approximately $23.7 million.
The above reduction in estimated losses for prior accident years reflects lower than expected emergence of catastrophic and attritional losses.
Offsetting prior year favorable development was $35.0 million of net unfavorable development related to the 2005 Hurricanes. The unfavorable development related to these storms was $16.8 million, $1.4 million and $34.3 million within the Property Per Risk Treaty Reinsurance, Casualty Treaty Reinsurance and Aerospace and Other Specialty Lines segments, respectively. Favorable development on the 2005 Hurricanes of $6.9 million and $10.6 million was experienced in the Property Catastrophe Reinsurance and Property Individual Risk segments, respectively. Net unfavorable development related to the 2005 Hurricanes was more than offset by favorable 2005 accident year development primarily within the Company’s property and specialty lines.
Reserves for losses and loss expenses are comprised of the following at March 31, 2006:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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) |
| Case Reserves | | $ | 363,392 | | | $ | 172,076 | | | $ | 161,028 | | | $ | 142,150 | | | $ | 9,083 | | | $ | 278,636 | | | $ | (15,355 | ) | | $ | 1,111,010 | |
| IBNR | | | 161,833 | | | | 46,358 | | | | 599,678 | | | | 54,162 | | | | 500,499 | | | | 272,306 | | | | (56,860 | ) | | | 1,577,976 | |
| Reserve for Losses and Loss Expenses | | $ | 525,225 | | | $ | 218,434 | | | $ | 760,706 | | | $ | 196,312 | | | $ | 509,582 | | | $ | 550,942 | | | $ | (72,215 | ) | | $ | 2,688,986 | |
|
| |
| (1) | 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. |
34
Table of ContentsReserves for losses and loss expenses are comprised of the following at December 31, 2005:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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) |
| Case Reserves | | $ | 332,001 | | | $ | 173,984 | | | $ | 140,986 | | | $ | 150,267 | | | $ | 9,083 | | | $ | 225,747 | | | $ | (13,576 | ) | | $ | 1,018,492 | |
| IBNR | | | 231,722 | | | | 45,469 | | | | 549,562 | | | | 61,324 | | | | 450,095 | | | | 279,975 | | | | (33,049 | ) | | | 1,585,098 | |
| Reserve for Losses and Loss Expenses | | $ | 563,723 | | | $ | 219,453 | | | $ | 690,548 | | | $ | 211,591 | | | $ | 459,178 | | | $ | 505,722 | | | $ | (46,625 | ) | | $ | 2,603,590 | |
|
| |
| (1) | 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. |
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; |
| | |
| • | 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 our underwriting, reserving or investment practices have anticipated; |
| | |
| • | 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; |
| | |
| • | uncertainties due to our limited operating history; |
| | |
| • | 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 the United States or the United Kingdom; |
| | |
| • | changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers; |
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Table of Contents | | |
| • | state, federal and foreign regulations may impede our ability to charge adequate rates and efficiently allocate capital; |
| | |
| • | reduced acceptance of our products and services, including new products and services; |
| | |
| • | the inability to renew business previously underwritten or acquired; |
| | |
| • | 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; |
| | |
| • | changes in the availability, cost or quality of reinsurance or retrocessional coverage; |
| | |
| • | political stability of Bermuda; |
| | |
| • | changes in accounting policies or practices; |
| | |
| • | the impact of the investigations of the New York Attorney General on the industry and on the Company in particular; |
| | |
| • | the commercial and investment activities of our significant shareholders may lead to conflicts of interst; |
| | |
| • | our investment performance may affect our financial assets and ability to conduct business; |
| | |
| • | we may require additional capital in the future which may not be available or only available on unfavorable terms; 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 the 2005 Annual Report on Form 10-K and our Current Report. The Company undertakes 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 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.
36
Table of ContentsPART 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.
On January 5, 2005, Endurance U.S. Reinsurance 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. Reinsurance, 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. The Company provided the NYAG with an initial set of documents responsive to the subpoena on January 21, 2005.
| |
| Item 1A. | Risk Factors |
There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005.
| |
| Item 2. | Changes in Securities and Issuer Purchases of Equity Securities |
None
| |
| 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 |
(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 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
37
Table of ContentsSIGNATURES
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 9, 2006 | | By: | | /s/ Kenneth J. LeStrange |
| | | | | Kenneth J. LeStrange
Chairman of the Board, Chief Executive Officer,
President |
| Date: May 9, 2006 | | By: | | /s/ Michael J. McGuire |
| | | | | Michael J. McGuire
Chief Financial Officer
(Principal Financial Officer) |
|
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![[X]](https://capedge.com/proxy/10-Q/0000950136-06-003609/xbox.gif){kind=small}
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act![[ ]](https://capedge.com/proxy/10-Q/0000950136-06-003609/ebox.gif){kind=small}
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934