Endurance Specialty 10Q 2006 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the period ended June 30, 2006, or

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

Commission file number 1-31599

ENDURANCE SPECIALTY HOLDINGS LTD.

(Exact Name of Registrant as Specified in Its Charter)


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

Wellesley House
90 Pitts Bay Road
Pembroke HM 08, Bermuda

(Address of principal executive offices, including postal code)

Registrant's Telephone Number, Including Area Code: (441) 278-0400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	Accelerated filer	Non-accelerated filer

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

Yes No

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


Description of Class			Common Shares Outstanding as of August 4, 2006
Ordinary Shares – $1.00 par value			66,096,340

INDEX


	Page
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2006 (unaudited) and December 31, 2005		2
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2006 and 2005		3
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2006 and 2005		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005		5
Notes to the Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		54
Item 4. Controls and Procedures		54
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		55
Item 1A. Risk Factors		55
Item 2. Changes in Securities and Issuer Purchases of Equity Securities		55
Item 3. Defaults Upon Senior Securities		55
Item 4. Submission of Matters to a Vote of Security Holders		55
Item 5. Other Information		57
Item 6. Exhibits		57
SIGNATURES		58

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ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars except share amounts)


	JUNE 30, 2006				DECEMBER 31, 2005
ASSETS	(UNAUDITED)
Investments
Fixed maturity investments, available for sale at fair value (amortized cost: $4,439,522 and $4,365,744 at June 30, 2006 and December 31, 2005)		$	4,323,661			$	4,323,339
Investments in other ventures, under equity method			204,272				161,883
Total investments			4,527,933				4,485,222
Cash and cash equivalents			669,583				468,015
Premiums receivable, net (includes $12,110 and $39,712 from related parties at June 30, 2006 and December 31, 2005, respectively)			827,239				575,109
Deferred acquisition costs			175,717				166,720
Securities lending collateral			371,407				408,663
Prepaid reinsurance premiums			56,194				27,132
Losses recoverable			27,452				17,248
Accrued investment income			36,740				33,734
Intangible assets			71,436				65,633
Deferred tax asset			66,545				69,360
Other assets			35,540				35,701
Total assets		$	6,865,786			$	6,352,537
LIABILITIES
Reserve for losses and loss expenses		$	2,782,803			$	2,603,590
Reserve for unearned premiums			967,844				803,629
Deposit liabilities			173,527				92,523
Reinsurance balances payable			122,829				85,281
Securities lending payable			371,407				408,663
Debt			447,131				447,092
Other liabilities			63,710				39,216
Total liabilities			4,929,251				4,479,994
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred shares
Series A, non-cumulative — 8,000,000 issued and outstanding (2005 — 8,000,000)			8,000				8,000
Common shares
Ordinary — $1.00 par value, 66,096,340 issued and outstanding (2005 — 66,138,901)			66,096				66,139
Additional paid-in capital			1,450,435				1,453,722
Accumulated other comprehensive loss			(82,087	)			(19,672	)
Retained earnings			494,091				364,354
Total shareholders’ equity			1,936,535				1,872,543
Total liabilities and shareholders’ equity		$	6,865,786			$	6,352,537

See accompanying notes to unaudited condensed consolidated financial statements.

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ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands of United States dollars, except share and per share amounts)


	THREE MONTHS ENDED JUNE 30,								SIX MONTHS ENDED JUNE 30,
	2006				2005				2006				2005
Revenues
Gross premiums written		$	451,253			$	403,189			$	1,022,634			$	1,105,680
Net premiums written		$	408,678			$	394,590			$	951,687			$	1,093,768
Change in unearned premiums			(2,000	)			43,331				(124,803	)			(218,249	)
Net premiums earned (includes $20,583 and $5,225 from related parties for the six months ended June 30, 2006 and 2005, respectively)			406,678				437,921				826,884				875,519
Net investment income			59,209				39,133				119,683				78,444
Net realized (losses) gains on sales of investments			(8,729	)			592				(12,059	)			(3,861	)
Other underwriting (loss) income			(1,992	)			418				1,509				1,289
Total revenues			455,166				478,064				936,017				951,391
Expenses
Losses and loss expenses (includes $15,820 and $3,399 from related parties for the six months ended June 30, 2006 and 2005, respectively)			269,445				228,916				508,177				479,975
Acquisition expenses (includes $6,332 and $1,469 payable to related parties for the six months ended June 30, 2006 and 2005, respectively)			76,758				89,334				150,529				176,109
General and administrative expenses			47,425				40,432				91,723				73,978
Amortization of intangibles			1,158				1,158				2,316				2,378
Net foreign exchange (gains) losses			(11,997	)			1,742				(14,883	)			4,163
Interest expense			7,459				5,612				14,985				11,083
Total expenses			390,248				367,194				752,847				747,686
Income before income taxes			64,918				110,870				183,170				203,705
Income tax (expense) benefit			(868	)			(853	)			(12,084	)			2,571
Net income			64,050				110,017				171,086				206,276
Preferred dividends			(3,875	)			—				(7,750	)			—
Net income available to common shareholders		$	60,175			$	110,017			$	163,336			$	206,276
Other comprehensive (loss) income
Net income		$	64,050			$	110,017			$	171,086			$	206,276
Net unrealized holding (losses) gains on investments arising during the period (net of applicable deferred income taxes of $6,049 and $1,707 for the six months ended June 30, 2006 and 2005, respectively)			(37,264	)			42,206				(77,211	)			1,263
Foreign currency translation adjustments			2,241				(9,542	)			2,693				(13,209	)
Reclassification adjustment for net realized losses (gains) included in net income			8,729				(592	)			12,059				3,861
Reclassification adjustment for net losses on derivative designated as cash flow hedge included in net income			22				23				44				45
Other comprehensive (loss) income			(26,272	)			32,095				(62,415	)			(8,040	)
Comprehensive income		$	37,778			$	142,112			$	108,671			$	198,236
Per share data
Weighted average number of common and common equivalent shares outstanding:
Basic			66,397,742				60,631,594				66,421,265				60,959,737
Diluted			71,109,361				66,063,355				71,243,145				66,276,048
Basic earnings per common share		$	0.91			$	1.81			$	2.46			$	3.38
Diluted earnings per common share		$	0.85			$	1.67			$	2.29			$	3.11

See accompanying notes to unaudited condensed consolidated financial statements.

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


	SIX MONTHS ENDED JUNE 30,
	2006				2005
Preferred shares
Balance, beginning and end of period		$	8,000			$	—
Common shares
Balance, beginning of period			66,139				61,255
Issuance of common shares			286				109
Repurchase of common shares			(329	)			(1,439	)
Balance, end of period			66,096				59,925
Additional paid-in capital
Balance, beginning of period			1,453,722				1,111,633
Issuance of common shares			3,440				976
Repurchase of common shares			(9,679	)			(50,319	)
Issuance of restricted share units in lieu of dividends			494				439
Public offering and registration costs			(48	)			(390	)
Settlement of equity awards			(1,970	)			(1,639	)
Stock-based compensation expense			4,476				9,315
Balance, end of period			1,450,435				1,070,015
Accumulated other comprehensive (loss) income
Cumulative foreign currency translation adjustments:
Balance, beginning of period			23,842				34,202
Foreign currency translation adjustments			2,693				(13,209	)
Balance, end of period			26,535				20,993
Unrealized holding losses on investments:
Balance, beginning of period			(40,948	)			7,927
Net unrealized holding losses arising during the period, net of reclassification adjustment			(65,152	)			5,124
Balance, end of period			(106,100	)			13,051
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of period			(2,566	)			(2,656	)
Net change from current period hedging transactions, net of reclassification adjustment			44				45
Balance, end of period			(2,522	)			(2,611	)
Total accumulated other comprehensive (loss) income			(82,087	)			31,433
Retained earnings
Balance, beginning of period			364,354				650,094
Net income			171,086				206,276
Issuance of restricted share units in lieu of dividends			(494	)			(438	)
Dividends on preferred shares			(7,750	)			—
Dividends on common shares			(33,105	)			(30,180	)
Balance, end of period			494,091				825,752
Total shareholders’ equity		$	1,936,535			$	1,987,125

See accompanying notes to unaudited condensed consolidated financial statements.

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


	SIX MONTHS ENDED JUNE 30,
	2006				2005
Cash flows provided by operating activities:
Net income		$	171,086			$	206,276
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premium on investments			8,093				10,421
Depreciation and amortization of other intangibles			7,514				7,012
Net realized losses on sales of investments			12,059				3,861
Deferred taxes			2,815				(9,602	)
Stock-based compensation expense			4,476				9,315
Equity in earnings of unconsolidated ventures			(13,890	)			(3,917	)
Premiums receivable, net			(252,130	)			(233,760	)
Deferred acquisition costs			(8,997	)			(30,228	)
Prepaid reinsurance premiums			(29,062	)			(4,524	)
Losses recoverable			(10,204	)			(1,706	)
Accrued investment income			(3,006	)			(1,873	)
Other assets			9,193				(2,783	)
Reserve for losses and loss expenses			179,213				273,880
Reserve for unearned premiums			164,215				212,275
Deposit liabilities			81,004				56,341
Reinsurance balances payable			41,507				(14,107	)
Other liabilities			16,262				(4,696	)
Net cash provided by operating activities			380,148				472,185
Cash flows used in investing activities:
Proceeds from sales of fixed maturity investments			803,400				1,673,542
Proceeds from maturities and calls on fixed maturity investments			309,086				326,665
Purchases of fixed maturity investments			(1,171,391	)			(2,183,952	)
Purchase of investments in other ventures			(28,499	)			(13,750	)
Purchases of fixed assets			(8,441	)			(4,918	)
Net cash paid in acquisitions			(12,078	)			(9,475	)
Net cash used in investing activities			(107,923	)			(211,888	)
Cash flows used in financing activities:
Issuance of common shares			3,678				1,085
Repurchase of common shares			(10,008	)			(51,937	)
Settlement of equity awards			(1,970	)			(1,639	)
Offering and registration costs paid			(48	)			(248	)
Dividends paid			(40,855	)			(30,180	)
Net cash used in financing activities			(49,203	)			(82,919	)
Effect of exchange rate changes on cash and cash equivalents			(21,454	)			8,764
Net increase in cash and cash equivalents			201,568				186,142
Cash and cash equivalents, beginning of period			468,015				271,143
Cash and cash equivalents, end of period		$	669,583			$	457,285

See accompanying notes to unaudited condensed consolidated financial statements.

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


1.	General

Endurance Specialty Holdings Ltd. (‘‘Endurance Holdings’’) was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings underwrites specialty lines of insurance and reinsurance on a global basis primarily through its five wholly-owned operating subsidiaries: Endurance Specialty Insurance Ltd. (‘‘Endurance Bermuda’’), based in Bermuda; Endurance Worldwide Insurance Limited, based in London, England; Endurance Reinsurance Corporation of America, based in New York; Traders & Pacific Insurance Company, based in New York; and Core Insurance Company, based in New York. Endurance Holdings and its wholly owned subsidiaries are collectively referred to herein as the ‘‘Company.’’

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The unaudited condensed consolidated financial statements include the accounts of Endurance Holdings and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. Management is required to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates. Among other matters, significant estimates and assumptions are used to record premiums written and ceded, and to record the reserve for losses and loss expenses and contingencies. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the period that they are determined to be necessary.

The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2005 contained in Endurance Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Certain reclassifications have been made for 2005 to conform to the 2006 presentation and have no impact on net income previously reported.


2.	Securities lending

The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity investments available for sale, are loaned to third parties, primarily major brokerage firms. The Company retains all economic interest in the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% – 105% of the market value of the loaned securities and is monitored and maintained by the lending agent. The Company had $364.5 million and $399.7 million in securities on loan at June 30, 2006 and December 31, 2005, respectively.

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


3.	Earnings per share

Endurance Holdings follows Statement of Financial Accounting Standards No. 128, ‘‘Earnings per Share,’’ to account for its weighted average shares. Basic earnings per common share are calculated by dividing net income available to holders of Endurance Holdings’ common shares by the weighted average number of common shares outstanding. In addition to the actual common shares outstanding, the weighted average number of common shares included in the basic earnings per common share calculation also includes the unsettled bonus restricted share units discussed in Note 4. Diluted earnings per common share are based on the weighted average number of common shares and dilutive potential common shares outstanding during the period of calculation using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share:



	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2006			2005			2006			2005
Numerator:
Net income available to common shareholders		$	60,175		$	110,017		$	163,336		$	206,276
Denominator:
Weighted average shares — basic
Common shares outstanding			66,181,345			60,352,912			66,186,511			60,701,697
Unsettled bonus restricted share units outstanding			216,397			278,682			234,754			258,040
			66,397,742			60,631,594			66,421,265			60,959,737
Share equivalents
Unvested incentive restricted share units outstanding			355,184			213,381			303,446			203,281
Warrants			3,165,668			3,612,508			3,271,202			3,533,061
Options			1,190,767			1,605,872			1,247,232			1,579,969
Weighted average shares — diluted			71,109,361			66,063,355			71,243,145			66,276,048
Basic earnings per common share		$	0.91		$	1.81		$	2.46		$	3.38
Diluted earnings per common share		$	0.85		$	1.67		$	2.29		$	3.11

On May 3, 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 ‘‘Series A Preferred Shares’’). The dividend on Endurance Holdings’ outstanding ordinary shares was paid on June 30, 2006 to the ordinary shareholders of record on June 16, 2006, and the dividend on the Series A Preferred Shares was paid on June 15, 2006 to the Series A Preferred shareholders of record on June 1, 2006.


	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2006			2005			2006			2005
Dividends declared per preferred share		$	0.484375			—		$	0.96875			—
Dividends declared per common share		$	0.25		$	0.25		$	0.50		$	0.50

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4.	Stock-based employee compensation and other stock plans

On January 1, 2006, the Company implemented Statement of Financial Accounting Standard 123(R) (‘‘SFAS 123(R)’’) under the modified-prospective method as it relates to its stock-based employee compensation and other stock plans. Prior to January 1, 2006, the Company accounted for its Option Plan under the fair value recognition provisions of Statement of Financial Accounting Standard 123 (‘‘SFAS 123’’), ‘‘Accounting for Stock-Based Compensation,’’ as subsequently amended by Statement of Financial Accounting Standard No. 148, ‘‘Accounting for Stock-Based Compensation — Transition and Disclosure.’’ The compensation costs recorded by the Company were materially consistent under SFAS 123(R) and SFAS 123 and thus, adoption of SFAS 123(R) did not have a material impact on the Company’s financial position or results of operations.

The Company has a stock-based employee compensation plan (the ‘‘Option Plan’’) which provides for the grant of options to purchase the Company’s common shares, share appreciation rights, share bonuses and other equity incentive awards to key employees. Two types of restricted share units are issued by the Company: bonus restricted share units (‘‘Bonus units’’) and incentive restricted share units (‘‘Incentive units’’). Bonus units issued by the Company do not require future service; however, they provide for a four year period in which unsettled Bonus units are forfeited if the holder departs the Company and violates the terms of a non-compete provision set forth in the Option Plan. The Company settles Bonus units pro rata over the four year non-compete term. Incentive units generally vest over a period of five years on a graded basis and are forfeited by an employee upon departure from the Company. The Company settles Incentive units as they vest over the life of the unit. At the Company’s exclusive option, the Bonus and Incentive units may be settled in cash, ordinary shares or in a combination thereof.

Under the terms of the Option Plan, a total of 4,986,975 common shares have been reserved for issuance. At June 30, 2006, 3,670,290 options had been granted with vesting dates between December 14, 2001 and July 14, 2007 and 1,519,909 restricted share units had been granted with vesting dates between March 1, 2003 and November 21, 2010. Activity with respect to the Option Plan for the three and six months ended June 30, 2006 is as follows:



	THREE MONTHS ENDED JUNE 30, 2006			SIX MONTHS ENDED JUNE 30, 2006
Options outstanding, beginning of period		3,039,541			3,081,041
Options granted		—			—
Options forfeited		—			(10,000	)
Options exercised		(160,000	)		(191,500	)
Options outstanding, end of period		2,879,541			2,879,541
Exercisable options, end of period		2,593,471			2,593,471

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4.	Stock-based employee compensation and other stock plans, cont'd.

The following table illustrates certain weighted average exercise price data for the three and six months ended June 30, 2006:



	THREE MONTHS ENDED JUNE 30, 2006			SIX MONTHS ENDED JUNE 30, 2006
Weighted average exercise prices of:
Options granted		$	—		$	—
Options forfeited		$	—		$	26.40
Options exercised		$	17.64		$	17.73

The total intrinsic value of options exercised during the three and six months ended June 30, 2006 was $2.1 million and $2.6 million, respectively. The Company received proceeds of $2.8 million and $3.4 million from the exercise of these options with no realized tax benefit from the exercise during the three and six months ended June 30, 2006, respectively. The Company issued new shares in response to the exercise of the above options.

The range of exercise prices for all options outstanding at June 30, 2006 under the Option Plan was $17.37 – $33.41 per share. The weighted average exercise price of options outstanding at June 30, 2006 was $18.74. The weighted average exercise price of exercisable options at June 30, 2006 was $18.48. The weighted average remaining contract life of outstanding options was 5.63 years. There were no options that expired during the three or six month periods ended June 30, 2006. The maximum term of an option is 10 years. The total fair value of options vested during the three and six month periods ended June 30, 2006 was $0.2 million and $0.6 million, respectively.

No additional options were granted under the Option Plan for the three or six months ended June 30, 2006.

Activity with respect to the Bonus units for the three and six months ended June 30, 2006 is as follows:



	THREE MONTHS ENDED JUNE 30, 2006			SIX MONTHS ENDED JUNE 30, 2006
Bonus units outstanding, beginning of period		217,883			274,036
Bonus units granted		416			53,569
Bonus units forfeited		(328	)		(2,517	)
Bonus units settled		—			(107,117	)
Unsettled Bonus units outstanding, end of period		217,971			217,971

On March, 1, 2006, the Company settled $1.6 million of its 2005 annual bonus obligations to certain employees with grants of 51,492 Bonus units. The fair value of the Bonus units at the date of grant was equal to the bonus obligation recognized during the year ended December 31, 2005, and as such, no additional compensation expense has been recognized. During the three and six months ended June 30, 2006, 1,690 and 3,351 Bonus units, respectively, were granted to holders in lieu of dividends.

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4.	Stock-based employee compensation and other stock plans, cont'd.

Activity with respect to the Incentive units for the three and six months ended June 30, 2006 is as follows:



	THREE MONTHS ENDED JUNE 30, 2006			SIX MONTHS ENDED JUNE 30, 2006
Incentive units outstanding, beginning of period		826,159			652,419
Incentive units granted		27,988			250,123
Incentive units forfeited		(9,183	)		(18,608	)
Incentive units settled		(7,839	)		(46,809	)
Unvested Incentive units outstanding, end of period		837,125			837,125

During the three and six months ended June 30, 2006, the Company granted 21,500 and 237,324 unvested Incentive units, respectively, with fair values of $0.7 million and $7.5 million. Unvested Incentive units are granted subject to vesting provisions which are generally five years and are automatically settled upon vesting. Compensation expenses related to awards with graded vesting schedules issued subsequent to January 1, 2006 were recognized by the Company on an accelerated basis over the vesting term. Compensation expense related to previously issued awards were also recognized on an accelerated basis. In addition, 6,488 and 12,799 unvested Incentive units were granted to holders in lieu of dividends for the three and six months ended June 30, 2006.

For the three and six months ended June 30, 2006, compensation costs recognized in income were $2.4 million and $3.0 million, respectively, and there were no recognized tax benefits for 2006. At June 30, 2006, compensation costs not yet recognized related to non-vested awards was $14.0 million.

This expense is expected to be recognized between 2006 and 2009, with approximately 33% expected to be recognized during the remainder of 2006.

On October 26, 2005, Endurance Holdings’ shareholders approved the Employee Share Purchase Plan (the ‘‘ESPP’’) and the 2005 Sharesave Scheme. Neither the ESPP nor the 2005 Sharesave Scheme is subject to any provisions of the Employee Retirement Income Security Act of 1974 as amended, and neither plan is a qualified plan within the meaning of Section 402(a) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’).

Following approval by the Company’s shareholders, 200,000 of Endurance Holdings’ ordinary shares, par value $1.00 per share, were reserved for issuance under the ESPP. Under the terms of the ESPP, which is administered by the Compensation Committee of the Board of Directors, employees of Endurance Holdings and certain of its subsidiaries who have completed five months of service may purchase Endurance Holdings’ ordinary shares at a 15% discount from the market price of the ordinary shares on the last trading day of each quarter from payroll deductions of between 1%-10% of their gross base salaries withheld during the period. Participants are eligible to receive dividends on their Endurance Holdings ordinary shares as of the purchase date. Participating employees may discontinue their participation at any time, but may not resume participation in the ESPP for a period of one year from the date of withdrawal from the plan. Ordinary shares purchased under the ESPP must be held for one year prior to disposition.

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4.	Stock-based employee compensation and other stock plans, cont'd.

Compensation expense related to the ESPP of approximately $25,000 and $50,000 was recorded for the three and six months ended June 30, 2006, respectively for 5,250 and 10,266 common shares purchased under the ESPP.

Under the terms of the 2005 Sharesave Scheme, all U.K. eligible employees may save between £5 and £250 per month for three, five or seven years, as determined by the Company. At the end of the savings period participating employees' savings may be used to purchase Endurance Holdings’ ordinary shares at an exercise price, which was established at a 15% discount from the market price on the date the options were granted. Participating employees may terminate their participation in the 2005 Sharesave Scheme and receive a refund of their contributed funds. The 2005 Sharesave Scheme was approved by Her Majesty’s Revenue on February 20, 2006.

On February 22, 2006, 13,124 options were granted under the 2005 Sharesave Scheme for a term of three years with a fair value of approximately $86,975. Compensation expense related to these options was approximately $7,250 for both the three and six months ended June 30, 2006. Total compensation expense is recognized on a straight-line basis over the three year term of the option. Options outstanding at June 30, 2006 are exercisable within six months following the three year term at an exercise price of £15.97 or $27.82 per share. No such options were forfeited, exercised or expired during the period.

The fair value of each option issued during 2006 under the 2005 Sharesave Scheme was estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The volatility assumption of approximately 24% was derived from daily changes of the Company’s historical stock prices. The other assumptions used in the option-pricing model were as follows: risk free interest rate for 2006 of 4.84%, expected life of 3.25 years and a dividend yield of 3.07%. The weighted average remaining contract life of options outstanding at June 30, 2006 is 3.25 years. The maximum term of an option is 3.5 years. The total fair value of options vested during the three and six months ended June 30, 2006 was $Nil and $Nil, respectively.


5.	Segment reporting

The determination of the Company’s business segments is based on how the Company monitors the performance of its underwriting operations. The Company has six reportable business segments: Property Per Risk Treaty Reinsurance, Property Catastrophe Reinsurance, Casualty Treaty Reinsurance, Property Individual Risk, Casualty Individual Risk and Aerospace and Other Specialty Lines.


	•	Property Per Risk Treaty Reinsurance — reinsures individual property risks of ceding companies on a treaty basis.


	•	Property Catastrophe Reinsurance — reinsures catastrophic perils for ceding companies on a treaty basis.


	•	Casualty Treaty Reinsurance — reinsures third party liability exposures from ceding companies on a treaty basis.


	•	Property Individual Risk — insures and writes facultative reinsurance of commercial properties.


	•	Casualty Individual Risk — insures and writes facultative reinsurance of third party liability exposures.


	•	Aerospace and Other Specialty Lines — insures and reinsures risks related to aerospace, surety, marine and energy, agricultural, personal accident and other lines.

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5.	Segment reporting, cont'd.

Because the Company does not manage its assets by segment, investment income and total assets are not allocated to the individual segments. Management measures segment results on the basis of the combined ratio that is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. 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.

For internal management reporting purposes, underwriting results by segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written. However, under the provisions of AICPA Statement of Position 98-7 — ‘‘Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk’’ a small number of reinsurance contracts written during the three and six months ended June 30, 2006 and 2005 have been accounted for as deposit liabilities.

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5.	Segment reporting, cont'd.

The following table provides a summary of the segment revenues, results and reserve for losses and loss expenses for the three months ended June 30, 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
Revenues
Gross premiums written		$	49,998			$	100,526			$	79,426			$	52,590			$	106,633			$	108,192			$	(46,112	)		$	451,253
Net premiums written			49,998				100,526				74,716				26,699				96,482				106,369				(46,112	)			408,678
Net premiums earned			89,861				57,380				119,731				18,384				69,969				101,524				(50,171	)			406,678
Other underwriting loss			—				—				—				—				—				—				(1,992	)			(1,992	)
			89,861				57,380				119,731				18,384				69,969				101,524				(52,163	)			404,686
Expenses
Losses and loss expenses			83,117				27,668				59,224				23,347				46,821				70,267				(40,999	)			269,445
Acquisition expenses			26,506				7,670				32,995				729				3,364				19,200				(13,706	)			76,758
General and administrative expenses			6,019				8,470				7,847				5,753				10,195				9,141				—				47,425
			115,642				43,808				100,066				29,829				60,380				98,608				(54,705	)			393,628
Underwriting income (loss)		$	(25,781	)		$	13,572			$	19,665			$	(11,445	)		$	9,589			$	2,916			$	2,542			$	11,058
Loss ratio			92.5	%			48.2	%			49.5	%			127.0	%			66.9	%			69.2	%			81.7	%			66.3	%
Acquisition expense ratio			29.5	%			13.4	%			27.6	%			4.0	%			4.8	%			18.9	%			27.3	%			18.9	%
General and administrative expense ratio			6.7	%			14.7	%			6.5	%			31.3	%			14.6	%			9.0	%			—				11.6	%
Combined ratio			128.7	%			76.3	%			83.6	%			162.3	%			86.3	%			97.1	%			109.0	%			96.8	%
Reserve for losses and loss expenses		$	527,290			$	213,445			$	803,130			$	200,810			$	560,700			$	577,713			$	(100,285	)		$	2,782,803


	(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

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5.	Segment reporting, cont'd.

The following table provides a summary of the segment revenues, results and reserve for losses and loss expenses for the three months ended June 30, 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
Revenues
Gross premiums written		$	99,342			$	67,574			$	31,750			$	35,932			$	105,079			$	64,747			$	(1,235	)		$	403,189
Net premiums written			99,268				67,574				31,048				32,410				103,520				62,005				(1,235	)			394,590
Net premiums earned			114,487				61,926				106,317				26,318				63,642				79,154				(13,923	)			437,921
Other underwriting income			—				—				—				—				—				—				418				418
			114,487				61,926				106,317				26,318				63,642				79,154				(13,505	)			438,339
Expenses
Losses and loss expenses			62,996				6,536				79,398				7,958				40,233				40,425				(8,630	)			228,916
Acquisition expenses			31,981				8,593				29,996				2,977				3,325				16,764				(4,302	)			89,334
General and administrative expenses			8,599				5,877				7,840				3,585				7,659				6,872				—				40,432
			103,576				21,006				117,234				14,520				51,217				64,061				(12,932	)			358,682
Underwriting income (loss)		$	10,911			$	40,920			$	(10,917	)		$	11,798			$	12,425			$	15,093			$	(573	)		$	79,657
Loss ratio			55.0	%			10.5	%			74.7	%			30.3	%			63.2	%			51.1	%			62.0	%			52.3	%
Acquisition expense ratio			28.0	%			13.9	%			28.2	%			11.3	%			5.3	%			21.1	%			30.9	%			20.4	%
General and administrative expense ratio			7.5	%			9.5	%			7.4	%			13.6	%			12.0	%			8.7	%			—				9.2	%
Combined ratio			90.5	%			33.9	%			110.3	%			55.2	%			80.5	%			80.9	%			92.9	%			81.9	%
Reserve for losses and loss expenses		$	391,239			$	60,699			$	606,885			$	95,659			$	377,968			$	304,684			$	(13,593	)		$	1,823,541


	(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

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5.	Segment reporting, cont'd.

The following table reconciles total segment results to income before income taxes for the three months ended June 30, 2006 and 2005, respectively:



	2006				2005
Total underwriting income		$	11,058			$	79,657
Net investment income			59,209				39,133
Net foreign exchange gains (losses)			11,997				(1,742	)
Net realized (losses) gains on sales of investments			(8,729	)			592
Amortization of intangibles			(1,158	)			(1,158	)
Interest expense			(7,459	)			(5,612	)
Income before income taxes		$	64,918			$	110,870

The following table provides a summary of the segment revenues, results and reserve for losses and loss expenses for the six months ended June 30, 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
Revenues
Gross premiums written		$	172,478			$	201,330			$	284,895			$	81,164			$	158,216			$	269,812			$	(145,261	)		$	1,022,634
Net premiums written			172,478				201,330				278,182				37,389				142,484				265,085				(145,261	)			951,687
Net premiums earned			187,970				110,778				270,778				39,442				139,337				185,507				(106,928	)			826,884
Other underwriting income			—				—				—				—				—				—				1,509				1,509
			187,970				110,778				270,778				39,442				139,337				185,507				(105,419	)			828,393
Expenses
Losses and loss expenses			123,552				60,373				145,184				17,886				93,889				139,565				(72,272	)			508,177
Acquisition expenses			46,601				15,481				75,517				2,018				6,721				38,467				(34,276	)			150,529
General and administrative expenses			13,468				15,043				19,683				9,530				15,726				18,273				—				91,723
			183,621				90,897				240,384				29,434				116,336				196,305				(106,548	)			750,429
Underwriting income (loss)		$	4,349			$	19,881			$	30,394			$	10,008			$	23,001			$	(10,798	)		$	1,129			$	77,964
Loss ratio			65.7	%			54.5	%			53.6	%			45.3	%			67.4	%			75.2	%			67.6	%			61.5	%
Acquisition expense ratio			24.8	%			14.0	%			27.9	%			5.1	%			4.8	%			20.7	%			32.0	%			18.2	%
General and administrative expense ratio			7.2	%			13.6	%			7.3	%			24.2	%			11.3	%			9.9	%			—				11.1	%
Combined ratio			97.7	%			82.1	%			88.8	%			74.6	%			83.5	%			105.8	%			99.6	%			90.8	%
Reserve for losses and loss expenses		$	527,290			$	213,445			$	803,130			$	200,810			$	560,700			$	577,713			$	(100,285	)		$	2,782,803


	(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

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5.	Segment reporting, cont'd.

The following table provides a summary of the segment revenues, results and reserve for losses and loss expenses for the six months ended June 30, 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
Revenues
Gross premiums written		$	270,632			$	178,264			$	283,293			$	59,306			$	152,769			$	248,273			$	(86,857	)		$	1,105,680
Net premiums written			270,558				178,264				280,831				55,560				151,300				244,112				(86,857	)			1,093,768
Net premiums earned			233,072				120,825				224,362				53,514				124,106				144,220				(24,580	)			875,519
Other underwriting income			—				—				—				—				—				—				1,289				1,289
			233,072				120,825				224,362				53,514				124,106				144,220				(23,291	)			876,808
Expenses
Losses and loss expenses			107,526				17,306				158,535				47,290				77,684				86,140				(14,506	)			479,975
Acquisition expenses			64,404				15,889				59,750				6,447				7,949				29,684				(8,014	)			176,109
General and administrative expenses			15,214				10,683				17,145				5,809				10,752				14,375				—				73,978
			187,144				43,878				235,430				59,546				96,385				130,199				(22,520	)			730,062
Underwriting income (loss)		$	45,928			$	76,947			$	(11,068	)		$	(6,032	)		$	27,721			$	14,021			$	(771	)		$	146,746
Loss ratio			46.1	%			14.3	%			70.7	%			88.4	%			62.6	%			59.7	%			59.0	%			54.8	%
Acquisition expense ratio			27.7	%			13.2	%			26.6	%			12.0	%			6.4	%			20.6	%			32.6	%			20.1	%
General and administrative expense ratio			6.5	%			8.8	%			7.6	%			10.9	%			8.7	%			10.0	%			—				8.5	%
Combined ratio			80.3	%			36.3	%			104.9	%			111.3	%			77.7	%			90.3	%			91.6	%			83.4	%
Reserve for losses and loss expenses		$	391,239			$	60,699			$	606,885			$	95,659			$	377,968			$	304,684			$	(13,593	)		$	1,823,541


	(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

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5.	Segment reporting, cont'd.

The following table reconciles total segment results to income before income taxes for the six months ended June 30, 2006 and 2005, respectively:



	2006				2005
Total underwriting income		$	77,964			$	146,746
Net investment income			119,683				78,444
Net foreign exchange gains (losses)			14,883				(4,163	)
Net realized losses on sales of investments			(12,059	)			(3,861	)
Amortization of intangibles			(2,316	)			(2,378	)
Interest expense			(14,985	)			(11,083	)
Income before income taxes		$	183,170			$	203,705


6.	Commitments and contingencies

Concentrations of credit risk. As of June 30, 2006, substantially all the Company’s cash and investments were held by three custodians. The Company’s investment guidelines limit the amount of credit exposure to any one issuer other than the U.S. Treasury and certain other foreign government obligations rated AAA.

Major production sources. During the six month period ended June 30, 2006 and 2005, the Company obtained 73.8% and 71.3% of its gross premiums written before deposit accounting adjustments through four brokers, respectively: Marsh & McLennan Companies, Inc. – 24.9% (2005 – 25.2%); Aon Corporation – 22.9% (2005 – 24.9%); Willis Companies – 15.9% (2005 – 10.5%); and Benfield Group – 10.1% (2005 – 10.7%).

Letters of credit. As of June 30, 2006, the Company had issued on its behalf letters of credit of $477.0 million (December 31, 2005 – $374.8 million) under its credit facility in favor of certain ceding companies.

Investment commitments. As of June 30, 2006 and December 31, 2005, the Company had committed cash and cash equivalents and fixed maturity investments of $266.7 million and $230.4 million in favor of certain ceding companies to collateralize obligations, respectively. As of June 30, 2006 and December 31, 2005, the Company had also pledged $454.6 million and $417.1 million of its fixed maturity investments as collateral to secure $416.8 million and $371.1 million in letters of credit outstanding under its credit facility, respectively. In addition, at June 30, 2006 and December 31, 2005, cash and fixed maturity investments with fair values of $36.4 million and $28.5 million were on deposit with U.S. state regulators, respectively and $29.7 million and $26.7 million were on deposit with Canadian regulators, respectively.

The Company is subject to certain commitments with respect to the investments in other ventures at June 30, 2006. Of the balance outstanding at June 30, 2006, the Company is subject to redemption restriction provisions of between two to three years from the date of acquisition. At June 30, 2006, the Company was committed to investing a further $4.5 million in alternative investment funds.

Employment agreements. The Company has entered into employment agreements with certain officers that provide for option awards, executive benefits and severance payments under certain circumstances.

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6.	Commitments and contingencies, cont'd.

Operating Leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at June 30, 2006 are as follows:


Year Ended June 30,	Amount
2007		$	8,546
2008			9,298
2009			9,266
2010			8,741
2011			10,915
2012 and thereafter			38,773
		$	85,539

Total rent expense under operating leases for the six month period ended June 30, 2006 was $4.8 million (2005 – $3.4 million).

Legal Proceedings. The Company is party to various legal proceedings generally arising in the normal course of its business. While any legal proceeding contains an element of uncertainty, the Company does not believe that the eventual outcome of any litigation or arbitration proceeding to which it is presently a party could have a material adverse effect on its financial condition or business. Pursuant to the Company’s insurance and reinsurance agreements, disputes are generally required to be finally settled by arbitration.


7.	Subsequent events

In order to protect the Company against the risk of a severe catastrophe event or the occurrence of multiple significant catastrophe events, Endurance Bermuda acquired $235 million of multi-year, collateralized catastrophe reinsurance from Shackleton Re Limited (‘‘Shackleton’’), a Cayman Island reinsurance company during the third quarter of 2006. On August 1, 2006, Shackleton financed the reinsurance coverage provided to Endurance Bermuda through the issuance of a $125 million risk-linked catastrophe bond pursuant to Rule 144A under the Securities Act of 1933 and the entrance into a $110 million multi-year risk-linked credit facility.

The reinsurance consists of three separate coverages. The first coverage is $125 million of reinsurance for earthquake risk in California from August 1, 2006 through January 31, 2008. The second coverage consists of $60 million of protection for hurricanes in the U.S. Northeast, Gulf Coast and certain inland states. The final coverage provides $50 million of reinsurance for losses resulting from hurricanes or California earthquakes following occurrence of a major hurricane or California earthquake. The second and third coverages provide protection from August 1, 2006 through July 31, 2008.

The reinsurance coverage provided by Shackleton to Endurance Bermuda was based on a modeled loss trigger designed to closely mimic the exposures in the Company’s portfolio of insurance and reinsurance business. Upon the occurrence of a hurricane or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss exceeds the designated attachment point for the peril at issue, then Endurance Bermuda may make a recovery under the applicable reinsurance agreement. The amount recoverable is related to and limited by the Company’s ultimate net loss from the loss event. The modeled loss trigger is reset to reflect any applicable changes in the Company’s portfolio of insurance and reinsurance business on July 31, 2007.

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7.	Subsequent events, cont'd.

Shackleton is a variable interest entity under the provisions of FASB Interpretation No. 46, ‘‘Consolidation of Variable Interest Entities’’. The Company is not the primary beneficiary of Shackleton and is therefore not required to consolidate Shackleton in its consolidated financial statements.

The Company has also purchased retrocessional reinsurance coverage at various retention levels in addition to the coverage obtained in the above noted catastrophe bond and loan transactions.

On August 2, 2006, Endurance Holdings' Board of Directors declared quarterly dividends of $0.25 per share payable on its ordinary shares and $0.484375 per share payable on its Series A Preferred Shares. The dividend on Endurance Holdings' outstanding ordinary shares will be payable on September 29, 2006 to the ordinary shareholders of record on September 15, 2006 and the dividend on the Series A Preferred Shares will be payable on September 15, 2006 to the Series A Preferred shareholders of record on September 1, 2006.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of the financial condition and results of operations for the three and six month periods ended June 30, 2006 of Endurance Specialty Holdings Ltd. (‘‘Endurance Holdings’’) and its wholly owned subsidiaries (collectively, the ‘‘Company’’). This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q as well as the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2005, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in Endurance Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the ‘‘2005 Annual Report on Form 10-K’’).

Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to the Company’s plans and strategy for its business, includes forward looking statements that involve risk and uncertainties. Please see the section ‘‘Cautionary Statement Regarding Forward-Looking Statements’’ below for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the ‘‘Risk Factors’’ set forth in the 2005 Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Overview

Endurance Holdings underwrites specialty lines of insurance and reinsurance on a global basis primarily through its five wholly-owned operating subsidiaries: Endurance Specialty Insurance Ltd. (‘‘Endurance Bermuda’’), based in Bermuda; Endurance Worldwide Insurance Limited (‘‘Endurance U.K.’’), based in London, England; Endurance Reinsurance Corporation of America (‘‘Endurance U.S. Reinsurance’’), based in New York; Traders & Pacific Insurance Company (‘‘Traders & Pacific’’) and Core Insurance Company (‘‘Core’’ and together with Traders & Pacific, ‘‘Endurance U.S. Insurance’’), both based in New York.

The Company writes specialty lines of commercial property, casualty and surety insurance and reinsurance on a global basis, and seeks to create a portfolio of specialty lines which are profitable and have limited correlation with one another. The Company’s portfolio of specialty lines of business is organized into the following segments: Property Per Risk Treaty Reinsurance, Property Catastrophe Reinsurance, Casualty Treaty Reinsurance, Property Individual Risk, Casualty Individual Risk, and Aerospace and Other Specialty Lines.

The insurance lines that the Company writes are included in the Property Individual Risk, Casualty Individual Risk, and Aerospace and Other Specialty Lines segments. The reinsurance lines that the Company writes are included in the Property Per Risk Treaty Reinsurance, Property Catastrophe Reinsurance, Casualty Treaty Reinsurance, and Aerospace and Other Specialty Lines segments.

Property insurance and reinsurance provides coverage of an insurable interest in tangible property for property loss, damage or loss of use. The Company writes property lines through its Property Per Risk Treaty Reinsurance, Property Catastrophe Reinsurance, Property Individual Risk and Aerospace and Other Specialty Lines segments.

Casualty insurance and reinsurance is primarily concerned with the losses caused by injuries to third parties, i.e., not the insured, or to property owned by third parties and the legal liability imposed on the insured resulting therefrom. It includes, but is not limited to, employers’ liability, workers’ compensation, public liability, automobile liability, personal liability, marine liability and aviation liability insurance. The Company writes casualty lines through its Casualty Treaty Reinsurance, Casualty Individual Risk, and Aerospace and Other Specialty Lines segments.

Surety involves the issuance or reinsurance of bonds that provide financial remuneration in the event that an obligor fails to meet its contractual obligations to an obligee. Surety products include

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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.

Application of Critical Accounting Estimates

The Company’s condensed consolidated financial statements are based on the selection of accounting policies and application of significant accounting estimates which require management to make significant estimates and assumptions. The Company believes that some of the more critical judgments in the areas of accounting estimates and assumptions that affect its financial condition and results of operations are related to the recognition of premiums written and ceded and the reserve 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 with the exception of changes in the Company’s reserve for losses and loss expenses and other-than-temporary impairment of investments policies as updated below. 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.

Reserve for Losses and Loss Expenses. The reserve for losses and loss expenses includes case reserves and reserves for unpaid reported losses and losses incurred but not reported (‘‘IBNR’’). Case reserves are generally based upon the amount of reserves recommended by the ceding company, but may be increased when it is determined by the Company that the size and severity of the loss differs from that reported by the ceding company. The reserve for unpaid reported losses and loss expenses is established by management based on reports from reinsurance intermediaries, ceding companies and insureds and consultations with independent legal counsel, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. The reserve for IBNR losses and loss expenses is established by management based on reported losses and loss expenses and estimates of ultimate losses and loss expenses.

The reserve for losses and loss expenses are initially estimated by the Company using information either developed by the Company from internal or independent external sources, or by using pricing information created by the Company or provided to the Company by insureds and brokers at the time individual contracts and policies are bound. In addition, the Company incorporates commercially available models, contract by contract review by our experienced underwriters, and to a limited extent, overall market share assumptions for specific loss events, to estimate our losses and loss expense reserves. In the Company’s assumed reinsurance business within the Property Per Risk Treaty Reinsurance, Property Catastrophe Reinsurance, Casualty Treaty Reinsurance and Aerospace and Other Specialty Lines segments, the Company estimates the reserve for losses and loss expenses by relying upon available industry data, as well as its own historical data for property lines and the ceding company’s operations and loss history, including historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided, loss reporting and payment patterns and rate change history. The information gathered by the Company is used to develop individual point estimates of carried reserves for each business segment. These individual point estimates are then aggregated along with actual losses reported to reach the total reserve carried in the Company’s consolidated financial statements. All of the Company’s loss reserving is currently performed on a point estimate basis. The Company does not utilize range estimation in the loss reserving process.

Since inception, the Company has used reserving methods that are commonly applied when limited loss development experience exists. However, as the Company progresses and accumulates its own loss reserve history, it becomes more appropriate to incorporate actual loss experience. As of the quarter ended June 30, 2006, the Company believes that its own loss development history in relation to its property lines of business provides a credible basis on which to estimate its reserves. As such, the Company’s actual reporting patterns were considered when determining the reserve for losses and loss expenses in the Property Per Risk Treaty Reinsurance, Property Catastrophe Reinsurance, and Property Individual Risk segments.

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The Company continues to use a variety of methods in establishing the reserve for losses and loss expenses. One method is the expected loss ratio approach which is based on expected results independent of current reporting activity. This approach is typically used for immature loss periods (i.e., current accident year). A second methodology, known as the Bornheuter-Ferguson method, establishes an initial loss estimate (expected loss technique) for each underwriting quarter by segment and type of contract. The portion of the initial loss estimate that is the IBNR reserve is then reduced each subsequent quarter by an amount equal to the amount of losses expected to be reported for that business segment during that quarter. Over time, the IBNR reserve will be reduced to zero and be replaced with the actual losses reported to the Company. The Company uses these multiple methods, supplemented with its own actuarial and professional judgment, to establish its best estimate of the reserve for losses and loss expenses.

The most significant assumptions used for the three and six month periods ended June 30, 2006 to estimate the reserve for losses and loss expenses are as follows:

1. the information developed from internal and independent external sources can be used to develop meaningful estimates of the likely future performance of business bound by the Company;

2. the loss and exposure information provided by ceding companies, insureds and brokers in support of their submissions can be used to derive meaningful estimates of the likely future performance of business bound with respect to each contract and policy;

3. historic loss development and trend experience is assumed to be indicative of future loss development and trends; and

4. no significant emergence of losses or types of losses that are not represented in the information supplied to the Company by its brokers, ceding companies and insureds will occur.

The above four assumptions significantly influence the Company’s determination of expected loss ratios and related loss reporting patterns that are the key inputs which impact potential variability in the estimate of the reserve for losses and loss expenses. While there can be no guarantee that any of the above assumptions will prove to be correct, management believes that these assumptions represent a realistic and appropriate basis for estimating the reserve for losses and loss expenses.

For the Company’s assumed reinsurance business, the Company relies on claims and loss expense information provided to it by its ceding company counterparties to establish its case reserves. In order to verify the accuracy and completeness of such information, the Company’s underwriters, actuaries, accounting and claims personnel perform claims and underwriting reviews of the Company’s ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserve. On occasion, the Company’s reviews reveal that the ceding company’s reported losses and loss expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instances where an amicable solution is not feasible, the Company’s position is to vigorously defend its position in litigation or arbitration. As of June 30, 2006 and December 31, 2005, the Company was not involved in any material claims litigation or arbitration proceedings.

Several aspects of the Company’s casualty insurance and reinsurance operations complicate the process of estimating loss reserves as compared to other insurance and reinsurance operations. Among these aspects are the differences in the Company’s policy forms compared to more traditional forms, the lack of complete historical data for losses of the same type intended to be covered by the policies and contracts written by the Company, and the expectation that a portion of losses in excess of the Company’s attachment levels in many of its contracts will be low in frequency and high in severity, limiting the usefulness of claims experience of other insurers and reinsurers for similar claims. In addition, the inherent uncertainties of estimating the Company’s reserves for its reinsurance business increases principally due to: (i) the lag in time between the time claims are reported to the ceding company and the time they are reported through one or more reinsurance broker intermediaries to a reinsurer, (ii) the differing reserving practices among ceding companies, (iii) the diversity of loss

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development patterns among different types of reinsurance treaties or contracts and (iv) a reinsurer’s reliance on the ceding companies for loss information. As at June 30, 2006, the Company’s reserve for losses and loss expenses in its reinsurance business was $1.9 billion.

Backlogs in the recording of the Company’s assumed reinsurance business can also impair the accuracy of its loss reserve estimates. As of June 30, 2006 and December 31, 2005, there were no significant backlogs related to the processing of assumed reinsurance information at the Company.

The time period over which all losses are expected to be reported to the Company varies significantly by line of business. This period can range from a few quarters for some lines, such as property catastrophe, to many years for some casualty lines. To the extent that actual reported losses for specific lines of business and segments exceed expected reported losses, the carried estimate of ultimate loss will be correspondingly increased, and to the extent that actual reported losses are less than expected reported losses, the carried estimate of ultimate losses will be reduced. Moreover, the Company assumes in its loss reserving process that, on average, such time periods between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time. For the Company’s reinsurance business, due to ceding company and reinsurance intermediary reporting patterns, the time period is generally longer than for its insurance business segments, resulting in reliance by the Company for a longer period of time on its actuarial estimates of losses and loss reserves.

During the period between the recording of expected losses and the reporting of actual losses from insureds and ceding companies, additional facts and trends may be revealed to the Company. As these facts and trends become apparent, case reserves will be adjusted, sometimes requiring an increase in the overall reserves of the Company, and at other times requiring a reallocation of IBNR reserves to case reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new reserves or the adjustment of previously recorded reserves could result in significant positive or negative changes to the Company’s financial condition for any particular period. While management believes that it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance and reinsurance operations, and it is possible that losses and loss expenses will exceed the total reserves.

The reserve for losses and loss expenses is based in part upon the estimation of losses resulting from catastrophic events. Estimation of the losses and loss expenses resulting from catastrophic events based upon the Company’s historical claims experience is inherently difficult because of the Company’s short operating history and the possible severity of catastrophe claims. Therefore, the Company utilizes both proprietary and commercially-available models, as well as historical reinsurance industry catastrophe claims experience, for purposes of evaluating future trends and providing an estimate of ultimate claims costs.

Under accounting principles generally accepted in the United States (‘‘U.S. GAAP’’), the Company is not permitted to establish loss reserves until the occurrence of an actual loss event. Once such an event occurs, the Company establishes reserves based upon estimates of total losses incurred by the ceding companies or insureds as a result of the event, its estimate of the potential losses incurred, and its estimate of the portion of such loss the Company has insured or reinsured. As a result, only loss reserves applicable to losses incurred up to the reporting date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. Losses arising from future events will be estimated and recognized at the time the loss is incurred and could be substantial.

Because of the above factors, 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.

Results for the three and six month periods ended June 30, 2006 included $21.6 million of unfavorable and $21.0 million of favorable development of prior year reserve for losses and loss expenses, respectively. See ‘‘Reserve for losses and loss expenses’’ below for further discussion.

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Other-than-Temporary Impairment of Investments. The Company regularly evaluates the fair value of its investments to determine if they are other-than-temporarily-impaired. The key factors considered are 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. If the decline in fair value is determined to be other-than-temporary, the cost of the security is written down to fair value and the amount is included in realized gains (losses) on sales of investments in the consolidated statements of income and comprehensive income. In contrast, the unrealized losses for securities which are determined to be temporarily impaired are reflected in comprehensive income (loss) in the consolidated statement of income and comprehensive income while the accumulation of unrealized gains (losses) on investments is reflected in accumulated other comprehensive income (loss) in the consolidated balance sheet. With respect to securities where the decline in fair value is determined to be temporary, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions to sell a security where the Company had previously intended to hold the security to recovery are based on new information that arises and is consistent with the dynamic nature of portfolio management. Such sales of securities are not considered to contradict the Company’s assertion regarding the intent to hold the securities to recovery.

During the three months ended June 30, 2006, the Company identified 25 fixed maturity securities with fair values totaling $213.4 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 $4.8 million on these securities.

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Consolidated results of operations — for the three month period ended June 30, 2006 and 2005

Results of operations for the three months ended June 30, 2006 and 2005 were as follows:


	2006				2005				Change ⁽¹⁾
Underwriting income	(in thousands, except for ratios)
Revenues
Gross premiums written		$	451,253			$	403,189			11.9	%
Net premiums written			408,678				394,590			3.6	%
Net premiums earned			406,678				437,921			(7.1	%)
Other underwriting (loss) income			(1,992	)			418		NM⁽²⁾
			404,686				438,339			(7.7	%)
Expenses
Losses and loss expenses			269,445				228,916			17.7	%
Acquisition expenses			76,758				89,334			(14.1	%)
General and administrative expenses			47,425				40,432			17.3	%
			393,628				358,682			9.7	%
Underwriting income⁽³⁾			11,058				79,657			(86.1	%)
Net investment income			59,209				39,133			51.3	%
Net foreign exchange gains (losses)			11,997				(1,742	)	NM⁽²⁾
Net realized (losses) gains on sales of investments			(8,729	)			592		NM⁽²⁾
Amortization of intangibles			(1,158	)			(1,158	)		—
Interest expense			(7,459	)			(5,612	)		32.9	%
Income tax expense			(868	)			(853	)		1.8	%
Net income		$	64,050			$	110,017			(41.8	%)
Loss ratio			66.3	%			52.3	%		14.0
Acquisition expense ratio			18.9	%			20.4	%		(1.5	)
General and administrative expense ratio			11.6	%			9.2	%		2.4
Combined ratio			96.8	%			81.9	%		14.9


(1)	With respect to ratios, changes show increase or decrease in percentage points.


(2)	Not meaningful.

(3)

Underwriting income is an internal performance measure used by the Company in the management of its operations. Underwriting income represents results of the Company’s underwriting segments. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing underwriting income enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results of operations in a manner similar to how management analyzes the Company’s performance. Underwriting income is a non-U.S. GAAP measure and should not be viewed as a substitute for U.S. GAAP net income.

Premiums. The increase in gross premiums written during the quarter ended June 30, 2006 compared to the same period in 2005 was due to price increases on catastrophe exposed lines in the Property Catastrophe Reinsurance and Property Individual Risk segments and from continued growth in our specialty and treaty casualty reinsurance lines. Offsetting these increases was a decline in Property Per Risk Treaty Reinsurance, where the Company strategically did not renew approximately $48 million of premiums related to several large underperforming accounts.

Premiums ceded in the quarter ended June 30, 2006 increased over the same period in 2005 due to the continued growth of the Property Individual Risk and Casualty Individual Risk segments. The Company also ceded additional premiums in relation to its Casualty Treaty Reinsurance and Aerospace and Other Specialty Lines segments. These additional purchases of reinsurance were made to strategically manage the Company’s overall risk exposures and to enhance the Company’s ability to withstand extreme loss events.

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Net premiums earned in the second quarter of 2006 decreased from the same period in the prior year primarily due to an increase in the level of ceded earned premium of $21.5 million.

Net Investment Income. Net investment income was derived primarily from interest earned on fixed maturity investments and earnings from the Company’s investments in other ventures, partially offset by investment management fees and other investment expenses. The increase in net investment income in the second quarter of 2006 was principally due to an increase in cash and investments from June 30, 2005 to June 30, 2006 of 20.8%. This increase resulted from positive net operating cash flows throughout the last twelve months and a general increase in investment yields. Investment expenses for the three months ended June 30, 2006 were $1.7 million compared to $1.6 million for the same period in 2005.

The annualized 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 June 30, 2006 were 4.62% and 0.88%, respectively. For the three months ended June 30, 2005, the annualized period net earned yield and total return were 3.79% and 7.44%, respectively. The Company has moderately increased its absolute cash position from March 31, 2006 to June 30, 2006. The increase in cash and cash equivalents has decreased the portfolio’s overall duration to 2.64 years from 2.66 years at March 31, 2006 and 2.72 years at December 31, 2005. Overall, the annualized period book yield of the portfolio has increased due to the addition of higher yielding spread securities and the positive earnings from the Company’s investments in other ventures experienced during the second quarter.

Losses and Loss Expenses. The reported loss ratio for the three months ended June 30, 2006 was impacted by unfavorable loss reserve development on 2005 accident year loss reserves offset by favorable loss reserve development on all other accident years.

During the three months ended June 30, 2006, the Company increased its loss reserves related to prior years, which resulted in overall unfavorable loss reserve development in the quarter of $21.6 million compared to $27.7 million of favorable loss reserve development for the same period in 2005. Unfavorable loss reserve development for the three months ended June 30, 2006 was primarily due to increased claims from Hurricanes Katrina, Rita and Wilma (the ‘‘2005 Hurricanes’’) and a corresponding increase in the expected ultimate losses from these storms, which resulted in an $84.0 million increase to the Company’s estimated ultimate losses and loss expenses for these events during the three months ended June 30, 2006. The unfavorable loss reserve development on the 2005 Hurricanes impacted the Company’s Property Per Risk Treaty Reinsurance, Treaty Catastrophe Reinsurance and Aerospace and Other Specialty Lines segments. The estimated losses from the 2005 Hurricanes continue to be subjected to considerable uncertainty due to the extent of damage caused, the delay in adjusting losses in the affected areas and related coverage issues associated with the attribution of losses to wind or flood damage. Overall unfavorable loss reserve development on the 2005 accident year was partially offset by favorable loss reserve development of $62.4 million across all accident years and business segments.

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. 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

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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’’ above 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 June 30, 2006 increased principally due to the growth in the U.S. insurance operations. At June 30, 2006, the Company had 418 employees compared to 344 employees at June 30, 2005.

Underwriting results by operating segments

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.

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The following table summarizes the underwriting results and associated ratios for the Company’s six business segments for the three month period ended June 30, 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		$	49,998			$	100,526			$	79,426			$	52,590			$	106,633			$	108,192			$	(46,112	)		$	451,253
Net premiums written			49,998				100,526				74,716				26,699				96,482				106,369				(46,112	)			408,678
Net premiums earned			89,861				57,380				119,731				18,384				69,969				101,524				(50,171	)			406,678
Other underwriting income			—				—				—				—				—				—				(1,992	)			(1,992	)
			89,861				57,380				119,731				18,384				69,969				101,524				(52,163	)			404,686
Expenses
Losses and loss expenses			83,117				27,668				59,224				23,347				46,821				70,267				(40,999	)			269,445
Acquisition expenses			26,506				7,670				32,995				729				3,364				19,200				(13,706	)			76,758
General and administrative expenses			6,019				8,470				7,847				5,753				10,195				9,141				—				47,425
			115,642				43,808				100,066				29,829				60,380				98,608				(54,705	)			393,628
Underwriting income (loss)		$	(25,781	)		$	13,572			$	19,665			$	(11,445	)		$	9,589			$	2,916			$	2,542			$	11,058
Loss ratio			92.5	%			48.2	%			49.5	%			127.0	%			66.9	%			69.2	%			81.7	%			66.3	%
Acquisition expense ratio			29.5	%			13.4	%			27.6	%			4.0	%			4.8	%			18.9	%			27.3	%			18.9	%
General and administrative expense ratio			6.7	%			14.7	%			6.5	%			31.3	%			14.6	%			9.0	%			—				11.6	%
Combined ratio			128.7	%			76.3	%			83.6	%			162.3	%			86.3	%			97.1	%			109.0	%			96.8	%


(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

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The following table provides a summary of the segment revenues and results for the three months ended June 30, 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		$	99,342			$	67,574			$	31,750			$	35,932			$	105,079			$	64,747			$	(1,235	)		$	403,189
Net premiums written			99,268				67,574				31,048				32,410				103,520				62,005				(1,235	)			394,590
Net premiums earned			114,487				61,926				106,317				26,318				63,642				79,154				(13,923	)			437,921
Other underwriting income			—				—				—				—				—				—				418				418
			114,487				61,926				106,317				26,318				63,642				79,154				(13,505	)			438,339
Expenses
Losses and loss expenses			62,996				6,536				79,398				7,958				40,233				40,425				(8,630	)			228,916
Acquisition expenses			31,981				8,593				29,996				2,977				3,325				16,764				(4,302	)			89,334
General and administrative expenses			8,599				5,877				7,840				3,585				7,659				6,872				—				40,432
			103,576				21,006				117,234				14,520				51,217				64,061				(12,932	)			358,682
Underwriting income (loss)		$	10,911			$	40,920			$	(10,917	)		$	11,798			$	12,425			$	15,093			$	(573	)		$	79,657
Loss ratio			55.0	%			10.5	%			74.7	%			30.3	%			63.2	%			51.1	%			62.0	%			52.3	%
Acquisition expense ratio			28.0	%			13.9	%			28.2	%			11.3	%			5.3	%			21.1	%			30.9	%			20.4	%
General and administrative expense ratio			7.5	%			9.5	%			7.4	%			13.6	%			12.0	%			8.7	%			—				9.2	%
Combined ratio			90.5	%			33.9	%			110.3	%			55.2	%			80.5	%			80.9	%			92.9	%			81.9	%


(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

Property 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 June 30, 2006 and 2005, respectively.

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	THREE MONTHS ENDED
	June 30, 2006				June 30, 2005				Change⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	49,998			$	99,342			(49.7	%)
Net premiums written			49,998				99,268			(49.6	%)
Net premiums earned			89,861				114,487			(21.5	%)
Expenses
Losses and loss expenses			83,117				62,996			31.9	%
Acquisition expenses			26,506				31,981			(17.1	%)
General and administrative expenses			6,019				8,599			(30.0	%)
			115,642				103,576			11.6	%
Underwriting income		$	(25,781	)		$	10,911		NM⁽²⁾
Loss ratio			92.5	%			55.0	%		37.5
Acquisition expense ratio			29.5	%			28.0	%		1.5
General and administrative expense ratio			6.7	%			7.5	%		(0.8	)
Combined ratio			128.7	%			90.5	%		38.2


(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 June 30, 2006 was due to strategic nonrenewals of approximately $48 million in premiums related to certain large underperforming contracts. At renewal, the pricing, terms and conditions on these contracts no longer met the Company’s underwriting requirements.

Losses and Loss Expenses. The loss ratio in the three months ended June 30, 2006 increased from the corresponding period for 2005 due to unfavorable loss reserve development of $20.6 million in the current period as compared to $12.0 million of favorable loss reserve development in the quarter ended June 30, 2005. Current quarter unfavorable loss reserve development was impacted by an increase in the Company’s estimated ultimate loss for the 2005 Hurricanes in this segment of $24.8 million. Favorable loss reserve development on all other prior year reserves partially offset this adverse development by $4.2 million. In addition, the Company had a few contracts that reported higher than expected losses during the quarter.

Acquisition Expenses. The acquisition cost ratio for the three months ended June 30, 2006 was largely consistent compared to the same period in 2005.

General and Administrative Expenses. General and administrative expenses have declined between the two periods reflecting a smaller allocation of corporate expenses commensurate with the lower level of gross premiums written.

Property 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 June 30, 2006 and 2005, respectively.

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	THREE MONTHS ENDED
	June 30, 2006				June 30, 2005				Change ⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	100,526			$	67,574			48.8	%
Net premiums written			100,526				67,574			48.8	%
Net premiums earned			57,380				61,926			(7.3	%)
Expenses
Losses and loss expenses			27,668				6,536			323.3	%
Acquisition expenses			7,670				8,593			(10.7	%)
General and administrative expenses			8,470				5,877			44.1	%
			43,808				21,006			108.5	%
Underwriting income		$	13,572			$	40,920			(66.8	%)
Loss ratio			48.2	%			10.5	%		37.7
Acquisition expense ratio			13.4	%			13.9	%		(0.5	)
General and administrative expense ratio			14.7	%			9.5	%		5.2
Combined ratio			76.3	%			33.9	%		42.4


(1)	With respect to ratios, changes show increase or decrease in percentage points.

Premiums. The increase in gross premiums written for the three months ended June 30, 2006 over the same period in 2005 was largely due to pricing increases on programs with U.S. catastrophe exposures. Pricing increases accounted for $16.9 million in additional premiums for the quarter ended June 30, 2006 over those reflected in the same period of 2005. In addition, new business outpaced nonrenewals by approximately $13 million.

Losses and Loss Expenses. The loss ratio in the three months ended June 30, 2006 increased from the corresponding period in 2005 due to unfavorable loss reserve development of $26.5 million for the three months ended June 30, 2006 as compared to $2.1 million of favorable loss reserve development in the quarter ended June 30, 2005. Current quarter unfavorable loss reserve development was impacted by an increase in the Company’s estimated ultimate loss for the 2005 Hurricanes of $35.6 million. Favorable loss reserve development of $9.1 million on all other prior year reserves partially offset this adverse development. The current accident year loss ratio for this business segment reflects the absence of significant loss events in the second quarter of 2006 or 2005.

Acquisition Expenses. The acquisition expense ratio for the three months ended June 30, 2006 was largely unchanged from the corresponding prior year period.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2006 increased due to an increase in corporate allocated expenses as a result of the increase in gross premiums written.

Casualty 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 June 30, 2006 and 2005, respectively.

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	THREE MONTHS ENDED
	June 30, 2006				June 30, 2005				Change⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	79,426			$	31,750			150.2	%
Net premiums written			74,716				31,048			140.6	%
Net premiums earned			119,731				106,317			12.6	%
Expenses
Losses and loss expenses			59,224				79,398			(25.4	%)
Acquisition expenses			32,995				29,996			10.0	%
General and administrative expenses			7,847				7,840			0.1	%
			100,066				117,234			(14.6	%)
Underwriting (loss) income		$	19,665			$	(10,917	)	NM⁽²⁾
Loss ratio			49.5	%			74.7	%		(25.2	)
Acquisition expense ratio			27.6	%			28.2	%		(0.6	)
General and administrative expense ratio			6.5	%			7.4	%		(0.9	)
Combined ratio			83.6	%			110.3	%		(26.7	)


(1)	With respect to ratios, changes show increase or decrease in percentage points.


(2)	Not meaningful.

Premiums. The increase in gross premiums written was in large part due to the increase in workers’ compensation gross premiums written at Endurance U.S. Reinsurance of $35.6 million during the second quarter of 2006 over those written in the second quarter of 2005. Workers’ compensation gross premiums written increased due to the renewal of a contract during the quarter that was originally written in the first quarter of 2005 and additional premiums recorded due to changes in premium estimates. In addition, Endurance Bermuda increased limits on a large casualty treaty contract in the second quarter of 2006 which resulted in $5.9 million of additional gross premiums written. The growth in premiums earned was in line with the historical growth of gross premiums written.

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 loss ratio for the three months ended June 30, 2006 was a result of decreases in prior year loss reserves of $13.1 million compared to $9.7 million of unfavorable loss reserve development for the corresponding period in 2005. Prior year reserves were decreased in the second quarter of 2006 as claims have not emerged as originally estimated by the Company.

Acquisition Expenses. The acquisition cost ratio for the three months ended June 30, 2006 was largely consistent compared to the same period in 2005.

General and Administrative Expenses. General and administrative expense ratio for the three months ended June 30, 2006 decreased as net earned premium has increased by 12.6%. General and administrative expenses in total were consistent between the two periods.

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 June 30, 2006 and 2005, respectively.

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	THREE MONTHS ENDED
	June 30, 2006				June 30, 2005				Change⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	52,590			$	35,932			46.4	%
Net premiums written			26,699				32,410			(17.6	)%
Net premiums earned			18,384				26,318			(30.1	)%
Expenses
Losses and loss expenses			23,347				7,958			193.4	%
Acquisition expenses			729				2,977			(75.5	%)
General and administrative expenses			5,753				3,585			60.5	%
			29,829				14,520			105.4	%
Underwriting income		$	(11,445	)		$	11,798		NM⁽²⁾
Loss ratio			127.0	%			30.3	%		96.7
Acquisition expense ratio			4.0	%			11.3	%		(7.3	)
General and administrative expense ratio			31.3	%			13.6	%		17.7
Combined ratio			162.3	%			55.2	%		107.1


(1)	With respect to ratios, changes show increase or decrease in percentage points.


(2)	Not meaningful.

Premiums. The increase in premiums written was a result of new business written by the Company’s U.S. insurance operations. The decrease in premiums earned for the three months ended June 30, 2006 as compared to the same period in 2005 resulted from an increase in the amount of gross premiums written which are subsequently ceded in order to strategically manage its overall risk exposures.

Losses and Loss Expenses. The increase in the loss ratio was due to a $19.0 million loss from an industrial fire in Canada. Partially offsetting this loss was favorable loss reserve development of $5.1 million in the three months ended June 30, 2006 compared to favorable prior period loss reserve development of $6.8 million in the three months ended June 30, 2005. Prior year reserves were decreased in the second quarter of 2006 as claims have not emerged as originally estimated by the Company.

General and Administrative Expenses. General and administrative expenses increased in the second quarter of 2006 due to the growth in Endurance U.S. Insurance and higher overall 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 workers’ compensation, 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 June 30, 2006 and 2005, respectively.

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	THREE MONTHS ENDED
	June 30, 2006				June 30, 2005				Change⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	106,633			$	105,079			1.5	%
Net premiums written			96,482				103,520			(6.8	%)
Net premiums earned			69,969				63,642			9.9	%
Expenses
Losses and loss expenses			46,821				40,233			16.4	%
Acquisition expenses			3,364				3,325			1.2	%
General and administrative expenses			10,195				7,659			33.1	%
			60,380				51,217			17.9	%
Underwriting income		$	9,589			$	12,425			(22.8	%)
Loss ratio			66.9	%			63.2	%		3.7
Acquisition expense ratio			4.8	%			5.3	%		(0.5	)
General and administrative expense ratio			14.6	%			12.0	%		2.6
Combined ratio			86.3	%			80.5	%		5.8


(1)	With respect to ratios, changes show increase or decrease in percentage points.

Premiums. The slight increase in gross premiums written in the second quarter of 2006 compared to the same period in 2005 resulted from the growth in Endurance U.S. Insurance and the addition of a large direct worker’s compensation contract at Endurance U.S. Reinsurance, which was previously structured as a reinsurance agreement within the Casualty Treaty Reinsurance segment. Together these increases contributed $17.5 million of additional premiums in the three months ended June 30, 2006. In addition, a modest amount of growth was experienced in professional lines despite competition and pricing pressures. This growth was offset by declines totaling $19.8 million in the excess casualty and healthcare lines where contracts were not renewed as pricing, terms and conditions no longer met the Company’s underwriting requirements. The increase in premiums earned was a result of the continued earning of 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 Company paying a claim. Accordingly, the reserve for losses and loss expenses established by the Company's actuaries is based on historical industry loss data and business segment specific pricing information. This segment is primarily comprised of claims made severity business. While not short tail, this business can generally be expected to report losses within three to seven years. Consequently, in the quarters ended June 30, 2006 and 2005, the Company reduced reserves for expected losses related to prior underwriting periods by $8.0 million and $9.4 million, respectively. The most significant reductions to reserves during the second quarter of 2006 were for expected losses from the 2003 and 2004 accident years where notices of potential losses have not developed as originally expected.

Acquisition Expenses. The acquisition expense ratio for the three months ended June 30, 2006 remained relatively consistent with the same period in 2005.

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.

Aerospace and Other Specialty Lines

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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 June 30, 2006 and 2005, respectively.


	THREE MONTHS ENDED
	June 30, 2006				June 30, 2005				Change⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	108,192			$	64,747			67.1	%
Net premiums written			106,369				62,005			71.5	%
Net premiums earned			101,524				79,154			28.3	%
Expenses
Losses and loss expenses			70,267				40,425			73.8	%
Acquisition expenses			19,200				16,764			14.5	%
General and administrative expenses			9,141				6,872			33.0	%
			98,608				64,061			53.9	%
Underwriting income		$	2,916			$	15,093			(80.7	)%
Loss ratio			69.2	%			51.1	%		18.1
Acquisition expense ratio			18.9	%			21.1	%		(2.2	)
General and administrative expense ratio			9.0	%			8.7	%		0.3
Combined ratio			97.1	%			80.9	%		16.2


	(1) With respect to ratios, changes show increase or decrease in percentage points.

Premiums. The increase in gross premiums written was in large part due to growth in the Company’s agriculture, surety and marine and energy lines of $33.2 million, $8.9 million, and $7.6 million, respectively. Additional agriculture premiums were recorded during the quarter on two large contracts totaling $24.5 million due to new information received. Growth within the marine and energy line resulted from price increases on catastrophe exposed business. Offsetting these increases were declines in the Company’s aerospace and personal accident lines. Premiums earned increased with the continued growth in gross premiums written.

Losses and Loss Expenses. The increase in the loss ratio for the second quarter of 2006 resulted from unfavorable loss reserve development related to the 2005 accident year. Unfavorable loss development for the second quarter of 2006 was $7.6 million as compared to favorable loss reserve development of $7.2 million for the second quarter of 2005. Unfavorable loss reserve development of $20.9 million was recorded in relation to the 2005 Hurricanes and was partially offset by $13.3 million of favorable loss reserve development on all other prior year reserves during the second quarter of 2006.

Acquisition Expenses. The expense ratio for the three months ended June 30, 2006 decreased from the equivalent period in 2005 due to shifts in the mix of business primarily due to agricultural contracts, which generally have lower acquisition cost.

General and Administrative Expenses. The general and administrative expense ratio remained relatively consistent for the three months ended June 30, 2006 as compared to the same period in the prior year.

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Consolidated results of operations — for the six month period ended June 30, 2006 and 2005

Results of operations for the six months ended June 30, 2006 and 2005 were as follows:


	2006				2005				Change⁽¹⁾
	(in thousands, except for ratios)
Underwriting income
Revenues
Gross premiums written		$	1,022,634			$	1,105,680			(7.5	%)
Net premiums written			951,687				1,093,768			(13.0	%)
Net premiums earned			826,884				875,519			(5.6	%)
Other underwriting income			1,509				1,289			17.1
			828,393				876,808			(5.5	%)
Expenses
Losses and loss expenses			508,177				479,975			5.9	%
Acquisition expenses			150,529				176,109			(14.5	%)
General and administrative expenses			91,723				73,978			24.0	%
			750,429				730,062			2.8	%
Underwriting income ⁽³⁾			77,964				146,746			(46.9	%)
Net investment income			119,683				78,444			52.6	%
Net foreign exchange gains (losses)			14,883				(4,163	)	NM⁽²⁾
Net realized losses on sales of investments			(12,059	)			(3,861	)		212.3	%
Amortization of intangibles			(2,316	)			(2,378	)		(2.6	%)
Interest expense			(14,985	)			(11,083	)		35.2	%
Income tax (expense) benefit			(12,084	)			2,571		NM⁽²⁾
Net income		$	171,086			$	206,276			(17.1	%)
Loss ratio			61.5	%			54.8	%		6.7
Acquisition expense ratio			18.2	%			20.1	%		(1.9	)
General and administrative expense ratio			11.1	%			8.5	%		2.6
Combined ratio			90.8	%			83.4	%		7.4


(1)	With respect to ratios, changes show increase or decrease in percentage points.


(2)	Not meaningful.

(3)

Premiums. Gross premiums written during the six months ended June 30, 2006 decreased as compared with the same period in 2005. The decrease in gross premiums written in comparison with 2005 was primarily due to a decline in gross premiums written of $90.8 million within the Property Per Risk Treaty Reinsurance segment. The Company nonrenewed certain contracts in both the first and second quarters of 2006 where pricing, terms, and conditions no longer met the Company’s requirements. Partially offsetting this decrease was increases in gross premiums written in comparison with 2005 in the Property Catastrophe Reinsurance, Property Individual Risk and Aerospace and Other Specialty Lines segments of $23.1 million, $21.9 million and $10.0 million, respectively. These increases were largely due to pricing improvements on catastrophe exposed lines in the Property Catastrophe Reinsurance and Property Individual Risk segments and from continued growth in the Aerospace and Other Specialty Lines segment.

Premiums ceded increased by $59.0 million for the six month period ended June 30, 2006 over the same period in 2005 as a result of continued growth in the Company’s Property Individual Risk and

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Casualty Individual Risk segments. The Company also ceded additional premiums in relation to its Casualty Treaty Reinsurance and Aerospace and Other Specialty Lines segments. These additional purchases of reinsurance have been made by the Company to strategically manage its overall risk exposures and to enhance its ability to withstand extreme loss scenarios.

Net premiums earned decreased in the six months ended June 30, 2006 as a result of the decline in gross premiums written and an increase in ceded premiums.

Net Investment Income. Net investment income was derived primarily from interest earned on fixed maturity investments and earnings from the Company’s investments in other ventures, partially offset by investment management fees and other investment expenses. The increase in net investment income in 2006 was principally due to an increase in cash and investments from June 30, 2005 to June 30, 2006 of approximately 20.8%. This increase resulted from positive net operating cash flows throughout the last twelve months and a general increase in investment yields. Investment expenses for the six months ended June 30, 2006 were $3.6 million compared to investment expenses of $2.9 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 six month period ended June 30, 2006 were 4.75% and 1.31%, respectively. For the six month period ended June 30, 2005, the net earned yield and total return were 3.85% and 3.02%, respectively. The Company has increased its absolute cash position from December 31, 2005 to June 30, 2006. The increase in cash and cash equivalents has shortened the portfolio’s overall duration to 2.64 years from 2.72 years at December 31, 2005 compared to 2.42 years at June 30, 2005. Overall, the annualized period book yield of the portfolio has increased due to the repositioning of some of the Company’s portfolio from government securities into higher yielding fixed income securities and the positive impact of earnings from the Company’s investments in other ventures during the first quarter of 2006. Earnings from the Company’s investments in other ventures were $9.3 million and $4.6 million in the quarters ended March 31, 2006 and June 30, 2006, respectively, reflecting their inherent volatility.

During the six months ended June 30, 2006, the Company identified 40 fixed maturity securities with fair values totaling $281.1 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 $6.9 million on these securities. During the six months ended June 30, 2005, no investments were considered other-than-temporarily-impaired.

Losses and Loss Expenses. During the six months ended June 30, 2006, the Company experienced an increase in the loss ratio over that reported for the comparable 2005 period. During the six months ended June 30, 2006 and 2005, the Company had overall favorable loss reserve development of $21.0 million and $73.8 million, respectively. The 2006 favorable loss reserve development included adverse loss development on the 2005 Hurricanes of $119.0 million. This adverse loss reserve development on the 2005 Hurricanes impacted the Company’s Property Per Risk Treaty Reinsurance, Treaty Catastrophe Reinsurance and Aerospace and Other Specialty Lines segments while overall favorable prior year loss reserve development on all other prior year reserves impacted all of the Company’s segments. The estimated losses from the 2005 Hurricanes continue to be subjected to considerable uncertainty due to the extent of damage caused, the delay in adjusting losses in the affected areas and related coverage issues associated with the attribution of losses to wind or flood damage. In addition, the Company experienced moderate losses in the first half of 2006 including an industrial fire in Canada and certain tornados and windstorms. During the six months ended June 30, 2005, the Company experienced a moderate amount of property losses from European windstorm Erwin, floods in California, Nevada and Israel and two industrial fires.

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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. See ‘‘— Reserve for Losses and Loss Expenses’’ for further discussion.

General and Administrative Expenses. The general and administrative expense ratio for the six month period ended June 30, 2006 increased slightly, principally due to expenses incurred related to the development of the Company’s U.S. insurance operations. In addition, at June 30, 2006, the Company had 418 employees compared to 344 employees at June 30, 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 six months ended June 30, 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.

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The following table summarizes the underwriting results and associated ratios for the Company’s six business segments for the six month period ended June 30, 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		$	172,478			$	201,330			$	284,895			$	81,164			$	158,216			$	269,812			$	(145,261	)		$	1,022,634
Net premiums written			172,478				201,330				278,182				37,389				142,484				265,085				(145,261	)			951,687
Net premiums earned			187,970				110,778				270,778				39,442				139,337				185,507				(106,928	)			826,884
Other underwriting income			—				—				—				—				—				—				1,509				1,509
			187,970				110,778				270,778				39,442				139,337				185,507				(105,419	)			828,393
Expenses
Losses and loss expenses			123,552				60,373				145,184				17,886				93,889				139,565				(72,272	)			508,177
Acquisition expenses			46,601				15,481				75,517				2,018				6,721				38,467				(34,276	)			150,529
General and administrative expenses			13,468				15,043				19,683				9,530				15,726				18,273				—				91,723
			183,621				90,897				240,384				29,434				116,336				196,305				(106,548	)			750,429
Underwriting income (loss)		$	4,349			$	19,881			$	30,394			$	10,008			$	23,001			$	(10,798	)		$	1,129			$	77,964
Loss ratio			65.7	%			54.5	%			53.6	%			45.3	%			67.4	%			75.2	%			67.6	%			61.5	%
Acquisition expense ratio			24.8	%			14.0	%			27.9	%			5.1	%			4.8	%			20.7	%			32.0	%			18.2	%
General and administrative expense ratio			7.2	%			13.6	%			7.3	%			24.2	%			11.3	%			9.9	%			—				11.1	%
Combined ratio			97.7	%			82.1	%			88.8	%			74.6	%			83.5	%			105.8	%			99.6	%			90.8	%


(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

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The following table provides a summary of the segment revenues and results for the six months ended June 30, 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		$	270,632			$	178,264			$	283,293			$	59,306			$	152,769			$	248,273			$	(86,857	)		$	1,105,680
Net premiums written			270,558				178,264				280,831				55,560				151,300				244,112				(86,857	)			1,093,768
Net premiums earned			233,072				120,825				224,362				53,514				124,106				144,220				(24,580	)			875,519
Other underwriting income			—				—				—				—				—				—				1,289				1,289
			233,072				120,825				224,362				53,514				124,106				144,220				(23,291	)			876,808
Expenses
Losses and loss expenses			107,526				17,306				158,535				47,290				77,684				86,140				(14,506	)			479,975
Acquisition expenses			64,404				15,889				59,750				6,447				7,949				29,684				(8,014	)			176,109
General and administrative expenses			15,214				10,683				17,145				5,809				10,752				14,375				—				73,978
			187,144				43,878				235,430				59,546				96,385				130,199				(22,520	)			730,062
Underwriting income (loss)		$	45,928			$	76,947			$	(11,068	)		$	(6,032	)		$	27,721			$	14,021			$	(771	)		$	146,746
Loss ratio			46.1	%			14.3	%			70.7	%			88.4	%			62.6	%			59.7	%			59.0	%			54.8	%
Acquisition expense ratio			27.7	%			13.2	%			26.6	%			12.0	%			6.4	%			20.6	%			32.6	%			20.1	%
General and administrative expense ratio			6.5	%			8.8	%			7.6	%			10.9	%			8.7	%			10.0	%			—				8.5	%
Combined ratio			80.3	%			36.3	%			104.9	%			111.3	%			77.7	%			90.3	%			91.6	%			83.4	%


(1)	Reconciles the Company's underwriting results by segment to the Company's financial statement presentation.

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Property 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 six months ended June 30, 2006 and 2005, respectively.


	SIX MONTHS ENDED
	June 30, 2006				June 30, 2005				Change ⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	172,478			$	270,632			(36.3	%)
Net premiums written			172,478				270,558			(36.3	%)
Net premiums earned			187,970				233,072			(19.4	%)
Expenses
Losses and loss expenses			123,552				107,526			14.9	%
Acquisition expenses			46,601				64,404			(27.6	%)
General and administrative expenses			13,468				15,214			(11.5	%)
			183,621				187,144			(1.9	%)
Underwriting income		$	4,349			$	45,928			(90.5	%)
Loss ratio			65.7	%			46.1	%		19.6
Acquisition expense ratio			24.8	%			27.7	%		(2.9	)
General and administrative expense ratio			7.2	%			6.5	%		0.7
Combined ratio			97.7	%			80.3	%		17.4


(1)	With respect to ratios, changes show increase or decrease in percentage points.

Premiums. The decrease in gross premiums written for the six months ended June 30, 2006 was due to strategic nonrenewals of approximately $84 million in premiums related to certain large underperforming contracts. At renewal, the pricing, terms and conditions on these contracts no longer met the Company’s underwriting requirements. Premiums earned decreased in the six months ended June 30, 2006 due to the net effect of the decline in gross premiums written and the earning of certain positive premium adjustments during the period.

Losses and Loss Expenses. This increase in losses and loss expenses is primarily related to higher than expected development on prior year loss reserves and higher than expected attritional losses on the current accident year. During the six months ended June 30, 2006, the Company recorded favorable loss reserve development of $10.1 million compared to $40.9 million in 2005. The current year favorable development includes an increase of $41.7 million in the Company’s estimated ultimate loss for the 2005 Hurricanes which was offset by favorable development of all other prior year reserves of $51.8 million.

Acquisition Expenses. As a result of the increase in the segment’s loss ratio during the six months ended June 30, 2006, certain sliding scale commissions were reduced, which contributed to the decline in the acquisition expense ratio.

General and Administrative Expenses. The general and administrative expense ratio for the three months ended June 30, 2006 was largely consistent compared to the same period in 2005.

Property 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

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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 six months ended June 30, 2006 and 2005, respectively.


	SIX MONTHS ENDED
	June 30, 2006				June 30, 2005				Change ⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	201,330			$	178,264			12.9	%
Net premiums written			201,330				178,264			12.9	%
Net premiums earned			110,778				120,825			(8.3	%)
Expenses
Losses and loss expenses			60,373				17,306			248.9	%
Acquisition expenses			15,481				15,889			(2.6	%)
General and administrative expenses			15,043				10,683			40.8	%
			90,897				43,878			107.2	%
Underwriting income		$	19,881			$	76,947			(74.2	%)
Loss ratio			54.5	%			14.3	%		40.2
Acquisition expense ratio			14.0	%			13.2	%		0.8
General and administrative expense ratio			13.6	%			8.8	%		4.8
Combined ratio			82.1	%			36.3	%		45.8


(1)	With respect to ratios, changes show increase or decrease in percentage points.

Premiums. The increase in gross premiums written for the six months ended June 30, 2006 over the same period in 2005 was largely due to price increases and changes in terms and conditions on programs in this segment with U.S. wind exposures.

Losses and Loss Expenses. The increase in the loss ratio for the six month period ended June 30, 2006 reflected unfavorable loss development on the 2005 Hurricanes. The unfavorable loss development recorded for the first half of 2006 was $36.6 million as compared to favorable loss reserve development for the six months ended June 30, 2005 of $7.3 million. The 2006 period was impacted by an increase in the Company’s estimated ultimate loss for the 2005 Hurricanes of $28.8 million. Additional adverse development on all other prior years reserves was $7.8 million. There were no significant loss events in the first half of 2006 and 2005 which significantly impacted the current accident year loss ratio.

Acquisition Expenses. The acquisition expense ratio for the six months ended June 30, 2006 was consistent with the same period in 2005.

General and Administrative Expenses. General and administrative expenses increased as a result of the increase in allocated corporate expenses commensurate with the higher level of premiums written in this segment.

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Casualty 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 six months ended June 30, 2006 and 2005, respectively.


	SIX MONTHS ENDED
	June 30, 2006				June 30, 2005				Change ⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	284,895			$	283,293			0.6	%
Net premiums written			278,182				280,831			(0.9	%)
Net premiums earned			270,778				224,362			20.7	%
Expenses
Losses and loss expenses			145,184				158,535			(8.4	%)
Acquisition expenses			75,517				59,750			26.4	%
General and administrative expenses			19,683				17,145			14.8	%
			240,384				235,430			2.1	%
Underwriting (loss) income		$	30,394			$	(11,068	)	NM ⁽²⁾
Loss ratio			53.6	%			70.7	%		(17.1	)
Acquisition expense ratio			27.9	%			26.6	%		1.3
General and administrative expense ratio			7.3	%			7.6	%		(0.3	)
Combined ratio			88.8	%			104.9	%		(16.1	)


(1)	With respect to ratios, changes show increase or decrease in percentage points.


(2)	Not meaningful.

Premiums. Gross premiums written slightly increased for the six months ended June 30, 2006, compared to the same period in 2005 due to a combination of factors. Extension and adjustment premiums on three large workers’ compensation contracts resulted in a net increase in gross premiums written of $15.3 million. This increase was largely offset by decreases in gross premiums written in the U.S. based business due to the deterioration of pricing and terms and conditions resulting in nonrewals and reductions in renewed business. Gross premiums written were also negatively impacted by increased ceding company retentions on certain workers’ compensation catastrophe programs.

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 loss reserves due to the long tail nature of this business. The decreased loss ratio in the six months ended June 30, 2006 was a result of favorable loss development of $21.5 million compared to unfavorable loss reserve development of $7.7 million in the six months ended June 30, 2005. Prior year reserves were decreased in the first half of 2006 as claims have not emerged as originally estimated by the Company.

Acquisition Expenses. As a result of the decrease in the segment’s loss ratio during the first half of 2006, certain sliding scale commissions were increased, which contributed to the increase in the acquisition expense ratio. In addition, acquisition expenses were recorded in relation to premium adjustments recorded within the six months ended June 30, 2006.

General and Administrative Expenses. General and administrative expenses remained relatively consistent for the six months ended June 30, 2006 as compared to the same period in prior year.

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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 six months ended June 30, 2006 and 2005, respectively.


	SIX MONTHS ENDED
	June 30, 2006				June 30, 2005				Change ⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	81,164			$	59,306			36.9	%
Net premiums written			37,389				55,560			(32.7	%)
Net premiums earned			39,442				53,514			(26.3	%)
Expenses
Losses and loss expenses			17,886				47,290			(62.2	%)
Acquisition expenses			2,018				6,447			(68.7	%)
General and administrative expenses			9,530				5,809			64.1	%
			29,434				59,546			(50.6	%)
Underwriting (loss) income		$	10,008			$	(6,032	)	NM ⁽²⁾
Loss ratio			45.3	%			88.4	%		(43.1	)
Acquisition expense ratio			5.1	%			12.0	%		(6.9	)
General and administrative expense ratio			24.2	%			10.9	%		13.3
Combined ratio			74.6	%			111.3	%		(36.7	)


(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 six months ended June 30, 2006, was due to the net increase in premiums written on certain U.S. insurance policies offset by nonrenewals and pricing pressures in our international property insurance lines. The Company wrote gross premiums of $56.8 million due to the expansion of its U.S. insurance operations during the first half of 2006. Offsetting the expansion was a decline of $28.4 million from the nonrenewal of policies as a result of the elimination of the Company’s Bermuda based property insurance unit and from a deterioration of terms and conditions during the first half of 2006. The decrease in net premiums earned in the first half of 2006 as compared to the same period in 2005 resulted from an increase in premiums ceded in order to strategically manage overall risk exposures.

Losses and Loss Expenses. The decreased loss ratio resulted from favorable loss reserve development on prior year loss reserves of $28.8 million for the six months ended June 30, 2006 as compared to favorable loss reserve development for the six months ended June 30, 2005 of $4.3 million. The improved prior year loss reserve development resulted primarily from favorable loss reserve development in relation to the 2005 Hurricanes as claims have not materialized as expected on this segment. A single large loss occurred during the six months ended June 30, 2006 as a result of an industrial fire in Canada as compared to losses from European winter storm Erwin, floods in California, Nevada and Israel and two industrial fires in the same period of 2005.

Acquisition Expenses. The decrease in the acquisition expense ratio was due to increased ceded premiums on which commissions were earned and offset against acquisition expenses in the first half of 2006 as compared to the same period in 2005.

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General and Administrative Expenses. The general and administrative expense ratio increased for the first half of 2006 due to the growth in Endurance U.S. Insurance, increased corporate expenses and overall higher staffing levels as compared to the first half of 2005.

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 six months ended June 30, 2006 and 2005, respectively.


	SIX MONTHS ENDED
	June 30, 2006				June 30, 2005				Change ⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	158,216			$	152,769			3.6	%
Net premiums written			142,484				151,300			(5.8	%)
Net premiums earned			139,337				124,106			12.3	%
Expenses
Losses and loss expenses			93,889				77,684			20.9	%
Acquisition expenses			6,721				7,949			(15.4	%)
General and administrative expenses			15,726				10,752			46.3	%
			116,336				96,385			20.7	%
Underwriting income		$	23,001			$	27,721			(17.0	)%
Loss ratio			67.4	%			62.6	%		4.8
Acquisition expense ratio			4.8	%			6.4	%		(1.6	)
General and administrative expense ratio			11.3	%			8.7	%		2.6
Combined ratio			83.5	%			77.7	%		5.8


(1)	With respect to ratios, changes show increase or decrease in percentage points.

Premiums. The increase in gross premiums written for the first half of 2006 resulted from new premiums written on the primary casualty lines and a new direct worker’s compensation policy, which was previously written as reinsurance within the Casualty Treaty Reinsurance segment. These increases totaled $27.7 million for the six months ended June 30, 2006 as compared to the same period in 2005. The increase in gross premiums written was offset by a decrease in gross premiums written in the excess casualty and healthcare lines of $23.0 million for the first half of 2006 resulting from pricing pressures within these lines. The increase in premiums earned was a result of the continued earning of premiums written in the twelve months ended June 30, 2006. All premiums written by this segment are earned ratably over the terms of the insurance policies, typically a twelve month period.

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 Company paying a claim. Accordingly, the reserve for losses and loss expenses established by the Company's actuaries was based on historical industry loss data and business segment specific pricing information. This segment is primarily comprised of claims made severity business. While not short tail, this business can generally be expected to report losses within three to seven years. Consequently, in the six months ended June 30, 2006, the Company reduced reserves for expected losses related to prior underwriting periods by $12.1 million compared to a reduction of $21.6 million in the six months ended June 30, 2005. Prior year loss reserves were decreased for the first half of 2006 as claims have not emerged as originally estimated by the Company.

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Acquisition Expenses. The acquisition expense ratio for the six months ended June 30, 2006 decreased due to increased ceded 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 June 30, 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 six months ended June 30, 2006 and 2005, respectively.


	SIX MONTHS ENDED
	June 30, 2006				June 30, 2005				Change⁽¹⁾
	(in thousands, except for ratios)
Revenues
Gross premiums written		$	269,812			$	248,273			8.7	%
Net premiums written			265,085				244,112			8.6	%
Net premiums earned			185,507				144,220			28.6	%
Expenses
Losses and loss expenses			139,565				86,140			62.0	%
Acquisition expenses			38,467				29,684			29.6	%
General and administrative expenses			18,273				14,375			27.1	%
			196,305				130,199			50.8	%
Underwriting income		$	(10,798	)		$	14,021		NM ⁽²⁾
Loss ratio			75.2	%			59.7	%		15.5
Acquisition expense ratio			20.7	%			20.6	%		0.1
General and administrative expense ratio			9.9	%			10.0	%		(0.1	)
Combined ratio			105.8	%			90.3	%		15.5


(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 first half of 2006 was the net result of growth within the Company’s agriculture, marine and energy, personal accident and surety lines, offset by the discontinuation of a large aviation contract that contributed $48.7 million to gross premiums written in the first half of 2005. The increase of $57.8 million and $16.1 million within the agriculture and marine and energy lines, respectively, were a result of new business outpacing nonrenewals, improved pricing on renewed business, and certain increases in premium estimates for the six months ended June 30, 2006 as compared to the same period in 2005. The 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 loss ratio for the six months ended June 30, 2006 resulted from unfavorable loss reserve development of $19.7 million. The unfavorable loss reserve development in the first half of 2006, included $55.1 million related to the 2005 Hurricanes within the marine and energy line. The marine and energy line loss reserve development was offset in part by favorable loss reserve development in the segment on all other prior year reserves of $35.4 million for the first half of 2006. The first half of 2005 had favorable loss development of $7.4 million and no significant incurred losses.

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Acquisition Expenses. The acquisition expense ratio for the six months ended June 30, 2006 was largely unchanged from the equivalent period in 2005.

General and Administrative Expenses. The general and administrative expense ratio for the six months ended June 30, 2006 was relatively consistent with the same period in 2005.

Deposit accounting

During the six months ended June 30, 2006 and 2005, the Company realized $145.3 million and $86.9 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 loss over the contract or expected claim payment periods. Income or loss associated with contracts determined to transfer only significant timing risk is included as a component of other underwriting income and recognized 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 six months ended June 30, 2006.

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	Underwriting Results by Segment				Deposit Accounting				Totals
	(in thousands, except for ratios)
Underwriting income
Revenues
Gross premiums written		$	1,167,895			$	(145,261	)		$	1,022,634
Net premiums written			1,096,948				(145,261	)			951,687
Net premiums earned			933,812				(106,928	)			826,884
Other underwriting income			—				1,509				1,509
			933,812				(105,419	)			828,393
Expenses
Losses and loss expenses			580,449				(72,272	)			508,177
Acquisition expenses			184,805				(34,276	)			150,529
General and administrative expenses			91,723				—				91,723
			856,977				(106,548	)			750,429
Underwriting income⁽¹⁾		$	76,835			$	1,129			$	77,964
Net investment income			119,683				—				119,683
Interest expense			(14,985	)			—				(14,985	)
Amortization of intangibles			(2,316	)			—				(2,316	)
Net foreign exchange gains			14,883				—				14,883
Net realized losses on sales of investments			(12,059	)			—				(12,059	)
Income before income taxes		$	182,041			$	1,129			$	183,170
Loss ratio			62.2	%			67.6	%			61.5	%
Acquisition expense ratio			19.8	%			32.0	%			18.2	%
General and administrative expense ratio			9.8	%			—				11.1	%
Combined ratio			91.8	%			99.6	%			90.8	%

(1)

Significant transactions and events

The reinsurance coverage provided by Shackleton to Endurance Bermuda was based on a modeled loss trigger designed to closely mimic the exposures in the Company’s portfolio of insurance

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and reinsurance business. Upon the occurrence of a hurricane or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss exceeds the designated attachment point for the peril at issue, then Endurance Bermuda may make a recovery under the applicable reinsurance agreement. The amount recoverable is related to and limited by the Company’s ultimate net loss from the loss event. The modeled loss trigger is reset to reflect any applicable changes in the Company’s portfolio of insurance and reinsurance business on July 31, 2007.

The Company has also purchased retrocessional reinsurance coverage at various retention levels in addition to the coverage obtained in the above noted catastrophe bond and loan transactions.

On August 2, 2006, Endurance Holdings' Board of Directors 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 ‘‘Series A Preferred Shares’’). The dividend on Endurance Holdings' outstanding ordinary shares will be payable on September 29, 2006 to the ordinary shareholders of record on September 15, 2006 and the dividend on the Series A Preferred Shares will be payable on September 15, 2006 to the Series A Preferred shareholders of record on September 1, 2006.

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 June 30, 2006, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $424.0 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 June 30, 2006, Endurance 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’s two operating subsidiaries, Traders & Pacific and Core, are subject to regulation by the State of Delaware Department of Insurance and the State of Vermont Department of Banking, Insurance, Securities and Health Care Administration, respectively. 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 June 30, 2006, Traders and Pacific did not have earned surplus; therefore, Traders & Pacific is precluded from

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declaring or distributing dividends during 2006 without the prior approval of the Delaware Insurance Commissioner. At June 30, 2006, Core did not have earned surplus; therefore, Core also is precluded from declaring or distributing dividends during 2006 without the prior approval of the State of Vermont Department of Banking, Insurance, Securities and Health Care Administration. Any dividends paid by Traders & Pacific and Core 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 June 30, 2006, Endurance U.K. did not have profits available for distribution and could not pay a dividend.

The Company's aggregate cash and cash equivalents and investments as of June 30, 2006 totaled $5.2 billion compared to $5.0 billion as of December 31, 2005. The increase in cash and cash equivalents and investments 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, general and administrative expenses paid, interest paid and dividends paid. The decline in cash flows from operations for the six months ended June 30, 2006 as compared to the same period in 2005 was primarily a result of claims payment activity during the first half of 2006. During the six months ended June 30, 2006, the Company paid claims of $351.0 million, including $164.0 million related to the 2005 Hurricanes, as compared to $197.0 million in the same period of 2005.

The Company had gross premiums written of $1.0 billion during the six months ended June 30, 2006. This has increased the premiums receivable, net by 43.8% from December 31, 2005 to $827.2 million as of June 30, 2006. The expected cash flow from premiums receivable, net is expected to be largely collected in the next 12 months, and 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.

The Company is subject to requirements to meet certain restrictive covenants related to its 6.15% and 7% Senior Notes and the 2005 Credit Facility. The Company was in compliance with all covenants contained in these agreements as of June 30, 2006.

On May 3, 2006, Endurance Holdings declared quarterly dividends of $0.25 per share payable on its ordinary shares and $0.484375 per share payable on the Series A Preferred Shares. The dividend on Endurance Holdings’ outstanding ordinary shares was paid on June 30, 2006 to the ordinary shareholders of record on June 16, 2006, and the dividend on the Series A Preferred Shares was paid on June 15, 2006 to the Series A Preferred shareholders of record on June 1, 2006.

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 the Series A Preferred Shares. 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 the Series A Preferred Shares was paid on March 15, 2006 to the Series A Preferred shareholders of record on March 1, 2006.

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

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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 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 June 30, 2006, the Company had accrued losses and loss expenses reserves of $2.8 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 June 30, 2006. During the six month period ended June 30, 2006 and 2005, the Company paid losses and loss expenses of $351.0 million and $197.1 million, respectively.

As of June 30, 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’’ updated above for further details.

Incurred losses for the three months ended June 30, 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		$	62,550		$	1,197		$	72,355			$	28,449			$	54,787			$	62,637		$	(34,112	)		$	247,863
Prior years			20,567			26,471			(13,131	)			(5,102	)			(7,966	)			7,630			(6,887	)			21,582
Total Incurred Losses		$	83,117		$	27,668		$	59,224			$	23,347			$	46,821			$	70,267		$	(40,999	)		$	269,445

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Incurred losses for the six months ended June 30, 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		$	133,700			$	23,802		$	166,695			$	46,734			$	105,964			$	119,886		$	(67,645	)		$	529,136
Prior years			(10,148	)			36,571			(21,511	)			(28,848	)			(12,075	)			19,679			(4,627	)			(20,959	)
Total Incurred Losses		$	123,552			$	60,373		$	145,184			$	17,886			$	93,889			$	139,565		$	(72,272	)		$	508,177

Incurred losses for the three months ended June 30, 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		$	74,990			$	8,653			$	69,728		$	14,746			$	49,594			$	47,583			$	(8,630	)		$	256,664
Prior years			(11,994	)			(2,117	)			9,670			(6,788	)			(9,361	)			(7,158	)			—				(27,748	)
Total Incurred Losses		$	62,996			$	6,536			$	79,398		$	7,958			$	40,233			$	40,425			$	(8,630	)		$	228,916

Incurred losses for the six months ended June 30, 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		$	148,420			$	24,569			$	150,794		$	51,601			$	99,310			$	93,536			$	(14,506	)		$	553,724
Prior years			(40,894	)			(7,263	)			7,741			(4,311	)			(21,626	)			(7,396	)			—				(73,749	)
Total Incurred Losses		$	107,526			$	17,306			$	158,535		$	47,290			$	77,684			$	86,140			$	(14,506	)		$	479,975


(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.

Incurred losses for the three and six months ended June 30, 2006 included approximately $21.6 million unfavorable loss reserve development and $21.0 million favorable loss reserve development, respectively, relating to prior accident years as compared to $27.7 million and $73.7 million of favorable loss reserve development for the three and six months ended June 30, 2005, respectively. The unfavorable loss reserve development experienced during the three months ended June 30, 2006 impacted the Company's reported loss ratio by approximately 5.3 percentage points. Unfavorable loss reserve development for the three months ended June 30, 2006 was primarily due to increased claims from the 2005 Hurricanes and a corresponding increase in the expected ultimate losses from the storms. The Company’s unfavorable loss reserve development was partially offset by favorable loss reserve development across all accident years and business segments.

The favorable loss reserve development experienced during the six months ended June 30, 2006 benefited the Company’s reported loss ratio by 2.5 percentage points. The six months ended June 30, 2006 favorable loss reserve development included adverse loss development on the 2005 Hurricanes offset by overall favorable prior year loss reserve development on all other prior year reserves across all of the Company’s segments.

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.

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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;


	•	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;


	•	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 on the industry and on the Company in particular;


	•	the commercial and investment activities of our significant shareholders may lead to conflicts of interest;

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	•	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. 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 3.	Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided under the caption ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Information about Market Risk’’ included in the Company’s 2005 Annual Report on Form 10-K.


Item 4.	Controls and Procedures

a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the 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 second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings

We are party to various legal proceedings generally arising in the normal course of our business. While any proceeding contains an element of uncertainty, we do not believe that the eventual outcome of any litigation or arbitration proceeding to which we are presently a party could have a material adverse effect on our financial condition or business. Pursuant to our insurance and reinsurance agreements, disputes are generally required to be finally settled by arbitration.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2. Changes in Securities and Issuer Purchases of Equity Securities

ISSUER PURCHASES OF EQUITY SECURITIES


Period	(a) Total Number of Shares Purchased ⁽¹⁾		(b) Average Price Paid per Share			(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾⁽²⁾		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾⁽²⁾
April 1, 2006 – April 30, 2006		—		$	—		—		1,754,200
May 1, 2006 – May 31, 2006		144,900			30.19		144,900		1,609,300
June 1, 2006 – June 30, 2006		184,200			30.58		184,200		1,425,100
Total		329,100		$	30.41		329,100		1,425,100


(1)	Ordinary shares or share equivalents.

(2)

On May 24, 2004, the Company initiated a share repurchase program. Under this program, the Company may repurchase up to 2,000,000 of its ordinary shares and share equivalents. The repurchases may 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.

Item 3. Defaults Upon Senior Securities

None

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

On May 3, 2006, the Company held its Annual General Meeting of Shareholders in Pembroke, Bermuda. Represented in person or by proxy at the Annual General Meeting were 52,405,493 ordinary shares or 83% percent of the eligible ordinary shares, which was 83% of the ordinary shares then outstanding. At the Annual General Meeting, the Company’s shareholders voted on the following proposals:

Proposal No. 1 — Election of Directors

The election of three Class I directors for a term of three years:

Steven W. Carlsen
Kenneth J. LeStrange
R. Max Williamson

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and one Class II director for a term of one year:

Therese M. Vaughan

to the Board of Directors of Endurance Specialty Holdings Ltd.