The New York and Delaware insurance laws require that insurers report their risk-based capital (‘‘RBC’’) based on a formula calculated by applying factors to various asset, premium and reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The State insurance departments use the formula only as an early warning regulatory tool to identify possibly inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. Insurance laws impose broad confidentiality requirements on those engaged in the insurance business (including insurers, agents, brokers and others) and on the state insurance departments as to the use and publication of RBC data. The New York Superintendent and Delaware Commissioner have explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels.
Statutory accounting practices, or ‘‘SAP,’’ are a basis of accounting developed to assist U.S. insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
U.S. GAAP concerns an insurer’s solvency, but it also concerns other financial measurements, such as income and cash flows. Accordingly, U.S. GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with U.S. GAAP as opposed to SAP.
Statutory accounting practices established by the NAIC and adopted, in part, by the New York and Delaware Departments of Insurance, determine, among other things, the amount of statutory surplus and statutory net income of Endurance Holdings’ U.S. insurance company subsidiaries and thus determine, in part, the amount of funds they have available to pay dividends to their respective parent companies.
Operations of Endurance U.K. and Endurance Bermuda
Endurance U.K. and Endurance Bermuda are not admitted to do business in any state in the United States. Insurance laws of each state of the United States and of many other countries restrict or prohibit the sale of insurance and reinsurance within their jurisdictions by non-admitted alien insurers and reinsurers such as Endurance U.K. and Endurance Bermuda.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the United States governing ‘‘credit for reinsurance’’ which are imposed on their ceding companies. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the reinsurer files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for unearned premiums (which are that portion of written premiums which applies to the remaining portion of the policy period) and loss reserves and loss expense reserves ceded to the reinsurer. As stated above, Endurance U.K. and Endurance Bermuda are not licensed, accredited or approved in any state in the United States. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be offset to the extent that the reinsurer provides a letter of credit or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed or non-accredited reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.
We do not believe that Endurance U.K. and Endurance Bermuda are in violation of insurance laws of any jurisdiction in the United States. There can be no assurance however, that inquiries or challenges to Endurance U.K.’s or Endurance Bermuda’s insurance or reinsurance activities will not be raised in the future.
MATERIAL TAX CONSIDERATIONS
Certain Bermuda Tax Considerations
Currently, there is no Bermuda income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by us or our shareholders, other than shareholders ordinarily resident in Bermuda, if any. Currently, there is no Bermuda withholding or other tax on principal interest or dividends paid to holders of the ordinary shares or Series A Preferred Shares, other than holders ordinarily resident in Bermuda, if any. There can be no assurance that we or our shareholders will not be subject to any such tax in the future.
Endurance Bermuda has received written assurance dated December 7, 2001 and Endurance Holdings has received written assurance dated July 18, 2002 from the Minister under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, that if there is enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of that tax would not be applicable to Endurance Bermuda or Endurance Holdings or to any of their respective operations, shares, debentures or obligations until March 28, 2016; provided, that the assurance is subject to the condition that it will not be construed to prevent the application of such tax to people ordinarily resident in Bermuda, or to prevent the application of any taxes payable by Endurance Bermuda or Endurance Holdings in respect of real property or leasehold interests in Bermuda held by them. There can be no assurance that we will not be subject to any such tax after March 28, 2016.
Certain United Kingdom Tax Considerations
Endurance U.K. is a company incorporated in the United Kingdom and is, therefore, resident in the United Kingdom for United Kingdom corporation tax purposes and will be subject to United Kingdom corporation tax on its worldwide profits. The current rate of United Kingdom corporation tax is generally 30% on profits of whatever description. Currently, no United Kingdom withholding tax applies to dividends paid by Endurance U.K.
Certain United States Federal Income Tax Considerations
The following discussion is a summary of certain U.S. federal income tax considerations relating to Endurance Holdings, Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance, Endurance U.S. Insurance and the ownership of our ordinary shares and Series A Preferred Shares.
This summary is based upon the Code, the regulations promulgated thereunder, rulings and other administrative pronouncements issued by the IRS, judicial decisions, the tax treaty between the United States and Bermuda (the ‘‘Bermuda Treaty’’) and the tax treaty between the United States and the United Kingdom (the ‘‘U.K. Treaty’’), all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this Annual Report on Form 10-K. This summary is for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of such investor’s investment or tax circumstances, or to investors subject to special tax rules, such as tax-exempt organizations, dealers in securities, banks, insurance companies, persons that hold ordinary shares or Series A Preferred Shares that are a hedge or that are hedged against interest rate or insurance risks or that are part of a straddle or conversion transaction, or persons whose functional currency is not the U.S. dollar. This summary assumes that an
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investor will hold our ordinary shares and Series A Preferred Shares as capital assets, which generally means as property held for investment. Investors should consult their tax advisors concerning the consequences, in their particular circumstances, of the ownership of ordinary shares and Series A Preferred Shares under U.S. federal, state, local and other tax laws.
For U.S. federal income tax purposes and for purposes of the following discussion, a ‘‘U.S. Person’’ means (i) a citizen or resident of the United States, (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, or a partnership, or other entity treated as a partnership for U.S federal income tax purposes, in each case created or organized in the United States or under the laws of the United States or of any of its political subdivisions, (iii) an estate the income of which is subject to U.S. federal income tax without regard to its source or (iv) a trust if either (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. Persons have the authority to control all substantial decisions of the trust or (b) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes. A ‘‘Non-U.S. Person’’ is a nonresident alien individual, or a corporation, estate or trust that is not a U.S. person.
If a partnership owns ordinary shares or Series A Preferred Shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership that owns ordinary shares or Series A Preferred Shares, you should consult your tax advisor.
United States Taxation of Endurance Holdings, Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance and Endurance U.S. Insurance
We intend to continue to operate Endurance Holdings, Endurance Bermuda and Endurance U.K. in such a manner that they will not be considered to be conducting business within the United States for purposes of U.S. federal income taxation. Whether business is being conducted in the United States is an inherently factual determination. Because the Code, regulations and court decisions fail to identify definitively activities that constitute being engaged in a trade or business in the United States, there can be no assurance that the IRS will not contend successfully that Endurance Holdings, Endurance Bermuda and/or Endurance U.K. are or will be engaged in a trade or business in the United States. A foreign corporation deemed to be so engaged would be subject to U.S. federal income tax (at a current maximum rate of 35%), as well as a 30% branch profits tax in certain circumstances, on its income which is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a foreign corporation is entitled to deductions and credits only if it timely files a U.S. federal income tax return. Endurance Holdings, Endurance Bermuda and Endurance U.K. intend to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that they are subject to U.S. federal income tax.
If Endurance Bermuda is entitled to the benefits under the Bermuda Treaty, it will not be subject to U.S. federal income tax on any income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the United States. Whether business is being conducted in the United States through a permanent establishment is an inherently factual determination. Endurance Bermuda intends to conduct its activities so as not to have a permanent establishment in the United States, although there can be no assurance that it will achieve this result. An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty if (i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the United States or Bermuda or U.S. citizens and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities of, persons who are neither residents of either the United States or Bermuda nor U.S. citizens.
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Foreign insurance companies that conduct an insurance business within the United States must maintain a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If Endurance Bermuda is considered to be engaged in the conduct of an insurance business in the United States and it is not entitled to the benefits of the Bermuda Treaty, either because it fails to satisfy one of the limitations on Bermuda Treaty benefits described above or because Endurance Bermuda is considered to have a U.S. permanent establishment, a significant portion of Endurance Bermuda’s premium and investment income could be subject to U.S. federal income tax. In addition, while the Bermuda Treaty clearly applies to premium income, it is not clear whether it applies to other income, such as investment income. If Endurance Bermuda is considered to be engaged in the conduct of an insurance business in the United States and is entitled to the benefits of the Bermuda Treaty, but the Bermuda Treaty is interpreted so as not to apply to investment income, a significant portion of Endurance Bermuda’s investment income could be subject to U.S. federal income tax even if Endurance Bermuda does not maintain a permanent establishment in the United States.
Under the U.K. Treaty, Endurance U.K., if entitled to the benefits of the U.K. Treaty, will not be subject to U.S. federal income tax on any income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the United States. Endurance U.K. intends to conduct its activities in a manner so that it does not have a permanent establishment in the United States, although we cannot predict whether we will achieve this result. Endurance U.K. will be entitled to the benefits of the U.K. Treaty if (i) during at least half of the days during the relevant taxable period, at least 50% of Endurance U.K.’s stock is beneficially owned, directly or indirectly, by citizens or residents of the United States and the United Kingdom, and less than 50% of Endurance U.K.’s gross income for the relevant taxable period is paid or accrued, directly or indirectly, to persons who are not U.S. or U.K. residents in the form of payments that are deductible for purposes of U.K. taxation or (ii) with respect to specific items of income, profit or gain derived from the United States, if such income, profit or gain is considered to be derived in connection with, or incidental to, Endurance U.K.’s business conducted in the United Kingdom.
Foreign corporations not engaged in a trade or business in the United States are nonetheless subject to U.S. withholding tax at a rate of 30% of the gross amount of certain ‘‘fixed or determinable annual or periodical gains, profits and income’’ derived from sources within the United States (such as dividends and certain interest on investments), subject to reduction by applicable treaties.
The United States also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rate of tax applicable to premiums paid to Endurance Bermuda is 4% for casualty insurance premiums and 1% for reinsurance premiums. The excise tax will not apply to premiums paid to Endurance U.K. if Endurance U.K. is entitled to the benefits of the U.K. Treaty, and certain other requirements are met.
Endurance U.S. Reinsurance is a New York State corporation and Endurance U.S. Insurance is a Delaware company. Each will be subject to taxation in the United States at regular corporate rates. Dividends paid by Endurance U.S. Holdings Corp. to Endurance Bermuda will be subject to U.S. withholding tax at the rate of 30%.
United States Taxation of Holders of Ordinary Shares and Series A Preferred Shares
Shareholders Who Are U.S. Persons
Dividends. Distributions with respect to ordinary shares and Series A Preferred Shares (including the payment of additional amounts, in the case of the Series A Preferred Shares) will be treated as ordinary dividend income to the extent of Endurance Holdings’ current or accumulated earnings and profits as determined for U.S. federal income tax purposes, subject to the discussion below relating to the potential application of the ‘‘controlled foreign corporation,’’ ‘‘related person insurance income’’ and ‘‘passive foreign investment company’’ rules. These dividends should constitute ‘‘qualified dividend income’’ as defined in Section 1(h)(11)(B) of the Code and, thus, should be
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entitled to the 15% preferential federal income tax rate applicable to ‘‘qualified dividends’’ received before January 1, 2011 by certain shareholders (such as individuals), provided that we are not considered a PFIC or a foreign investment company.
Distributions with respect to Endurance Holdings’ ordinary shares and Series A Preferred Shares will not be eligible for the dividends-received deduction allowed to U.S. corporations under the Code. The amount of any distribution in excess of the current and accumulated earnings and profits of Endurance Holdings will first be applied to reduce a holder’s tax basis in the ordinary shares or Series A Preferred Shares as the case may be, and any amount in excess of tax basis will be treated as gain from the sale or exchange of such holder’s shares.
Classification of Endurance Holdings, Endurance U.K. or Endurance Bermuda as a Controlled Foreign Corporation. Each ‘‘10% U.S. Shareholder’’ of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year, and who owns shares in the CFC directly or indirectly through foreign entities, in such corporation on the last day, in such year, in which such corporation is a CFC must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s ‘‘subpart F income,’’ even if the subpart F income is not distributed. A foreign corporation is considered a CFC if ‘‘10% U.S. Shareholders’’ own (directly, indirectly through foreign entities or constructively pursuant to the application of certain constructive ownership rules) more than 50% of the total combined voting power of all classes of voting stock of such foreign corporation, or the total value of all stock of such corporation. A 10% U.S. Shareholder is a U.S. Person who owns at least 10% of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. The Series A Preferred Shares should not be considered voting stock for purposes of determining whether a U.S. Person would be a ‘‘10% U.S. Shareholder’’ unless and until there exists a Nonpayment Event which triggers the Series A Preferred Shareholders’ right to elect two additional directors to the board of directors of Endurance Holdings. In such case, the Series A Preferred Shares should be treated as voting stock for as long as such right continues.
For purposes of taking into account insurance income, a CFC also includes a foreign corporation in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned (directly, indirectly through foreign entities or constructively pursuant to the application of certain constructive ownership rules) by 10% U.S. Shareholders, on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance contracts exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks. Due to the anticipated dispersion of Endurance Holdings’ share ownership among holders, its bye-law provisions that impose limitations on the concentration of voting power of any shares that are entitled to vote and authorize the board to repurchase such shares under certain circumstances and other factors, no U.S. Person that owns shares in Endurance Holdings directly or indirectly through foreign entities should be subject to treatment as a 10% U.S. Shareholder of a CFC. There can be no assurance, however, that the IRS will not challenge the effectiveness of these provisions for purposes of preventing 10% U.S. Shareholder status and that a court will not sustain such challenge.
RPII Companies. The CFC rules also apply to certain insurance companies that earn ‘‘related person insurance income.’’ For purposes of applying the CFC rules to foreign corporations that earn RPII, a different definition of ‘‘controlled foreign corporation,’’ as discussed below, applies.
RPII is defined as any ‘‘insurance income’’ attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a ‘‘RPII Shareholder’’ of the foreign corporation or a ‘‘related person’’ to such RPII Shareholder. In general, and subject to certain limitations, ‘‘insurance income’’ is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance company.
For purposes of the RPII rules, ‘‘related person’’ means someone who controls or is controlled by the RPII Shareholder or someone who is controlled by the same person or persons which control the RPII Shareholder. ‘‘Control’’ is measured by either more than 50% in value or more than 50% in
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voting power of stock, applying constructive ownership principles. A corporation’s pension plan is ordinarily not a ‘‘related person’’ with respect to the corporation unless the pension plan owns, directly or indirectly through the application of constructive ownership rules, more than 50%, measured by vote or value, of the stock of the corporation.
For purposes of inclusion of Endurance U.K.’s or Endurance Bermuda’s RPII in the income of a RPII Shareholder, to the extent required under the RPII rules, the term ‘‘RPII Shareholder’’ means any U.S. Person who owns, directly or indirectly through foreign entities, any amount (rather than stock possessing 10% or more of the total combined voting power) of Endurance U.K.’s or Endurance Bermuda’s stock. Endurance U.K. or Endurance Bermuda will be treated as a CFC for RPII purposes if such persons collectively own directly, indirectly through foreign entities or by application of the constructive ownership rules 25% or more of the stock of Endurance U.K. or Endurance Bermuda by vote or value.
RPII Exceptions. The special RPII rules do not apply if (i) direct or indirect insureds and persons related to such insureds, whether or not U.S. Persons, own, directly or indirectly, less than 20% of the voting power and less than 20% of the value of the stock of Endurance U.K. or Endurance Bermuda, as applicable (the ‘‘20% Ownership Exception’’), (ii) RPII, determined on a gross basis, is less than 20% of Endurance U.K.’s or Endurance Bermuda’s gross insurance income for the taxable year, as applicable (the ‘‘20% Gross Income Exception’’), (iii) Endurance U.K. or Endurance Bermuda elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business and to waive all treaty benefits with respect to RPII and meets certain other requirements or (iv) Endurance U.K. or Endurance Bermuda elects to be treated as a U.S. corporation. Endurance Bermuda and Endurance U.K. intend to operate in a manner that is intended to ensure that each qualifies for the 20% Gross Income Exception. It is possible that neither Endurance Bermuda nor Endurance U.K. will be successful in qualifying under this exception.
If none of these exceptions applies, each U.S. Person who owns shares in Endurance Holdings (and therefore, indirectly in Endurance U.K. and Endurance Bermuda) on the last day of Endurance Holdings’ taxable year, will be required to include in its gross income for U.S. federal income tax purposes its share of RPII of Endurance U.K. and/or Endurance Bermuda for the entire taxable year. This inclusion will be determined as if such RPII were distributed proportionately only to such U.S. Persons holding shares in Endurance Holdings at that date. The inclusion will be limited to the current-year earnings and profits of Endurance U.K. or Endurance Bermuda, as applicable, reduced by the shareholder’s pro rata share, if any, of certain prior year deficits in earnings and profits.
Computation of RPII. In order to determine how much RPII each of Endurance U.K. and Endurance Bermuda has earned in each taxable year, Endurance Holdings intends to obtain and rely upon information from Endurance U.K.’s and Endurance Bermuda’s insureds and reinsureds to determine whether any of the insureds, reinsureds or other persons related to such insureds or reinsureds own shares in Endurance Holdings and are U.S. Persons. Endurance Holdings may not be able to determine whether any of the underlying insureds of the insurance companies to which Endurance U.K. and Endurance Bermuda provide insurance or reinsurance are U.S. shareholders or related persons to such shareholders. Consequently, Endurance Holdings may not be able to determine accurately the gross amount of RPII earned by Endurance U.K. or Endurance Bermuda in a given taxable year. For any taxable year in which Endurance U.K.’s or Endurance Bermuda’s gross RPII is 20% or more of its gross insurance income for the year, Endurance Holdings may also seek information from its shareholders to determine whether direct or indirect owners of shares in Endurance Holdings at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such persons. To the extent Endurance Holdings is unable to determine whether a direct or indirect owner of shares is a U.S. Person, Endurance Holdings may assume that such owner is not a U.S. Person, thereby increasing the per share RPII amount for all shareholders identified as U.S. Persons.
Basis Adjustments. A RPII Shareholder’s tax basis in its Endurance Holdings ordinary shares or Series A Preferred Shares, as the case may be, will be increased by the amount of any RPII that the shareholder includes in income. Any distributions made by Endurance Holdings out of previously
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taxed RPII income will be exempt from further tax in the hands of the RPII Shareholder. The RPII Shareholder’s tax basis in its Endurance Holdings shares will be reduced by the amount of any distributions that are excluded from income under this rule.
Information Reporting. Under certain circumstances, U.S. Persons owning stock in a foreign corporation are required to file IRS Form 5471 with their U.S. federal income tax returns. Generally, information reporting on IRS Form 5471 is required with respect to (i) a person who is treated as a RPII Shareholder, (ii) a 10% U.S. Shareholder of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned the stock on the last of that year and (iii) under certain circumstances, a U.S. Person who acquires stock in a foreign corporation, and as a result thereof owns 10% or more of the voting power or value of such foreign corporation, whether or not such foreign corporation is a CFC. For any taxable year in which Endurance Holdings determines that gross RPII constitutes 20% or more of Endurance U.K.’s or Endurance Bermuda’s gross insurance income and the 20% Ownership Exception does not apply, Endurance Holdings intends to mail to all U.S. Persons registered as holders of its ordinary shares and Series A Preferred Shares IRS Form 5471, completed with information from Endurance Holdings, for attachment to the U.S. federal income tax returns of such shareholders. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in the circumstances described above. Failure to file IRS Form 5471 may result in penalties.
Tax-Exempt Shareholders. Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII, that is includible in income by the tax-exempt entity as unrelated business taxable income.
Dispositions of Ordinary Shares and Series A Preferred Shares. Subject to the discussion below relating to the redemption of Series A Preferred Shares or the potential application of Code section 1248 or the ‘‘PFIC’’ rules, any gain or loss realized by a U.S. Person on the sale or other disposition of ordinary shares or Series A Preferred Shares will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the amount realized upon such sale or exchange and such person’s tax basis in the shares. If the holding period for these shares exceeds one year at the time of the disposition, any gain will be subject to tax at a current maximum marginal tax rate of 15% for individuals and 35% for corporations. Moreover, gain, if any, generally will be U.S. source gain and generally will constitute ‘‘passive income’’ for foreign tax credit limitation purposes.
Code section 1248 provides that if a U.S. Person sells or exchanges stock in a foreign corporation and such person owned directly, indirectly through certain foreign entities or constructively 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as ordinary income to the extent of the CFC’s earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. For these purposes, the Series A Preferred Shares should not be considered as having voting power unless and until there exists a Nonpayment Event which triggers the Series A Preferred Shareholders’ right to elect two additional directors to the board of directors of Endurance Holdings. In such case, the Series A Preferred Shares should be treated as voting stock for as long as such right continues.
Section 1248 also applies to the sale or exchange of shares in a foreign corporation if the foreign corporation would be treated as a CFC for RPII purposes and would be taxed as an insurance company if it were a domestic corporation, regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20% Gross Income Exception or the 20% Ownership Exception applies. Proposed regulations do not specifically address whether or how Code section 1248 would apply to dispositions of shares of stock in a foreign corporation that is not a CFC and does not directly engage in the insurance business, but has a subsidiary that is a CFC and that would be taxed as an insurance
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company if it were a domestic corporation. The Company believes, however, that the application of Code section 1248 under the RPII rules should not apply to the disposition of ordinary shares or Series A Preferred Shares because Endurance Holdings is not directly engaged in the insurance business. There can be no assurance, however, that the IRS will not interpret the regulations in a contrary manner or that the U.S. Treasury Department will not amend the regulations to provide that these rules will apply to dispositions of our ordinary shares and Series A Preferred Shares. Prospective investors should consult their tax advisors regarding the effects of these rules on a disposition of our shares.
Uncertainty as to Application of RPII. Regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes might ultimately be made or whether any such changes, as well as any interpretation or application of the RPII rules by the IRS, the courts or otherwise, might have retroactive effect. Accordingly, the meaning of the RPII provisions and their application to Endurance U.K. and Endurance Bermuda is uncertain. These provisions include the grant of authority to the U.S. Treasury to prescribe ‘‘such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise.’’ In addition, there can be no assurance that the IRS will not challenge any determinations by Endurance U.K. or Endurance Bermuda as to the amount, if any, of RPII that should be includible in income or that the amounts of the RPII inclusions will not be subject to adjustment based upon subsequent IRS examination. Prospective investors should consult their tax advisors as to the effects of these uncertainties.
Redemption of Series A Preferred Shares. Subject to the discussion herein relating to the application of the RPII and PFIC rules, under Section 302 of the Code, a redemption of the Series A Preferred Shares will be treated as a dividend to the extent of our current and accumulated earnings and profits, unless such redemption satisfies the tests set forth under Section 302(b) of the Code, which would treat the redemption as a sale or exchange subject to taxation as described above under ‘‘Dispositions of Ordinary Shares and Series A Preferred Shares.’’ A redemption will be treated as a sale or exchange if: (i) it is ‘‘substantially disproportionate,’’ (ii) constitutes a ‘‘complete termination of the holder’s stock interest’’ in us, or (iii) is ‘‘not essentially equivalent to a dividend’’, each within the meaning of Section 302(b) of the Code. In determining whether any of these tests are satisfied, shares considered to be owned by a U.S. Person by reason of certain constructive ownership rules set forth in the Code, as well as shares actually owned, must generally be taken into account. Because the determination as to whether any of the alternative tests of Section 302(b) of the Code is satisfied with respect to a particular holder of the Series A Preferred Shares will depend on the facts and circumstances as of the time the determination is made, U.S. shareholders should consult their tax advisors, at such time, to determine their tax treatment in light of their particular circumstances.
Passive Foreign Investment Companies. In general, a foreign corporation will be a PFIC during a given year if (i) 75% or more of its gross income constitutes ‘‘passive income’’ or (ii) 50% or more of its assets produce passive income.
If Endurance Holdings were characterized as a PFIC during a given year, U.S. Persons owning ordinary shares or Series A Preferred Shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an ‘‘excess distribution’’ with respect to, their shares, unless such shareholders made a ‘‘qualified electing fund election’’ or ‘‘mark-to-market’’ election. It is uncertain that Endurance Holdings would be able to provide its shareholders with the information necessary for a U.S. Person to make the elections. In general, a shareholder receives an ‘‘excess distribution’’ if the amount of the distribution is more than 125% of the average distribution with respect to the shares during the three preceding taxable years (or shorter period during which the taxpayer held the shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the shares was taxed in equal portions at the highest applicable tax rate on ordinary income throughout the shareholder’s period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such period.
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For the above purposes, passive income generally includes interest, dividends, annuities and other investment income. The PFIC statutory provisions, however, contain an express exception for income derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business.
This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Endurance Holdings expects for purposes of the PFIC rules that each of Endurance U.K. and Endurance Bermuda will be predominantly engaged in an insurance business and is unlikely to have financial reserves in excess of the reasonable needs of its insurance business. Accordingly, neither expects to be treated as a PFIC for U.S. federal income tax purposes. There can be no assurances, however, that this will be the case. The PFIC statutory provisions contain a look-through rule stating that, for purposes of determining whether a foreign corporation is a PFIC, such foreign corporation shall be treated as if it received ‘‘directly its proportionate share of the income . . .’’ and as if it ‘‘held its proportionate share of the assets . . .’’ of any other corporation in which it owns at least 25% by value of the shares. While no explicit guidance is provided by the statutory language, under this look-through rule Endurance Holdings should be deemed to own the assets and to have received the income of its insurance subsidiaries directly for purposes of determining whether it qualifies for the insurance exception. Consequently, Endurance Holdings does not expect to be treated as a PFIC for U.S. federal income tax purposes. This interpretation of the look-through rule is consistent with the legislative intention generally to exclude bona fide insurance companies from the application of PFIC provision. There can be no assurance, however, that the IRS will not challenge this position or that a court will not sustain such challenge. Prospective investors should consult their tax advisor as to the effects of the PFIC rules.
Other. Except as discussed below with respect to backup withholding, dividends paid by Endurance Holdings will not be subject to U.S. withholding tax.
Information Reporting and Backup Withholding. Information returns may be filed with the IRS in connection with payments of dividends with respect to our ordinary shares or Series A Preferred Shares and the proceeds from a sale or other disposition of the shares unless the shareholder establishes an exemption from the information reporting rules. A U.S. Person holding our ordinary shares or Series A Preferred Shares that does not establish such an exemption may be subject to U.S. backup withholding tax on these payments if the holder fails to provide its taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to a U.S. Person will be allowed as a credit against the U.S. Person’s U.S. federal income tax liability and may entitle such person to a refund, provided that the required information is furnished to the IRS.
Shareholders Who Are Non-U.S. Persons
Dividends and Disposition. In general (and subject to the discussion below under ‘‘Information Reporting and Backup Withholding’’), a Non-U.S. Person will not be subject to U.S. federal income or withholding tax with respect to payments of dividends on, or gain upon the disposition of, our ordinary shares or Series A Preferred Shares unless (i) the dividends or gain is effectively connected with the conduct by the Non-U.S. Person of a trade or business in the United States or (ii) in the case of gain upon the disposition of shares, the Non-U.S. Person is an individual who is present in the United States for 183 days or more in the taxable year and certain other conditions are met. Nonresident alien individuals will not be subject to U.S. estate tax with respect to our ordinary shares or Series A Preferred Shares.
Dividends or gain that is effectively connected with the conduct by a Non-U.S. Person of a trade or business in the United States generally will be subject to regular U.S. federal income tax in the same manner as if it were realized by a U.S. Person. In addition, if such Non-US. Person is a non-US. corporation, such dividends or gain may be subject to a branch profits tax at a rate of 30% (or such lower rate as is provided by an applicable income tax treaty).
Information Reporting and Backup Withholding. If our ordinary shares or Series A Preferred Shares are held by a Non-U.S. Person through a non-U.S. (and non-U.S. related) broker or financial
47
institution, information reporting and backup withholding generally would not be required. Information reporting, and possibly backup withholding, may apply if the shares are held by a Non-U.S. Person through a U.S. (or U.S. related) broker or financial institution and the Non-U.S. Person fails to provide appropriate information. Non-U.S. Persons should consult their tax advisors concerning the application of the information reporting and backup withholding rules.
Proposed U.S. Tax Legislation. Legislation has been introduced in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. While there are no currently pending legislative proposals which, if enacted, would have a material adverse effect on us or our shareholders, it is possible that broader based legislative proposals could emerge in the future that could have an adverse impact on us or our shareholders.
AVAILABLE INFORMATION
General information about us, including our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters for the Audit, Compensation, Investment, Nominating and Corporate Governance and Underwriting Committees of our Board of Directors, can be found at www.endurance.bm. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the United States Securities and Exchange Commission (the ‘‘SEC’’). Any of the above referenced documents can also be obtained in print, free of charge, by contacting the Secretary at Endurance Specialty Holdings Ltd., Wellesley House, 90 Pitts Bay Road, Pembroke HM08, Bermuda. Information on our website is not incorporated into this Form 10-K or our other securities filings and is not a part of these filings.
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| Item 1B. | Unresolved Staff Comments |
The Company had no outstanding, unresolved comments from the SEC staff at December 31, 2006.
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| Item 2. | Properties |
The Company leases office space in Pembroke, Bermuda where the Company’s principal executive office are located. Additionally, the Company and its subsidiaries lease office space in the United States and the United Kingdom including White Plains, New York; New York, New York; Chicago, Illinois; Los Angeles, California; San Francisco, California and London, England. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2006, please see Note 11 — ‘‘Commitments and Contingencies’’ of our Audited Consolidated Financial Statements.
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| Item 3. | 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.
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| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
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PART II
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| Item 5. | Market for the Registrant’s Ordinary Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our ordinary shares are publicly traded on the New York Stock Exchange (‘‘NYSE’’) under the symbol ‘‘ENH.’’ The following table sets forth, for the fiscal quarters and periods indicated, the high and low sale price per ordinary share as reported on the NYSE for the two most recent fiscal years:
| | | | | | | | | | | | |
| | | | High | | | Low |
| 2005 | | | | | | | | | | | | |
| First quarter | | | | $ | 37.85 | | | | | $ | 33.22 | |
| Second quarter | | | | | 38.00 | | | | | | 35.80 | |
| Third quarter | | | | | 39.64 | | | | | | 30.16 | |
| Fourth quarter | | | | | 37.48 | | | | | | 31.00 | |
| 2006 | | | | | | | | | | | | |
| First quarter | | | | $ | 36.13 | | | | | $ | 30.69 | |
| Second quarter | | | | | 32.77 | | | | | | 29.83 | |
| Third quarter | | | | | 35.38 | | | | | | 29.80 | |
| Fourth quarter | | | | | 37.89 | | | | | | 34.45 | |
|
Number of Holders of Ordinary Shares
The approximate number of record holders of our ordinary shares as of February 23, 2007 was 202, not including beneficial owners of shares registered in nominee or street name.
Dividend History and Restrictions
We paid a quarterly dividend of $0.25 per ordinary share in each of the four quarters of 2006 and 2005. Our Board of Directors reviews our ordinary share dividend each quarter. Among the factors considered by the Board of Directors in determining the amount of each dividend are the results of operations and the capital requirements, growth and other characteristics of our businesses. The declaration and payment of future dividends is also subject to certain legal, regulatory and other restrictions.
Endurance Holdings is a holding company and has no direct operations. The ability of Endurance Holdings to pay dividends or distributions depends almost exclusively on the ability of its subsidiaries to pay dividends to Endurance Holdings. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or other distributions. As of December 31, 2006, the maximum amount of distributions that Endurance Bermuda could pay to Endurance Holdings under applicable insurance and Companies Act regulations without prior regulatory approval was approximately $696 million. At December 31, 2006, Endurance U.S. Reinsurance, Endurance U.S. Insurance and Endurance U.K. were precluded by regulatory restrictions from declaring or distributing dividends. Our credit facilities prohibit Endurance Holdings from declaring or paying any dividends if a default or event of default has occurred and is continuing at the time of such declaration or payment or would result from such declaration or payment. In addition, the terms of our Series A Preferred Shares prohibit dividends from being declared or paid on ordinary shares unless the full dividends for the latest completed dividend period on all outstanding Series A Preferred Shares have been declared and paid.
For a description of working capital restrictions and other limitations upon the payment of dividends, see ‘‘Item 1. Business — Regulatory Matters,’’ ‘‘Item 7. Management’s Discussion and
49
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources’’ and ‘‘Item 8. Financial Statements and Supplementary Data’’ Note 17 to the Company’s Audited Consolidated Financial Statements.
Recent Sales of Unregistered Securities
None.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.
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| Item 6. | Selected Financial Data |
The following table sets forth our selected consolidated financial information for the years ended and as of the dates indicated. As described in Note 1 to our Audited Consolidated Financial Statements included elsewhere in the Company’s Annual Report on Form 10-K, our Audited Consolidated Financial Statements include the accounts of Endurance Holdings, Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance and Endurance U.S. Insurance.
We derived the following selected consolidated financial for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 from our Audited Consolidated Financial Statements and related notes. These historical results are not necessarily indicative of results to be expected from any future period.
You should read the following selected consolidated financial information along with the information contained in the Company’s Annual Report on Form 10-K, including ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and the Audited Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, 2006, 2005, 2004, 2003 and 2002 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 |
| | | | (U.S. dollars in thousands, except for per share amounts) |
| Selected Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross premiums written(a) | | | | $ | 1,789,642 | | | | | $ | 1,668,877 | | | | | $ | 1,711,357 | | | | | $ | 1,601,997 | | | | | $ | 798,760 | |
| Net premiums written(b) | | | | | 1,585,564 | | | | | | 1,619,349 | | | | | | 1,697,020 | | | | | | 1,597,844 | | | | | | 764,918 | |
| Net premiums earned | | | | | 1,638,574 | | | | | | 1,723,694 | | | | | | 1,632,600 | | | | | | 1,173,947 | | | | | | 369,489 | |
| Net investment income | | | | | 257,449 | | | | | | 180,451 | | | | | | 122,059 | | | | | | 71,010 | | | | | | 42,938 | |
| Net realized (losses) gains on sales of investments | | | | | (20,342 | | | | | | (8,244 | | | | | | 6,130 | | | | | | 5,718 | | | | | | 6,730 | |
| Net losses and loss expenses | | | | | 827,630 | | | | | | 1,650,943 | | | | | | 937,330 | | | | | | 663,696 | | | | | | 204,455 | |
| Acquisition expenses | | | | | 317,489 | | | | | | 331,309 | | | | | | 329,784 | | | | | | 230,549 | | | | | | 64,013 | |
| General and administrative expenses | | | | | 190,373 | | | | | | 146,419 | | | | | | 133,725 | | | | | | 100,657 | | | | | | 49,999 | |
| Net income (loss) | | | | | 498,126 | | | | | | (220,484 | | | | | | 355,584 | | | | | | 263,437 | | | | | | 102,066 | |
| Preferred Dividends | | | | | (15,500 | | | | | | (2,720 | | | | | | — | | | | | | — | | | | | | — | |
| Net income (loss) available to common shareholders | | | | | 482,626 | | | | | | (223,204 | | | | | | 355,584 | | | | | | 263,437 | | | | | | 102,066 | |
| Per Share Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared and paid per
common share | | | | $ | 1.00 | | | | | $ | 1.00 | | | | | $ | 0.81 | | | | | $ | 0.32 | | | | | $ | — | |
| Basic earnings (loss) per common share | | | | $ | 7.26 | | | | | | ($3.60 | | | | | $ | 5.66 | | | | | $ | 4.19 | | | | | $ | 1.74 | |
| Diluted earnings (loss) per common share | | | | $ | 6.73 | | | | | | ($3.60 | | | | | $ | 5.28 | | | | | $ | 4.00 | | | | | $ | 1.73 | |
| Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | 66,436 | | | | | | 62,029 | | | | | | 62,781 | | | | | | 62,933 | | | | | | 58,699 | |
| Diluted | | | | | 71,755 | | | | | | 62,029 | | | | | | 67,283 | | | | | | 65,900 | | | | | | 58,858 | |
|
50
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 |
| | | | (U.S. dollars in thousands) |
| Selected Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and investments | | | | $ | 5,515,044 | | | | | $ | 4,953,237 | | | | | $ | 3,940,353 | | | | | $ | 2,674,232 | | | | | $ | 1,663,249 | |
| Total assets | | | | | 6,925,554 | | | | | | 6,348,407 | | | | | | 5,224,398 | | | | | | 3,458,518 | | | | | | 2,054,594 | |
| Reserve for losses and loss expenses | | | | | 2,701,686 | | | | | | 2,603,590 | | | | | | 1,549,661 | | | | | | 833,158 | | | | | | 200,840 | |
| Reserve for unearned premiums | | | | | 843,202 | | | | | | 803,629 | | | | | | 897,605 | | | | | | 824,685 | | | | | | 403,305 | |
| Debt | | | | | 447,172 | | | | | | 447,092 | | | | | | 391,280 | | | | | | 103,029 | | | | | | 192,000 | |
| Preferred stock, Series A non-cumulative | | | | | 8,000 | | | | | | 8,000 | | | | | | — | | | | | | — | | | | | | — | |
| Total shareholders’ equity | | | | | 2,297,874 | | | | | | 1,872,543 | | | | | | 1,862,455 | | | | | | 1,644,815 | | | | | | 1,217,500 | |
| Per Share Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Book value per common share(c) | | | | $ | 31.45 | | | | | $ | 25.18 | | | | | $ | 30.30 | | | | | $ | 25.68 | | | | | $ | 22.14 | |
| Diluted book value per common share(d) | | | | $ | 28.87 | | | | | $ | 23.17 | | | | | $ | 27.91 | | | | | $ | 24.03 | | | | | $ | 21.73 | |
|
Selected Ratios (based on U.S. GAAP income statement data):
| | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | | 2006 | | | 2005 | | | 2004 |
| Net loss ratio(e) | | | | | 50.5 | | | | | | 95.8 | | | | | | 57.4 | |
| Acquisition expense ratio(f) | | | | | 19.4 | | | | | | 19.2 | | | | | | 20.2 | |
| General and administrative expense ratio(g) | | | | | 11.6 | | | | | | 8.5 | | | | | | 8.2 | |
| Combined ratio(h) | | | | | 81.5 | | | | | | 123.5 | | | | | | 85.8 | |
|
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| (a) | Gross premiums written for the year ended December 31, 2003 included $400.3 million of gross premiums acquired in the HartRe transaction. Gross premiums written for the year ended December 31, 2002 included $90.0 million of gross premiums acquired in the LaSalle transaction. |
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| (b) | Net premiums written for the year ended December 31, 2003 included $400.3 million of gross premiums acquired in the HartRe transaction. Net premiums written for the year ended December 31, 2002 included $69.0 million of net premiums acquired in the LaSalle transaction. |
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| (c) | Book value per share is a non-GAAP measure based on total shareholders’ equity divided by basic common shares outstanding of 66,701,712 at December 31, 2006, 66,412,937 at December 31, 2005, 61,472,808 at December 31, 2004, 64,046,776 at December 31, 2003 and 55,000,000 at December 31, 2002. Common shares outstanding include 221,331 vested restricted share units for purposes of the December 31, 2006 book value per share calculation. |
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| (d) | Diluted book value per share is a non-GAAP measure based on total shareholders’ equity divided by the number of common shares and common share equivalents outstanding at the end of the period, using the treasury stock method. Common share equivalents include options and warrants which are dilutive when the market price of the Company’s shares exceeds the exercise price of the options or warrants. Diluted shares outstanding were 72,654,109 at December 31, 2006, 72,172,980 at December 31, 2005, 66,729,185 at December 31, 2004, 68,444,576 at December 31, 2003 and 56,016,679 at December 31, 2002. We believe that this is an effective measure of the per share value of the Company as it takes into account the effect of all outstanding dilutive securities. |
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| (e) | The net loss ratio is calculated by dividing losses and loss expenses by net premiums earned. |
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| (f) | The acquisition expense ratio is calculated by dividing acquisition expenses by net premiums earned. |
| |
| (g) | The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned. |
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| (h) | The combined ratio is the sum of the loss ratio, the acquisition expense ratio and the general and administrative expense ratio. Our historical combined ratio may not be indicative of future underwriting performance. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The section of our 2006 Annual Report to Shareholders entitled ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ is incorporated herein by reference and is filed as Exhibit 13.1 to this Form 10-K.
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| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
The Company believes that it is principally exposed to four types of market risk: interest rate risk, equity price risk, foreign currency risk and credit risk.
51
Interest Rate Risk. The Company’s primary market risk exposure is to changes in interest rates. The Company’s fixed maturity portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, the market value of our fixed maturity portfolio falls, and the converse is also true. The Company manages its interest rate risk through an asset liability strategy that involves the selection, by our managers, of investments with appropriate characteristics, such as duration, yield, currency and liquidity that are tailored to the anticipated cash outflow characteristics of our liabilities. The target duration of assets not managed versus liabilities (including reserves for losses and loss expenses) is approximately three years. A significant portion of the investment portfolio matures each year, allowing for reinvestment at current market rates. As of December 31, 2006 and 2005, assuming parallel shifts in interest rates, the impact of these interest rate shifts in basis points on the Company’s cash and fixed income securities of $5.3 billion would have been as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Interest Rate Shift in Basis Points |
| | | | −100 | | | −50 | | | 0 | | | 50 | | | 100 |
| | | | (U.S. dollars in millions) |
| December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total market value | | | | $ | 5,386.0 | | | | | $ | 5,325.8 | | | | | $ | 5,262.0 | | | | | $ | 5,195.3 | | | | | $ | 5,126.9 | |
| Market value change from base | | | | | 2.36 | | | | | | 1.21 | | | | | | — | | | | | | (1.27 | | | | | | (2.57 | |
| Change in unrealized value | | | | $ | 124.0 | | | | | $ | 63.8 | | | | | | — | | | | | | ($66.7 | | | | | | ($135.1 | |
| December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total market value | | | | $ | 4,916.8 | | | | | $ | 4,855.8 | | | | | $ | 4,791.4 | | | | | $ | 4,724.2 | | | | | $ | 4,655.3 | |
| Market value change from base | | | | | 2.62 | | | | | | 1.35 | | | | | | — | | | | | | (1.40 | | | | | | (2.84 | |
| Change in unrealized value | | | | $ | 125.4 | | | | | $ | 64.4 | | | | | | — | | | | | | ($67.2 | | | | | | ($136.1 | |
|
Another method used by the Company to evaluate portfolio risk is Value-at-Risk (‘‘VaR’’). VaR is a probablistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. Portfolio risk, as measured by VaR, is affected by four primary risk factors: asset concentration, asset volatility, asset correlation and systematic risk. For a one year period over 95% of the time, assuming the risks taken into account in the VaR model perform per their historical tendencies, the portfolio loss for this year period is expected to be less than or equal to 3.24% at December 31, 2006, compared to an expected loss of less than or equal to 3.0% at December 31, 2005.
The Company’s investments in alternative funds are exposed to interest rate risk. To the extent that the securities underlying these investments are fixed maturities, fluctuations in interest rates have a direct impact on the market valuation of these investments.
Equity Price Risk. The Company’s investments in alternative funds are exposed to equity price risk. To the extent that the securities underlying these investments are equity securities, fluctuations in the equity markets have a direct impact on the market valuation of these investments. The Company’s investments in alternative funds at December 31, 2006 were $253.1 million which represents 4.6% of the Company’s invested assets including pending securities transactions.
Foreign Currency Risk. The Company has made a significant investment in the capitalization of Endurance U.K., which is denominated in British Sterling. In addition, the Company enters into reinsurance and insurance contracts for which it is obligated to pay losses in currencies other than U.S. dollars. For the year ended December 31, 2006, approximately 17% of the Company’s gross premiums, prior to deposit accounting adjustments, were written in currencies other than the U.S. dollar. A portion of our cash and cash equivalents, investments and loss reserves are also denominated in non-U.S. currencies. The majority of our operating foreign currency assets and liabilities are denominated in Euros, British Sterling, Canadian Dollars, Japanese Yen and Australian Dollars (‘‘Major Currencies’’). The Company may, from time to time, experience losses from fluctuations in the values of these and other non-U.S. currencies, which could have a material adverse effect on its results of operations. The Company will attempt to manage its foreign currency risk by seeking to match its liabilities under insurance and reinsurance contracts that are payable in foreign currencies with investments that are denominated in such currencies. The Company purchases assets which are
52
matched in currency to its case reserves for liabilities incurred in major currencies including U.S. dollars, Euros, British Sterling, Canadian Dollars, Japanese Yen and Australian dollars at the time such reserves are established. The Company has no currency hedges in place; however, as part of its matching strategy, the Company may consider the use of hedges when it becomes aware of probable significant losses that will be paid in non-U.S. dollar currencies. For liabilities incurred in currencies other than those listed above, U.S. dollars are converted to the currency of the loss at the time of claims payment. As a result, the Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies.
Credit Risk. The Company has exposure to credit risk primarily as a holder of fixed maturity securities and investments in other ventures. The Company’s risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. The Company attempts to limit our credit exposure by investing the fixed income portfolio primarily in investments rated A−/A3 or higher. In addition, the Company has limited its exposure to any single corporate issuer to 2% or less of its total portfolio. As at December 31, 2006 66.2% of the Company’s fixed income portfolio was rated AAA by S&P, Moody’s or other rating agency, 13.8% was rated A or better and 1.3% of the Company’s portfolio was rated below investment grade.
In addition, the Company has exposure to credit risk as it relates to losses recoverable on paid and unpaid losses where the Company has purchased reinsurance and retrocessional coverages. The Company relies on reinsurance within its insurance businesses in order to manage risk accumulations. The Company continues not to rely heavily on retrocessional reinsurance, but strategically purchases this coverage across the whole portfolio to reduce our exposure to the risk of a severe catastrophe event or occurrence of multiple significant catastrophe events. When reinsurance or retrocessional reinsurance is purchased, we require our reinsurers to have high financial strength ratings. The Company evaluates the financial condition of its reinsurers and monitors its concentration of credit risk on an ongoing basis. The balance of losses recoverable at December 31, 2006 was $44.2 million (2005 — $17.2 million). At December 31, 2006 and 2005, the Company had no allowance for estimated uncollectible losses recoverable.
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| Item 8. | Financial Statements and Supplementary Data |
The Report of Independent Registered Public Accounting Firm, Audited Consolidated Financial Statements, Notes to the Audited Consolidated Financial Statements and the Condensed Unaudited Quarterly Financial Data included in our 2006 Annual Report to Shareholders are incorporated herein by reference and are filed as Exhibit 13.1 to this Form 10-K.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There were no changes in or disagreements with accountants on accounting and financial disclosure during the course of the year.
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| Item 9A. | 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 Securities Exchange Act of 1934, as amended, (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 and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s Chief Executive Officer and Chief |
53
| | |
| | Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting and the associated Report of Independent Registered Public Accounting Firm included in our 2006 Annual Report to Shareholders are incorporated herein by reference and are filed as Exhibit 13.1 to this Form 10-K. |
| | |
| b) | Changes in 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 fourth 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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| Item 9B. | Other Information |
No information required to be disclosed in a report on Form 8-K during the three months ended December 31, 2006 was not so reported.
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PART III
| |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information called for by Item 10 is incorporated herein by reference to the sections captioned ‘‘Board of Directors,’’ ‘‘Management’’ and ‘‘Section 16 Beneficial Ownership Reporting Compliance’’ of our proxy statement for our 2007 Annual General Meeting of Shareholders.
Our Board of Directors has adopted a code of ethics entitled ‘‘Code of Business Conduct and Ethics’’ which applies to all of our employees, officers and directors, including our chief executive officer and chief financial officer. Copies of this code can be found at www.endurance.bm and may be obtained in print, without cost, by writing Endurance Specialty Holdings Ltd., Attention: Secretary, Wellesley House, 90 Pitts Bay Road, Pembroke HM08, Bermuda.
| |
| Item 11. | Executive Compensation |
The information called for by Item 11 is incorporated herein by reference to the sections captioned ‘‘Compensation Discussion and Analysis,’’ ‘‘Compensation Committee Report ’’ and ‘‘Executive Compensation’’ of our Proxy Statement for our 2007 Annual General Meeting of Shareholders.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
The information called for by Item 12 relating to the security ownership of certain beneficial owners and management is incorporated herein by reference to the sections captioned ‘‘Security Ownership of Certain Beneficial Owners’’ and ‘‘Security Ownership of Directors and Executive Officers’’ of our Proxy Statement for our 2007 Annual General Meeting of Shareholders.
Information required by this item relating to securities authorized for issuance under the equity compensation plans is included in the following table:
Equity Compensation Plan Information
| | | | | | | | | | | | | | | | | | |
| Plan category | | | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights | | | Weighted-average
exercise price of
outstanding options,
warrants and rights(1) | | | Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column) |
| Equity compensation plans approved by security holders | | | | | 3,599,977 | | | | | $ | 18.50 | | | | | | 1,080,910 | |
| Equity compensation plans not approved by security holders | | | | | — | | | | | | — | | | | | | — | |
| Total | | | | | 3,599,977 | | | | | $ | 18.50 | | | | | | 1,080,910 | |
|
| |
| (1) | Weighted average exercise price does not include $Nil exercise price of 1,011,309 restricted stock units included in the number of securities to be issued upon exercise. |
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information called for by Item 13 is incorporated herein by reference to the sections captioned ‘‘Transactions with Related Persons, Promoters and Certain Control Persons’’ and ‘‘Board of Directors’’ of our Proxy Statement for our 2007 Annual General Meeting of Shareholders.
| |
| Item 14. | Principal Accountant Fees and Services |
The information called for by Item 14 is incorporated herein by reference to the section captioned ‘‘Audit Fees’’ of our Proxy Statement for our 2007 Annual General Meeting of Shareholders.
55
PART IV
| |
| Item 15. | Exhibits, Financial Statement Schedules |
| | |
| (a) | The following is a list of certain documents filed as a part of this report: |
| | |
| 1. | Financial statements and other information from the Registrant’s 2006 Annual Report to Shareholders which are incorporated herein by reference: |
| | |
| | Management Report on Effectiveness of Internal Control over Financial Reporting (Exhibit 13.1) |
| | |
| | Reports of Independent Registered Public Accounting Firm — Ernst & Young (Exhibit 13.1). |
| | |
| | Consolidated Balance Sheets at December 31, 2006 and December 31, 2005 (Exhibit 13.1). |
| | |
| | Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004 (Exhibit 13.1). |
| | |
| | Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004 (Exhibit 13.1). |
| | |
| | Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 (Exhibit 13.1). |
| | |
| | Notes to Consolidated Financial Statements (Exhibit 13.1). |
| | |
| | Consolidated Selected Financial Data (Exhibit 13.1) |
| | |
| | Management’s Discussion and Analysis of Financial Condition and Results of Operations (Exhibit 13.1). |
| | |
| 2. | Financial statement schedules required to be filed by Item 8 of this Form: |
| | |
| | Schedule I — Summary of Investments Other Than Investments in Related Parties |
| | |
| | Schedule II — Condensed Financial Information of Registrant |
| | |
| | Schedule III — Supplementary Insurance Information |
| | |
| | Schedule IV — Reinsurance |
| | |
| | Schedule VI — Supplementary Information for Property and Casualty Insurance Underwritten |
| | |
| | All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted. |
| | |
| 3. | The following sets forth those exhibits filed pursuant to Item 601 of Regulation S-K. |
| | | |
| Exhibit Number | | | Description of Document |
| 3.1 | | | Memorandum of Association. Incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 3.2 | | | Certificate of Deposit of Memorandum of Increase of Share Capital. Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the Year Ended December 31, 2004. |
| 3.3 | | | Amended and Restated Bye-laws. Incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended June 30, 2005. |
|
56
| | | |
| Exhibit Number | | | Description of Document |
| 4.1 | | | Specimen Ordinary Share Certificate. Incorporated herein by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form S-1 filed on February 10, 2003. |
| 4.2 | | | Specimen Class A Share Certificate. Incorporated herein by reference to Exhibit 4.2 to Amendment No. 2 to the Registration Statement on Form S-1 filed on February 10, 2003. |
| 4.3 | | | Specimen 7.75% Non-Cumulative Preferred Share, Series A Certificate. Incorporated herein by reference to Exhibit 4.2 to Form 8-A filed on October 12, 2005. |
| 4.4 | | | Form of Warrant for Ordinary Shares. Incorporated herein by reference to Exhibit 4.3 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 4.5 | | | Amendment to Form of Warrant for Ordinary Shares. Incorporated herein by reference to Exhibit 4.4 to Amendment No. 3 to the Registration Statement on Form S-1 filed on February 27, 2003. |
| 4.6 | | | Form of Warrant for Class A Shares. Incorporated herein by reference to Exhibit 4.5 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 4.7 | | | Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on July 15, 2004. |
| 4.8 | | | First Supplemental Indenture, dated as of July 15, 2004, to the Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on July 15, 2004. |
| 4.9 | | | Form of 7% Senior Note due July 15, 2034 (included in Exhibit 4.2 to the Current Report on Form 8-K on July 15, 2004). Incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K filed on July 15, 2004. |
| 4.10 | | | Second Supplemental Indenture, dated as of October 17, 2005, to the Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 1.2 to the Current Report on Form 8-K filed on October 18, 2005. |
| 4.11 | | | Form of 6.15% Senior Note due October 15, 2015 (included in Exhibit 1.2 to the Current Report on Form 8-K on July 15, 2004). Incorporated herein by reference to Exhibit 1.2 to the Current Report on Form 8-K filed on October 18, 2005. |
| 10.1 | | | Amended and Restated Shareholders Agreement among the Registrant and each of the persons listed on Schedule A thereto. Incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 10.2 | | | Registration Rights Agreement, dated as of July 22, 2002, among the Registrant and each of the persons listed on Schedule A thereto. Incorporated herein by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 10.3 | | | Credit Agreement, dated as of August 6, 2004, among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, as Administrative Agent. Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004. |
|
57
| | | |
| Exhibit Number | | | Description of Document |
| 10.4 | | | Amended Credit Agreement, dated as of April 18, 2005, among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, as Administrative Agent. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated April 20, 2005. |
| 10.5 | | | Pledge and Security Agreement, dated as of August 6, 2004, by and among the Company, various designated subsidiary borrowers, The Bank of New York, as Collateral Agent and Custodian and JPMorgan Chase Bank, as Administrative Agent. Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004. |
| 10.6 | | | Account Control Agreement, dated as of August 6, 2004, by and among the Company, Endurance Specialty Insurance Ltd., Endurance U.S. Holdings Corp., Endurance Worldwide Holdings Limited, Endurance Worldwide Insurance Limited and The Bank of New York, as Custodian. Incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 |
| 10.7 | | | Underlease, dated July 18, 2003, between Centre Solutions (Bermuda) Limited and Endurance Specialty Insurance Ltd. Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2003. |
| 10.8 | | | 2002 Amended and Restated Stock Option Plan. Incorporated herein by reference to Exhibit 10.11 to Amendment No. 3 to the Registration Statement on Form S-1 filed on February 27, 2003.** |
| 10.9 | | | Amended and Restated 2003 Non-Employee Director Equity Incentive Plan. Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2005.** |
| 10.10 | | | Employee Share Purchase Plan. Incorporated by reference to Exhibit 4.2 of Registration Statement on Form S-8 filed on September 9, 2005.** |
| 10.11 | | | 2005 Sharesave Scheme. Incorporaated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 2005.** |
| 10.12 | | | Renewal Rights Purchase Agreement, dated as of October 1, 2004, by and between XL Reinsurance America Inc. and Endurance Reinsurance Corporation of America. Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on October 4, 2004. |
| 10.13 | | | Termination Agreement entered into as of June 1, 2006 between Endurance Services Limited and Steven W. Carlsen. Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on June 6, 2006.** |
| 10.14 | | | Amendment No. 1 to Share Option Agreement made as of June 1, 2006, between Endurance Specialty Holdings Ltd. and Steven W. Carlsen. Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on June 6, 2006.** |
| 10.15 | | | Amendment No. 1 to Restricted Share Unit Agreement made as of June 1, 2006, between Endurance Specialty Holdings Ltd. and Steven W. Carlsen. Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed on June 6, 2006.** |
| 10.16 | | | Consulting Agreement, effective as of June 1, 2006, by and between Endurance Services Limited, and Shadowbrook Advising Inc. Incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K filed on June 6, 2006.** |
|
58
| | | |
| Exhibit Number | | | Description of Document |
| 10.17 | | | Form of Share Option Agreement No. 2. Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on July 7, 2007.** |
| 10.18 | | | Form of Option Dividend Restricted Share Unit Agreement. Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on July 7, 2007.** |
| 10.19 | | | Reinsurance Agreement, dated as of August 1, 2006, by and between Endurance Specialty Insurance Ltd. and Shackleton Re Limited. Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on August 1, 2006. |
| 10.20 | | | Reinsurance Agreement, dated as of August 1, 2006, by and between Endurance Specialty Insurance Ltd. and Shackleton Re Limited. Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed on August 1, 2006. |
| 13.1 | | | Selected Portions of the Registrant’s 2006 Annual Report to Shareholders |
| 21.1 | | | Subsidiaries of the Registrant |
| 23.1 | | | Consent of Independent Registered Public Accounting Firm |
| 31.1 | | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
| 31.2 | | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
| 32 | | | Certifications Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| |
| ** | Management contract or compensatory plan or arrangement. |
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | |
| | | | ENDURANCE SPECIALTY HOLDINGS LTD. |
| Date: February 28, 2007 | | | /s/ Kenneth J. LeStrange |
| | | | Name: | | | Kenneth J. LeStrange |
| | | | Title: | | | Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | |
| Signature | | | Title | | | Date |
| /s/ Kenneth J. LeStrange | | | Chairman, President, Chief Executive
Officer and Director (Principal
Executive Officer) | | | February 28, 2007 |
| Kenneth J. LeStrange | | | |
| | | | | | | |
| /s/ Michael J. McGuire | | | Chief Financial Officer (Principal
Financial and Accounting Officer) | | | February 28, 2007 |
| Michael J. McGuire | | | |
| | | | Director | | | February 28, 2007 |
| Gregor S. Bailar | | | | | | |
| /s/ John T. Baily | | | Director | | | February 28, 2007 |
| John T. Baily | | | | | | |
| /s/ Norman Barham | | | Director | | | February 28, 2007 |
| Norman Barham | | | | | | |
| /s/ Galen R. Barnes | | | Director | | | February 28, 2007 |
| Galen R. Barnes | | | | | | |
| /s/ William H. Bolinder | | | Director | | | February 28, 2007 |
| William H. Bolinder | | | | | | |
| /s/ Steven W. Carlsen | | | Director | | | February 28, 2007 |
| Steven W. Carlsen | | | | | | |
| /s/ Brendan R. O’Neill | | | Director | | | February 28, 2007 |
| Brendan R. O’Neill | | | | | | |
| /s/ Richard C. Perry | | | Director | | | February 28, 2007 |
| Richard C. Perry | | | | | | |
| /s/ William J. Raver | | | Director | | | February 28, 2007 |
| William J. Raver | | | | | | |
| /s/ Robert A. Spass | | | Director | | | February 28, 2007 |
| Robert A. Spass | | | | | | |
| /s/ Therese M. Vaughan | | | Director | | | February 28, 2007 |
| Therese M. Vaughan | | | | | | |
| /s/ R. Max Williamson | | | Director | | | February 28, 2007 |
| R. Max Williamson | | | | | | |
|
60
Index to Schedules to Consolidated Financial Statements
| | | | | | |
| | | | | | | Pages |
| I. | | | Summary of Investments other than Investments in Related Parties at December 31, 2006 | | | S-2 |
| II. | | | Condensed Financial Statement Information of the Registrant | | | S-3 |
| III. | | | Supplementary Insurance Information for the years ended December 31, 2006, 2005 and 2004 | | | S-6 |
| IV. | | | Reinsurance for the years ended December 31, 2006, 2005 and 2004 | | | S-8 |
| VI. | | | Supplementary Information for Property and Casualty Insurance Underwriters for the years ended December 31, 2006, 2005 and 2004 | | | S-9 |
|
All other financial statement schedules are not required under the related instructions or are inapplicable
and therefore have been omitted.
S-1
SCHEDULE I
ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
AT DECEMBER 31, 2006
(in thousands of United States dollars)
| | | | | | | | | | | | | | | | | | |
| | | | Cost(1) | | | Market Value | | | Amount at
Which Shown
on the
Balance Sheet |
| Type of Investment: | | | | | | | | | | | | | | | | | | |
| Fixed Maturities | | | | | | | | | | | | | | | | | | |
| U.S. government and government agencies and authorities | | | | $ | 878,091 | | | | | $ | 876,143 | | | | | $ | 876,143 | |
| U.S. states, municipalities and political subdivisions | | | | | 8,004 | | | | | | 7,864 | | | | | | 7,864 | |
| Foreign governments | | | | | 236,411 | | | | | | 234,336 | | | | | | 234,336 | |
| Corporate bonds | | | | | 881,429 | | | | | | 873,818 | | | | | | 873,818 | |
| U.S. asset backed securities | | | | | 637,867 | | | | | | 634,541 | | | | | | 634,541 | |
| U.S. mortgage backed securities | | | | | 2,108,017 | | | | | | 2,087,502 | | | | | | 2,087,502 | |
| Total fixed maturities | | | | | 4,749,819 | | | | | | 4,714,204 | | | | | | 4,714,204 | |
| Investments in other ventures | | | | | 204,612 | | | | | | 253,068 | | | | | | 253,068 | |
| Total Investments | | | | $ | 4,954,431 | | | | | $ | 4,967,272 | | | | | $ | 4,967,272 | |
|
| |
| (1) | Investments in fixed maturity securities are shown at amortized cost. |
S-2
SCHEDULE II
ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS – PARENT ONLY
DECEMBER 31, 2006 AND 2005
(In thousands of United States dollars except share amounts)
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| ASSETS | | | | | | | | | | | | |
| Investment in subsidiary | | | | $ | 2,731,690 | | | | | $ | 2,288,489 | |
| Cash and cash equivalents | | | | | 14,355 | | | | | | 26,189 | |
| Amounts due from subsidiaries | | | | | 7,132 | | | | | | 9,786 | |
| Other assets | | | | | 6,786 | | | | | | 6,139 | |
| Total assets | | | | $ | 2,759,963 | | | | | $ | 2,330,603 | |
| LIABILITIES | | | | | | | | | | | | |
| Debt | | | | $ | 447,172 | | | | | $ | 447,092 | |
| Other liabilities | | | | | 14,917 | | | | | | 10,968 | |
| Total liabilities | | | | | 462,089 | | | | | | 458,060 | |
| 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 – 66,480,381 issued and outstanding (2005 – 66,138,901) | | | | | 66,480 | | | | | | 66,139 | |
| Additional paid-in capital | | | | | 1,458,063 | | | | | | 1,453,722 | |
| Accumulated other comprehensive loss | | | | | (14,465 | | | | | | (19,672 | |
| Retained earnings | | | | | 779,796 | | | | | | 364,354 | |
| Total shareholders’ equity | | | | | 2,297,874 | | | | | | 1,872,543 | |
| Total liabilities and shareholders’ equity | | | | $ | 2,759,963 | | | | | $ | 2,330,603 | |
|
See accompanying notes to the consolidated financial statements.
S-3
SCHEDULE II
ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT, Cont’d.
STATEMENTS OF INCOME (LOSS) – PARENT ONLY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands of United States dollars)
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Revenues | | | | | | | | | | | | | | | | | | |
| Net investment income (loss) | | | | $ | 223 | | | | | $ | (318 | | | | | $ | 1,859 | |
| Net realized gains on sales of investments | | | | | — | | | | | | — | | | | | | — | |
| Total revenues | | | | | 223 | | | | | | (318 | | | | | | 1,859 | |
| Expenses | | | | | | | | | | | | | | | | | | |
| General and administrative expenses | | | | | 12,339 | | | | | | 14,487 | | | | | | 10,442 | |
| Net realized losses on sales of investments | | | | | — | | | | | | — | | | | | | 2,543 | |
| Interest expense | | | | | 30,040 | | | | | | 20,236 | | | | | | 9,842 | |
| Total expenses | | | | | 42,379 | | | | | | 34,723 | | | | | | 22,827 | |
| Net loss before equity in net income (loss) of subsidiaries | | | | | (42,156 | | | | | | (35,041 | | | | | | (20,968 | |
| Equity in net income (loss) of subsidiaries | | | | | 540,282 | | | | | | (185,443 | | | | | | 376,552 | |
| Net income (loss) | | | | | 498,126 | | | | | | (220,484 | | | | | | 355,584 | |
| Preferred dividends | | | | | (15,500 | | | | | | (2,720 | | | | | | — | |
| Net income (loss) available to common shareholders | | | | $ | 482,626 | | | | | $ | (223,204 | | | | | $ | 355,584 | |
|
See accompanying notes to the consolidated financial statements.
S-4
SCHEDULE II
ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT, Cont’d.
STATEMENTS OF CASH FLOWS – PARENT ONLY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands of United States dollars)
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Cash flows used in operating activities: | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | | $ | 498,126 | | | | | $ | (220,484 | | | | | $ | 355,584 | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 167 | | | | | | 123 | | | | | | 348 | |
| Net realized gains on sales of investments | | | | | — | | | | | | — | | | | | | 2,543 | |
| Stock-based compensation expense | | | | | (1,005 | | | | | | 2,106 | | | | | | 2,351 | |
| Equity in net loss (income) of subsidiary | | | | | (540,282 | | | | | | 185,443 | | | | | | (376,552 | |
| Accrued investment income | | | | | — | | | | | | — | | | | | | 892 | |
| Other assets | | | | | (647 | | | | | | 28 | | | | | | (1,454 | |
| Other liabilities | | | | | 3,949 | | | | | | 4,834 | | | | | | 15,039 | |
| Net cash used in operating activities | | | | | (39,692 | | | | | | (27,950 | | | | | | (1,249 | |
| Cash flows provided by (used in) investing activities: | | | | | | | | | | | | | | | | | | |
| Proceeds from sales of fixed maturity investments | | | | | — | | | | | | — | | | | | | 112,485 | |
| Proceeds from maturities and calls on fixed maturity investments | | | | | — | | | | | | — | | | | | | 6,164 | |
| Purchases of fixed maturity investments | | | | | — | | | | | | — | | | | | | (16,235 | |
| Investments in subsidiary | | | | | (11,800 | | | | | | (588,200 | | | | | | (196,070 | |
| Dividends received from subsidiary | | | | | 114,000 | | | | | | 156,720 | | | | | | 99,000 | |
| Net amounts loaned to subsidiaries | | | | | 11,807 | | | | | | 4,450 | | | | | | 361 | |
| Net cash provided by (used in) investing activities | | | | | 114,007 | | | | | | (427,030 | | | | | | 5,705 | |
| Cash flows (used in) provided by financing activities: | | | | | | | | | | | | | | | | | | |
| Issuance of common shares | | | | | 9,253 | | | | | | 202,711 | | | | | | 2,821 | |
| Issuance of preference shares | | | | | — | | | | | | 193,700 | | | | | | — | |
| Offering and registration costs paid | | | | | (134 | | | | | | (2,769 | | | | | | (4,152 | |
| Repurchase of common shares | | | | | (10,008 | | | | | | (51,937 | | | | | | (91,484 | |
| Settlement of restricted shares | | | | | (3,498 | | | | | | (2,702 | | | | | | (1,625 | |
| Issuance of long term debt | | | | | — | | | | | | 199,278 | | | | | | 247,775 | |
| Bank debt repaid | | | | | — | | | | | | — | | | | | | (103,029 | |
| Interest rate lock settlement | | | | | — | | | | | | — | | | | | | (2,698 | |
| Dividends paid | | | | | (81,762 | | | | | | (64,416 | | | | | | (50,346 | |
| Net cash (used in) provided by financing activities | | | | | (86,149 | | | | | | 473,865 | | | | | | (2,738 | |
| Net (decrease) increase in cash and cash equivalents | | | | | (11,834 | | | | | | 18,885 | | | | | | 1,718 | |
| Cash and cash equivalents, beginning of year | | | | | 26,189 | | | | | | 7,304 | | | | | | 5,586 | |
| Cash and cash equivalents, end of year | | | | $ | 14,355 | | | | | $ | 26,189 | | | | | $ | 7,304 | |
|
See accompanying notes to the consolidated financial statements.
S-5
SCHEDULE III
ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands of United States dollars)
YEAR ENDED DECEMBER 31, 2006
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Insurance | | | Reinsurance | | | Deposit
Accounting(3) | | | Total |
| Deferred Acquisition Costs | | | | $ | 39,875 | | | | | $ | 140,042 | | | | | $ | (11,108 | | | | | $ | 168,809 | |
| Reserve for Losses and Loss Expenses | | | | | 865,347 | | | | | | 1,964,961 | | | | | | (128,622 | | | | | | 2,701,686 | |
| Unearned Premiums | | | | | 321,015 | | | | | | 564,367 | | | | | | (42,180 | | | | | | 843,202 | |
| Net Premiums Earned | | | | | 371,762 | | | | | | 1,447,167 | | | | | | (180,355 | | | | | | 1,638,574 | |
| Net Investment Income(1) | | | | | — | | | | | | — | | | | | | | | | | | | 257,449 | |
| Losses and Loss Expenses | | | | | 252,310 | | | | | | 696,962 | | | | | | (121,642 | | | | | | 827,630 | |
| Amortization of Deferred Acquisition Costs | | | | | 32,528 | | | | | | 341,194 | | | | | | (56,233 | | | | | | 317,489 | |
| Other Operating Expenses(2) | | | | | 49,524 | | | | | | 140,849 | | | | | | — | | | | | | 190,373 | |
| Net Premiums Written | | | | | 416,637 | | | | | | 1,327,919 | | | | | | (158,992 | | | | | | 1,585,564 | |
|
| |
| (1) | Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments. |
| |
| (2) | General and administrative expenses incurred by segments are allocated directly. Remaining corporate overhead is allocated to segments based on each segment’s proportional share of gross premiums written. |
| |
| (3) | Adjusts the Company’s underwriting results by segment to the Company’s financial statement presentation. |
YEAR ENDED DECEMBER 31, 2005
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Insurance | | | Reinsurance | | | Deposit
Accounting(3) | | | Total |
| Deferred Acquisition Costs | | | | $ | 12,822 | | | | | $ | 167,655 | | | | | $ | (17,885 | | | | | $ | 162,592 | |
| Reserve for Losses and Loss Expenses | | | | | 670,769 | | | | | | 1,979,446 | | | | | | (46,625 | | | | | | 2,603,590 | |
| Unearned Premiums | | | | | 213,539 | | | | | | 653,633 | | | | | | (63,543 | | | | | | 803,629 | |
| Net Premiums Earned | | | | | 364,175 | | | | | | 1,439,267 | | | | | | (79,748 | | | | | | 1,723,694 | |
| Net Investment Income(1) | | | | | — | | | | | | — | | | | | | — | | | | | | 180,451 | |
| Losses and Loss Expenses | | | | | 343,577 | | | | | | 1,368,284 | | | | | | (60,918 | | | | | | 1,650,943 | |
| Amortization of Deferred Acquisition Costs | | | | | 27,483 | | | | | | 327,236 | | | | | | (23,410 | | | | | | 331,309 | |
| Other Operating Expenses(2) | | | | | 35,987 | | | | | | 110,432 | | | | | | — | | | | | | 146,419 | |
| Net Premiums Written | | | | | 387,653 | | | | | | 1,374,987 | | | | | | (143,291 | | | | | | 1,619,349 | |
|
| |
| (1) | Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments. |
| |
| (2) | General and administrative expenses incurred by segments are allocated directly. Remaining corporate overhead is allocated to segments based on each segment’s proportional share of gross premiums written. |
| |
| (3) | Adjusts the Company’s underwriting results by segment to the Company’s financial statement presentation. |
S-6
SCHEDULE III
ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands of United States dollars)
YEAR ENDED DECEMBER 31, 2004
| | | | | | | | | | | | | | | | | | |
| | | | Insurance | | | Reinsurance | | | Total |
| Deferred Acquisition Costs | | | | $ | 16,036 | | | | | $ | 179,383 | | | | | $ | 195,419 | |
| Reserve for Losses and Loss Expenses | | | | | 370,330 | | | | | | 1,179,331 | | | | | | 1,549,661 | |
| Unearned Premiums | | | | | 173,998 | | | | | | 723,607 | | | | | | 897,605 | |
| Net Premiums Earned | | | | | 338,401 | | | | | | 1,294,199 | | | | | | 1,632,600 | |
| Net Investment Income(1) | | | | | — | | | | | | — | | | | | | 122,059 | |
| Losses and Loss Expenses | | | | | 193,709 | | | | | | 743,621 | | | | | | 937,330 | |
| Amortization of Deferred Acquisition Costs | | | | | 36,284 | | | | | | 293,500 | | | | | | 329,784 | |
| Other Operating Expenses(2) | | | | | 33,407 | | | | | | 100,318 | | | | | | 133,725 | |
| Net Premiums Written | | | | | 356,771 | | | | | | 1,340,249 | | | | | | 1,697,020 | |
|
| |
| (1) | Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments. |
| |
| (2) | General and administrative expenses incurred by segments are allocated directly. Remaining corporate overhead is allocated to segments based on each segment’s proportional share of gross premiums written. |
S-7
SCHEDULE IV
ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands of United States dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Premiums Written | | | Gross | | | Ceded to
Other
Companies | | | Assumed from
Other
Companies | | | Net Amount | | | Percentage of
Amount
Assumed to
Net |
| Year ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and liability insurance | | | | $ | 576,745 | | | | | $ | 204,078 | | | | | $ | 1,212,897 | | | | | $ | 1,585,564 | | | | | | 76 | |
| Year ended December 31, 2005: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and liability insurance | | | | $ | 473,532 | | | | | $ | 49,528 | | | | | $ | 1,195,345 | | | | | $ | 1,619,349 | | | | | | 74 | |
| Year ended December 31, 2004: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and liability insurance | | | | $ | 409,118 | | | | | $ | 14,337 | | | | | $ | 1,302,239 | | | | | $ | 1,697,020 | | | | | | 77 | |
|
S-8
SCHEDULE VI
ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY INSURANCE
UNDERWRITERS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands of United States dollars)
YEAR ENDED DECEMBER 31, 2006
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Insurance | | | Reinsurance | | | Deposit
Accounting(2) | | | Total |
| Deferred Acquisition Costs | | | | $ | 39,875 | | | | | $ | 140,042 | | | | | $ | (11,108 | | | | | $ | 168,809 | |
| Reserve for Losses and Loss Expenses | | | | | 865,347 | | | | | | 1,964,961 | | | | | | (128,622 | | | | | | 2,701,686 | |
| Discount if any, Reserve for Losses and Loss Expenses | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Unearned Premiums | | | | | 321,015 | | | | | | 564,367 | | | | | | (42,180 | | | | | | 843,202 | |
| Net Premiums Earned | | | | | 371,762 | | | | | | 1,447,167 | | | | | | (180,355 | | | | | | 1,638,574 | |
| Net Investment Income(1) | | | | | — | | | | | | — | | | | | | | | | | | | 257,449 | |
| Losses and Loss Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Year | | | | | 306,697 | | | | | | 701,950 | | | | | | (123,278 | | | | | | 885,369 | |
| Prior Year | | | | | (54,387 | | | | | | (4,988 | | | | | | 1,636 | | | | | | (57,739 | |
| Amortization of Deferred Acquisition Costs | | | | | 32,528 | | | | | | 341,194 | | | | | | (56,233 | | | | | | 317,489 | |
| Paid Losses and Loss Expenses | | | | | 87,531 | | | | | | 734,971 | | | | | | (39,644 | | | | | | 782,858 | |
| Net Premiums Written | | | | | 416,637 | | | | | | 1,327,919 | | | | | | (158,992 | | | | | | 1,585,564 | |
|
| |
| (1) | Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments. |
| |
| (2) | Adjusts the Company’s underwriting results by segment to the Company’s financial statement presentation. |
YEAR ENDED DECEMBER 31, 2005
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Insurance | | | Reinsurance | | | Deposit
Accounting(2) | | | Total |
| Deferred Acquisition Costs | | | | $ | 12,822 | | | | | $ | 167,655 | | | | | $ | (17,885 | | | | | $ | 162,592 | |
| Reserve for Losses and Loss Expenses | | | | | 670,769 | | | | | | 1,979,446 | | | | | | (46,625 | | | | | | 2,603,590 | |
| Discount if any, Reserve for Losses and Loss Expenses | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Unearned Premiums | | | | | 213,539 | | | | | | 653,633 | | | | | | (63,543 | | | | | | 803,629 | |
| Net Premiums Earned | | | | | 364,175 | | | | | | 1,439,267 | | | | | | (79,748 | | | | | | 1,723,694 | |
| Net Investment Income(1) | | | | | — | | | | | | — | | | | | | — | | | | | | 180,451 | |
| Losses and Loss Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Year | | | | | 401,573 | | | | | | 1,472,750 | | | | | | (60,918 | | | | | | 1,813,405 | |
| Prior Year | | | | | (57,996 | | | | | | (104,466 | | | | | | — | | | | | | (162,462 | |
| Amortization of Deferred Acquisition Costs | | | | | 27,483 | | | | | | 327,236 | | | | | | (23,410 | | | | | | 331,309 | |
| Paid Losses and Loss Expenses | | | | | 50,020 | | | | | | 544,261 | | | | | | (14,293 | | | | | | 579,988 | |
| Net Premiums Written | | | | | 387,653 | | | | | | 1,374,987 | | | | | | (143,291 | | | | | | 1,619,349 | |
|
| |
| (1) | Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments. |
| |
| (2) | Adjusts the Company’s underwriting results by segment to the Company’s financial statement presentation. |
S-9
SCHEDULE VI
ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY INSURANCE
UNDERWRITERS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands of United States dollars)
YEAR ENDED DECEMBER 31, 2004
| | | | | | | | | | | | | | | | | | |
| | | | Insurance | | | Reinsurance | | | Total |
| Deferred Acquisition Costs | | | | $ | 16,036 | | | | | $ | 179,383 | | | | | $ | 195,419 | |
| Reserve for Losses and Loss Expenses | | | | | 370,330 | | | | | | 1,179,331 | | | | | | 1,549,661 | |
| Discount if any, Reserve for Losses and Loss Expenses | | | | | — | | | | | | — | | | | | | — | |
| Unearned Premiums | | | | | 173,998 | | | | | | 723,607 | | | | | | 897,605 | |
| Net Premiums Earned | | | | | 338,401 | | | | | | 1,294,199 | | | | | | 1,632,600 | |
| Net Investment Income(1) | | | | | — | | | | | | — | | | | | | 122,059 | |
| Losses and Loss Expenses | | | | | | | | | | | | | | | | | | |
| Current Year | | | | | 224,562 | | | | | | 849,448 | | | | | | 1,074,010 | |
| Prior Year | | | | | (30,853 | | | | | | (105,827 | | | | | | (136,680 | |
| Amortization of Deferred Acquisition Costs | | | | | 36,284 | | | | | | 293,500 | | | | | | 329,784 | |
| Paid Losses and Loss Expenses | | | | | 14,095 | | | | | | 222,599 | | | | | | 236,694 | |
| Net Premiums Written | | | | | 356,771 | | | | | | 1,340,249 | | | | | | 1,697,020 | |
|
| |
| (1) | Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments. |
S-10
Exhibit Index
| | | |
Exhibit
Number | | | Description of Document |
| 3.1 | | | Memorandum of Association. Incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 3.2 | | | Certificate of Deposit of Memorandum of Increase of Share Capital. Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the Year Ended December 31, 2004. |
| 3.3 | | | Amended and Restated Bye-laws. Incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended June 30, 2005. |
| 4.1 | | | Specimen Ordinary Share Certificate. Incorporated herein by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form S-1 filed on February 10, 2003. |
| 4.2 | | | Specimen Class A Share Certificate. Incorporated herein by reference to Exhibit 4.2 to Amendment No. 2 to the Registration Statement on Form S-1 filed on February 10, 2003. |
| 4.3 | | | Specimen 7.75% Non-Cumulative Preferred Share, Series A Certificate. Incorporated herein by reference to Exhibit 4.2 to Form 8-A filed on October 12, 2005. |
| 4.4 | | | Form of Warrant for Ordinary Shares. Incorporated herein by reference to Exhibit 4.3 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 4.5 | | | Amendment to Form of Warrant for Ordinary Shares. Incorporated herein by reference to Exhibit 4.4 to Amendment No. 3 to the Registration Statement on Form S-1 filed on February 27, 2003. |
| 4.6 | | | Form of Warrant for Class A Shares. Incorporated herein by reference to Exhibit 4.5 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 4.7 | | | Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on July 15, 2004. |
| 4.8 | | | First Supplemental Indenture, dated as of July 15, 2004, to the Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on July 15, 2004. |
| 4.9 | | | Form of 7% Senior Note due July 15, 2034 (included in Exhibit 4.2 to the Current Report on Form 8-K on July 15, 2004). Incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K filed on July 15, 2004. |
| 4.10 | | | Second Supplemental Indenture, dated as of October 17, 2005, to the Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 1.2 to the Current Report on Form 8-K filed on October 18, 2005. |
| 4.11 | | | Form of 6.15% Senior Note due October 15, 2015 (included in Exhibit 1.2 to the Current Report on Form 8-K on July 15, 2004). Incorporated herein by reference to Exhibit 1.2 to the Current Report on Form 8-K filed on October 18, 2005. |
| 10.1 | | | Amended and Restated Shareholders Agreement among the Registrant and each of the persons listed on Schedule A thereto. Incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Registration Statement on Form S-1 filed on January 28, 2003. |
| 10.2 | | | Registration Rights Agreement, dated as of July 22, 2002, among the Registrant and each of the persons listed on Schedule A thereto. Incorporated herein by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003. |
|
| | | |
Exhibit
Number | | | Description of Document |
| 10.3 | | | Credit Agreement, dated as of August 6, 2004, among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, as Administrative Agent. Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004. |
| 10.4 | | | Amended Credit Agreement, dated as of April 18, 2005, among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, as Administrative Agent. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated April 20, 2005. |
| 10.5 | | | Pledge and Security Agreement, dated as of August 6, 2004, by and among the Company, various designated subsidiary borrowers, The Bank of New York, as Collateral Agent and Custodian and JPMorgan Chase Bank, as Administrative Agent. Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004. |
| 10.6 | | | Account Control Agreement, dated as of August 6, 2004, by and among the Company, Endurance Specialty Insurance Ltd., Endurance U.S. Holdings Corp., Endurance Worldwide Holdings Limited, Endurance Worldwide Insurance Limited and The Bank of New York, as Custodian. Incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 |
| 10.7 | | | Underlease, dated July 18, 2003, between Centre Solutions (Bermuda) Limited and Endurance Specialty Insurance Ltd. Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2003. |
| 10.8 | | | 2002 Amended and Restated Stock Option Plan. Incorporated herein by reference to Exhibit 10.11 to Amendment No. 3 to the Registration Statement on Form S-1 filed on February 27, 2003.** |
| 10.9 | | | Amended and Restated 2003 Non-Employee Director Equity Incentive Plan. Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2005.** |
| 10.10 | | | Employee Share Purchase Plan. Incorporated by reference to Exhibit 4.2 of Registration Statement on Form S-8 filed on September 9, 2005.** |
| 10.11 | | | 2005 Sharesave Scheme. Incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 2005.** |
| 10.12 | | | Renewal Rights Purchase Agreement, dated as of October 1, 2004, by and between XL Reinsurance America Inc. and Endurance Reinsurance Corporation of America. Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on October 4, 2004. |
| 10.13 | | | Termination Agreement entered into as of June 1, 2006 between Endurance Services Limited and Steven W. Carlsen. Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on June 6, 2006.** |
| 10.14 | | | Amendment No. 1 to Share Option Agreement made as of June 1, 2006, between Endurance Specialty Holdings Ltd. and Steven W. Carlsen. Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on June 6, 2006.** |
| 10.15 | | | Amendment No. 1 to Restricted Share Unit Agreement made as of June 1, 2006, between Endurance Specialty Holdings Ltd. and Steven W. Carlsen. Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed on June 6, 2006.** |
| 10.16 | | | Consulting Agreement, effective as of June 1, 2006, by and between Endurance Services Limited, and Shadowbrook Advising Inc. Incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K filed on June 6, 2006.** |
| 10.17 | | | Form of Share Option Agreement No. 2. Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on July 7, 2007.** |
|
| | | |
Exhibit
Number | | | Description of Document |
| 10.18 | | | Form of Option Dividend Restricted Share Unit Agreement. Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on July 7, 2007.** |
| 10.19 | | | Reinsurance Agreement, dated as of August 1, 2006, by and between Endurance Specialty Insurance Ltd. and Shackleton Re Limited. Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on August 1, 2006. |
| 10.20 | | | Reinsurance Agreement, dated as of August 1, 2006, by and between Endurance Specialty Insurance Ltd. and Shackleton Re Limited. Incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed on August 1, 2006. |
| 13.1 | | | Selected Portions of the Registrant’s 2006 Annual Report to Shareholders |
| 21.1 | | | Subsidiaries of the Registrant |
| 23.1 | | | Consent of Independent Registered Public Accounting Firm |
| 31.1 | | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
| 31.2 | | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
| 32 | | | Certifications Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| |
| ** | Management contract or compensatory plan or arrangement. |
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934