Endurance Specialty 10Q 2007 Q2 Quarterly report

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

FORM 10-Q

/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the period ended June 30, 2007, or

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

Commission file number 1-31599

ENDURANCE SPECIALTY HOLDINGS LTD.

(Exact Name of Registrant as Specified in Its Charter)


Bermuda (State or other jurisdiction of incorporation or organization)			98-0392908 (I.R.S. Employer Identification No.)
Wellesley House 90 Pitts Bay Road Pembroke HM 08, Bermuda (Address of principal executive offices, including postal code)

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

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

Yes / X / No / /

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


Large accelerated filer / X /			Accelerated filer / /			Non-accelerated filer / /

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

Yes / / No / X /

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


Description of Class						Common Shares Outstanding as of August 3, 2007
Ordinary Shares – $1.00 par value						64,616,128

INDEX


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at June 30, 2007 (unaudited) and December 31, 2006		2
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2007 and 2006		3
	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2007 and 2006		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006		5
	Notes to the Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures		45
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings		46
Item 1A.	Risk Factors		46
Item 2.	Changes in Securities and Issuer Purchases of Equity Securities		46
Item 3.	Defaults Upon Senior Securities		46
Item 4.	Submission of Matters to a Vote of Security Holders		47
Item 5.	Other Information		48
Item 6.	Exhibits		49
SIGNATURES			50

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


	JUNE 30, 2007				DECEMBER 31, 2006
	(UNAUDITED)
ASSETS
Investments
Fixed maturity investments, available for sale at fair value (amortized cost: $4,817,986 and $4,749,819 at June 30, 2007 and December 31, 2006)		$	4,728,942			$	4,714,204
Investments in other ventures, under equity method			281,241				253,068
Total investments			5,010,183				4,967,272
Cash and cash equivalents			625,662				547,772
Premiums receivable, net			839,106				660,570
Deferred acquisition costs			198,537				168,809
Securities lending collateral			173,884				226,762
Prepaid reinsurance premiums			99,446				105,058
Losses recoverable			66,377				44,244
Accrued investment income			40,443				40,692
Intangible assets			70,456				70,366
Deferred tax asset			57,993				54,019
Other assets			43,760				39,990
Total assets		$	7,225,847			$	6,925,554
LIABILITIES
Reserve for losses and loss expenses		$	2,767,525			$	2,701,686
Reserve for unearned premiums			1,027,229				843,202
Deposit liabilities			143,073				161,024
Reinsurance balances payable			194,012				172,328
Securities lending payable			173,884				226,762
Debt			447,213				447,172
Net payable for investments purchased			31,767				—
Other liabilities			61,298				75,506
Total liabilities			4,846,001				4,627,680
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred shares
Series A, non-cumulative – 8,000,000 issued and outstanding (2006 – 8,000,000)			8,000				8,000
Common shares
Ordinary – $1.00 par value, 64,591,095 issued and outstanding (2006 – 66,480,381)			64,591				66,480
Additional paid-in capital			1,378,685				1,458,063
Accumulated other comprehensive loss			(47,525	)			(14,465	)
Retained earnings			976,095				779,796
Total shareholders’ equity			2,379,846				2,297,874
Total liabilities and shareholders’ equity		$	7,225,847			$	6,925,554

See accompanying notes to unaudited condensed consolidated financial statements.

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


	THREE MONTHS ENDED JUNE 30,								SIX MONTHS ENDED JUNE 30,
	2007				2006				2007				2006
Revenues
Gross premiums written		$	506,803			$	451,253			$	1,080,094			$	1,022,634
Ceded premiums written			(58,577	)			(42,575	)			(98,203	)			(70,947	)
Net premiums written		$	448,226			$	408,678			$	981,891			$	951,687
Change in unearned premiums			(30,675	)			(2,000	)			(187,295	)			(124,803	)
Net premiums earned (includes $Nil and $20,583 from related parties for the six months ended June 30, 2007 and 2006, respectively)			417,551				406,678				794,596				826,884
Net investment income			78,548				60,291				153,361				121,835
Net realized losses on investments			(9,038	)			(8,729	)			(11,122	)			(12,059	)
Other underwriting (loss) income			(3,203	)			(1,992	)			(9,139	)			1,509
Total revenues			483,858				456,248				927,696				938,169
Expenses
Losses and loss expenses (includes $Nil and $15,820 from related parties for the six months ended June 30, 2007 and 2006, respectively)			207,179				269,445				417,773				508,177
Acquisition expenses (includes $Nil and $6,332 to related parties for the six months ended June 30, 2007 and 2006, respectively)			73,941				79,197				141,471				154,445
General and administrative expenses			48,664				46,068				97,493				89,959
Amortization of intangibles			1,127				1,158				2,254				2,316
Net foreign exchange (gains) losses			(2,072	)			(11,997	)			541				(14,883	)
Interest expense			7,531				7,459				15,060				14,985
Total expenses			336,370				391,330				674,592				754,999
Income before income taxes			147,488				64,918				253,104				183,170
Income tax expense			(12,147	)			(868	)			(15,928	)			(12,084	)
Net income			135,341				64,050				237,176				171,086
Preferred dividends			(3,875	)			(3,875	)			(7,750	)			(7,750	)
Net income available to common shareholders		$	131,466			$	60,175			$	229,426			$	163,336
Other comprehensive loss
Net income		$	135,341			$	64,050			$	237,176			$	171,086
Net unrealized holding losses on investments arising during the period (net of applicable deferred income taxes of $3,892 and $6,049 for the six months ended June 30, 2007 and 2006, respectively)			(59,341	)			(37,264	)			(47,302	)			(77,211	)
Foreign currency translation adjustments			2,887				2,241				3,076				2,693
Reclassification adjustment for net realized losses included in net income			9,038				8,729				11,122				12,059
Reclassification adjustment for net losses on derivative designated as cash flow hedge included in net income			22				22				44				44
Other comprehensive loss			(47,394	)			(26,272	)			(33,060	)			(62,415	)
Comprehensive income		$	87,947			$	37,778			$	204,116			$	108,671
Per share data
Weighted average number of common and common equivalent shares outstanding:
Basic			65,530,868				66,397,742				66,068,935				66,421,265
Diluted			70,930,107				71,109,361				71,294,303				71,243,145
Basic earnings per common share		$	2.01			$	0.91			$	3.47			$	2.46
Diluted earnings per common share		$	1.85			$	0.85			$	3.22			$	2.29

See accompanying notes to unaudited condensed consolidated financial statements.

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


	SIX MONTHS ENDED JUNE 30,
	2007				2006
Preferred shares
Balance, beginning and end of period		$	8,000			$	8,000
Common shares
Balance, beginning of period			66,480				66,139
Issuance of common shares			554				286
Repurchase of common shares			(2,443	)			(329	)
Balance, end of period			64,591				66,096
Additional paid-in capital
Balance, beginning of period			1,458,063				1,453,722
Issuance of common shares			6,794				3,440
Repurchase of common shares			(87,440	)			(9,679	)
Issuance of restricted share units in lieu of dividends			290				494
Public offering and registration costs			(18	)			(48	)
Settlement of equity awards			(2,273	)			(1,970	)
Stock-based compensation expense			3,269				4,476
Balance, end of period			1,378,685				1,450,435
Accumulated other comprehensive loss
Cumulative foreign currency translation adjustments:
Balance, beginning of period			28,852				23,842
Foreign currency translation adjustments			3,076				2,693
Balance, end of period			31,928				26,535
Unrealized holding losses on investments:
Balance, beginning of period			(40,841	)			(40,948	)
Net unrealized holding losses arising during the period, net of reclassification adjustment			(36,180	)			(65,152	)
Balance, end of period			(77,021	)			(106,100	)
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of period			(2,476	)			(2,566	)
Net change from current period hedging transactions, net of reclassification adjustment			44				44
Balance, end of period			(2,432	)			(2,522	)
Total accumulated other comprehensive loss			(47,525	)			(82,087	)
Retained earnings
Balance, beginning of period			779,796				364,354
Net income			237,176				171,086
Issuance of restricted share units in lieu of dividends			(290	)			(494	)
Dividends on preferred shares			(7,750	)			(7,750	)
Dividends on common shares			(32,837	)			(33,105	)
Balance, end of period			976,095				494,091
Total shareholders’ equity		$	2,379,846			$	1,936,535

See accompanying notes to unaudited condensed consolidated financial statements.

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


	SIX MONTHS ENDED JUNE 30,
	2007				2006
Cash flows provided by operating activities:
Net income		$	237,176			$	171,086
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premium on investments			2,165				8,093
Depreciation and amortization of other intangibles			7,846				7,514
Net realized losses on investments			11,122				12,059
Deferred taxes			(3,974	)			2,815
Stock-based compensation expense			3,269				4,476
Equity in earnings of unconsolidated ventures			(25,673	)			(13,890	)
Premiums receivable, net			(178,536	)			(252,130	)
Deferred acquisition costs			(29,728	)			(6,597	)
Prepaid reinsurance premiums			5,612				(29,062	)
Losses recoverable			(22,133	)			(10,204	)
Accrued investment income			249				(3,006	)
Other assets			4,000				9,193
Reserve for losses and loss expenses			65,839				179,213
Reserve for unearned premiums			184,027				164,215
Deposit liabilities			(17,951	)			81,004
Reinsurance balances payable			22,962				41,507
Other liabilities			(13,996	)			7,638
Net cash provided by operating activities			252,276				373,924
Cash flows provided by (used in) investing activities:
Proceeds from sales of fixed maturity investments			1,262,062				803,400
Proceeds from maturities and calls on fixed maturity investments			356,215				309,086
Purchases of fixed maturity investments			(1,642,972	)			(1,171,391	)
Purchase of investments in other ventures			(2,500	)			(28,499	)
Purchases of fixed assets			(9,409	)			(8,441	)
Change in securities lending collateral received			52,878				37,256
Net cash paid in acquisition			(3,622	)			(12,078	)
Other			(11,601	)			(23,697	)
Net cash provided by (used in) investing activities			1,051				(94,364	)
Cash flows used in financing activities:
Issuance of common shares			7,292				3,678
Repurchase of common shares			(89,883	)			(10,008	)
Offering and registration costs paid			(18	)			(48	)
Change in securities lending collateral			(52,878	)			(37,256	)
Settlement of equity awards			(2,273	)			(1,970	)
Dividends paid			(40,587	)			(40,855	)
Net cash used in financing activities			(178,347	)			(86,459	)
Effect of exchange rate changes on cash and cash equivalents			2,910				8,467
Net increase in cash and cash equivalents			77,890				201,568
Cash and cash equivalents, beginning of period			547,772				468,015
Cash and cash equivalents, end of period		$	625,662			$	669,583

See accompanying notes to unaudited condensed consolidated financial statements.

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


1.	General

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

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The unaudited condensed consolidated financial statements include the accounts of Endurance Holdings and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated on consolidation. Management is required to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates. Among other matters, significant estimates and assumptions are used to record premiums written and ceded, and to record reserves for losses and loss expenses and contingencies. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the period that they are determined.

The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2006 contained in Endurance Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the ‘‘2006 Annual Report on Form 10-K’’).

Certain reclassifications have been made for 2006 to conform to the 2007 presentation and have no impact on net income previously reported. Such reclassifications include information presented in Note 5.


2.	Significant events

Credit Facility. On May 8, 2007, Endurance Holdings amended its existing credit facility among Endurance Holdings, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, among other changes, increase the size of the facility to $1,175 million from $925 million and to extend the maturity of the facility to May 8, 2012 (the ‘‘Credit Agreement’’). On July 18, 2007, the Company entered into the First Amendment to the Credit Agreement, to, among other things, modify the restrictive covenants in the Credit Agreement to permit the Company to pay dividends on its preference shares following a default under the Credit Agreement. As amended, the credit facility is referred to as the ‘‘2007 Credit Facility.&rsqu o;’

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


2.	Significant events, cont’d.

The full amount of the 2007 Credit Facility is available for revolving credit borrowings and for the issuance of letters of credit. The proceeds of the facility may be used for general corporate and working capital purposes, to finance potential acquisitions and for the repurchase of Endurance Holdings’ outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the facility, the Company may request that the size of the facility be increased by $500 million, provided that no participating lender is obligated to increase its commitments under the facility.

Up to $675 million of borrowings or letter of credit issuances under the 2007 Credit Facility may be collateralized by a portion of the investment portfolio of such subsidiary borrowing under the facility to the extent of such subsidiary’s borrowing. The facility allows for the issuance of up to $200 million in multicurrency letters of credit and up to $300 million of fronted letters of credit, that may also be multicurrency letters of credit. Endurance Holdings guarantees the obligations of its subsidiaries that are parties to the 2007 Credit Facility.

The interest rate for revolving loans under the 2007 Credit Facility is either (i) the higher of (a) the Federal Funds Effective Rate plus 0.5% and (b) the prime commercial lending rate of JPMorgan Chase Bank or (ii) LIBOR, plus a fee ranging from 0.165% to 0.375% depending on the Company’s leverage ratio and if the loan is collateralized or uncollateralized. For letters of credit issued on a collateralized basis, the Company is required to pay a fee ranging from 0.165% to 0.29% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis, the Company is required to pay a fee ranging from 0.275% to 0.375% on the daily stated amount of such letters of credit. In addition, the 2007 Credit Facility requires the Company to pay to the lenders a facility fee and a utilization fee.

The 2007 Credit Facility requires the Company’s compliance with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a leverage ratio (no greater than 0.35:1.00 at any time) and a consolidated tangible net worth (no less than $1.4 billion at any time). In addition, each of the Company’s regulated insurance subsidiaries that have a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the facility generally restrict the declaration or payment of dividends on the Company’s common shares if the Company is already in default or the payment or declaration would cause a default under the terms of the credit facility.

The 2007 Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 2007 Credit Facility, the lenders can terminate their commitments under the revolving 2007 Credit Facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the 2007 Credit Facility.


3.	Earnings per share

Endurance Holdings follows Statement of Financial Accounting Standards No. 128, ‘‘Earnings per Share,’’ to account for its weighted average shares. Basic earnings per common share are calculated by dividing net income available to holders of Endurance Holdings’ common shares by the weighted average number of common shares outstanding. In addition to the actual common shares outstanding, the weighted average number of common shares included in the basic earnings per common share

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3.	Earnings per share, cont’d.

calculation also includes the unsettled bonus restricted share units discussed in detail in the Company’s 2006 Annual Report on Form 10-K. Diluted earnings per common share are based on the weighted average number of common shares and dilutive potential common shares outstanding during the period of calculation using the treasury stock method.

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


	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Numerator:
Net income available to common shareholders		$	131,466		$	60,175		$	229,426		$	163,336
Denominator:
Weighted average shares – basic
Common shares outstanding			65,388,436			66,181,345			65,900,693			66,186,511
Unsettled bonus restricted share units outstanding			142,432			216,397			168,242			234,754
			65,530,868			66,397,742			66,068,935			66,421,265
Share equivalents
Unvested incentive restricted share units outstanding			110,102			355,184			49,926			303,446
Warrants			4,106,820			3,165,668			3,984,135			3,271,202
Options			1,182,317			1,190,767			1,191,307			1,247,232
Weighted average shares – diluted			70,930,107			71,109,361			71,294,303			71,243,145
Basic earnings per common share		$	2.01		$	0.91		$	3.47		$	2.46
Diluted earnings per common share		$	1.85		$	0.85		$	3.22		$	2.29

On May 9, 2007, Endurance Holdings declared quarterly dividends of $0.25 per share payable on its ordinary shares and $0.484375 per share payable on its 7.75% Non-Cumulative Preferred Shares, Series A (the ‘‘Series A Preferred Shares’’). The dividend on Endurance Holdings’ outstanding ordinary shares was paid on June 30, 2007 to the ordinary shareholders of record on June 15, 2007, and the dividend on the Series A Preferred Shares was paid on June 15, 2007 to the Series A Preferred shareholders of record on June 1, 2007.


	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Dividends declared per preferred share		$	0.484375		$	0.484375		$	0.96875		$	0.96875
Dividends declared per common share		$	0.25		$	0.25		$	0.50		$	0.50


4.	Stock-based employee compensation and other stock plans

The Company has several share-based employee compensation plans which are disclosed in detail in the Company’s 2006 Annual Report on Form 10-K. In addition, at its meeting on February 28, 2007, the Company’s Board of Directors adopted the 2007 Equity Incentive Plan to allow for the issuance

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

of equity incentives to non-employee directors of the Company and eligible employees of the Company and its subsidiaries. At the Annual General Meeting of Shareholders held on May 9, 2007, the Company’s shareholders approved the adoption of the 2007 Equity Incentive Plan. The 2007 Equity Incentive Plan allows the Company to grant options to purchase the Company’s ordinary shares, restricted shares, restricted share units, stock appreciation rights, share bonuses and other forms of equity incentive awards, as determined by the Compensation Committee of the Company’s Board of Directors, to employees and non-employee directors. At the Company’s exclusive option, restricted share units may be settled in cash, ordinary shares or in a combination thereof. Generally, cash settlements of restricted share units are equal to the minimum statutory withholding requirements based on the individual employee’s tax paying jurisdiction.


5.	Segment reporting

The determination of the Company’s business segments is based on how the Company monitors the performance of its underwriting operations. The Company has two reportable business segments: Insurance and Reinsurance.

•

Insurance — The lines of business underwritten by the Company in the Insurance business segment are property, casualty, healthcare liability, workers’ compensation and professional lines. The property line of business is comprised of the insurance and facultative reinsurance of commercial properties. The casualty, healthcare liability, workers’ compensation and professional lines of business are comprised of the insurance and facultative reinsurance of third party liability exposures.

•

Reinsurance — The lines of business underwritten by the Company in the Reinsurance business segment are property, casualty, catastrophe, agriculture, marine, aerospace and surety and other specialty. The property, catastrophe, agriculture, marine and aerospace lines of business are principally comprised of the reinsurance of insurance companies’ insurance exposures related to various types of property on an excess of loss or proportional basis. The casualty and surety and other specialty lines of business are comprised of the reinsurance of underlying insurance companies’ third party liability insurance exposures on an excess of loss or proportional basis.

Because the Company does not manage its assets by segment, investment income and total assets are not allocated to the individual segments. Management measures segment results on the basis of the combined ratio that is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned by each respective segment. General and administrative expenses incurred by segments are allocated directly. Remaining corporate overhead is allocated to segments based on various factors, including each segment’s proportional share of premiums, headcount, and other variables deemed relevant to the allocation of such expenses. In 2006, general and administrative expenses not directly incurred by the segments were allocated based on each segment’s proportional share of gross premiums written. Ceded reinsurance and recoveries are recorded within the segment to which they apply. Group reinsuranc e protection purchased and any subsequent recoveries are allocated to segments based on the underlying exposures covered.

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5.	Segment reporting, cont’d.

The following table provides a summary of the segment revenues, results and reserve for losses and loss expenses for the three months ended June 30, 2007:


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	197,967			$	328,815			$	(19,979	)		$	506,803
Ceded premiums written			(45,967	)			(12,610	)			—				(58,577	)
Net premiums written			152,000				316,205				(19,979	)			448,226
Net premiums earned			124,057				324,318				(30,824	)			417,551
Other underwriting loss			—				—				(3,203	)			(3,203	)
			124,057				324,318				(34,027	)			414,348
Expenses
Net losses and loss expenses			63,422				171,172				(27,415	)			207,179
Acquisition expenses			16,528				64,555				(7,142	)			73,941
General and administrative expenses			18,592				30,072				—				48,664
			98,542				265,799				(34,557	)			329,784
Underwriting income		$	25,515			$	58,519			$	530			$	84,564
Net loss ratio			51.1	%			52.8	%			88.9	%			49.6	%
Acquisition expense ratio			13.3	%			19.9	%			23.2	%			17.7	%
General and administrative expense ratio			15.0	%			9.3	%			—				11.7	%
Combined ratio			79.4	%			82.0	%			112.1	%			79.0	%
Reserve for losses and loss expenses		$	967,273			$	1,935,124			$	(134,872	)		$	2,767,525

⁽¹⁾

The Insurance and Reinsurance business segments are shown prior to deposit accounting adjustments. The deposit accounting column reconciles the Company’s underwriting results by segment to the Company’s financial statement presentation.

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5.	Segment reporting, cont’d.

The following table provides a summary of the segment revenues, results and reserve for losses and loss expenses for the three months ended June 30, 2006:


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	159,223			$	338,142			$	(46,112	)		$	451,253
Ceded premiums written			(36,042	)			(6,533	)			—				(42,575	)
Net premiums written			123,181				331,609				(46,112	)			408,678
Net premiums earned			88,353				368,496				(50,171	)			406,678
Other underwriting loss			—				—				(1,992	)			(1,992	)
			88,353				368,496				(52,163	)			404,686
Expenses
Net losses and loss expenses			70,168				240,276				(40,999	)			269,445
Acquisition expenses			6,532				86,371				(13,706	)			79,197
General and administrative expenses			13,823				32,245				—				46,068
			90,523				358,892				(54,705	)			394,710
Underwriting (loss) income		$	(2,170	)		$	9,604			$	2,542			$	9,976
Net loss ratio			79.4	%			65.2	%			81.7	%			66.3	%
Acquisition expense ratio			7.4	%			23.4	%			27.3	%			19.5	%
General and administrative expense ratio			15.7	%			8.8	%			—				11.3	%
Combined ratio			102.5	%			97.4	%			109.0	%			97.1	%
Reserve for losses and loss expenses		$	761,510			$	2,121,578			$	(100,285	)		$	2,782,803

⁽¹⁾

The following table reconciles total segment results to income before income taxes for the three months ended June 30, 2007 and 2006, respectively:


	2007				2006
Total underwriting income		$	84,564			$	9,976
Net investment income			78,548				60,291
Net foreign exchange gains			2,072				11,997
Net realized losses on investments			(9,038	)			(8,729	)
Amortization of intangibles			(1,127	)			(1,158	)
Interest expense			(7,531	)			(7,459	)
Income before income taxes		$	147,488			$	64,918

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5.	Segment reporting, cont’d.

The following table provides gross premiums written by line of business for the three months ended June 30, 2007 and 2006:


Business Segment	2007				2006
Insurance
Property		$	40,835			$	52,591
Casualty			42,343				42,877
Healthcare liability			28,054				31,047
Workers’ compensation			57,142				6,431
Professional lines			29,593				26,277
Total Insurance			197,967				159,223
Reinsurance
Casualty			27,788				77,188
Property			65,476				49,998
Catastrophe			147,506				102,763
Agriculture			24,118				42,373
Marine			12,220				14,560
Aerospace			20,263				25,560
Surety and other specialty			31,444				25,700
Total Reinsurance			328,815				338,142
Subtotal total company			526,782				497,365
Deposit accounting⁽¹⁾			(19,979	)			(46,112	)
Total		$	506,803			$	451,253

⁽¹⁾

The Insurance and Reinsurance business segments are shown prior to deposit accounting adjustments. The deposit accounting adjustment reconciles the Company’s underwriting results by segment to the Company’s financial statement presentation.

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5.	Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the six months ended June 30, 2007:


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	345,000			$	758,288			$	(23,194	)		$	1,080,094
Ceded premiums written			(84,911	)			(13,292	)			—				(98,203	)
Net premiums written			260,089				744,996				(23,194	)			981,891
Net premiums earned			234,382				615,713				(55,499	)			794,596
Other underwriting loss			—				—				(9,139	)			(9,139	)
			234,382				615,713				(64,638	)			785,457
Expenses
Net losses and loss expenses			126,951				340,871				(50,049	)			417,773
Acquisition expenses			30,354				125,973				(14,856	)			141,471
General and administrative expenses			40,809				56,684				—				97,493
			198,114				523,528				(64,905	)			656,737
Underwriting income		$	36,268			$	92,185			$	267			$	128,720
Net loss ratio			54.2	%			55.4	%			90.2	%			52.6	%
Acquisition expense ratio			13.0	%			20.5	%			26.8	%			17.8	%
General and administrative expense ratio			17.3	%			9.1	%			—				12.3	%
Combined ratio			84.5	%			85.0	%			117.0	%			82.7	%

⁽¹⁾

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5.	Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the six months ended June 30, 2006:


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	239,380			$	928,515			$	(145,261	)		$	1,022,634
Ceded premiums written			(59,507	)			(11,440	)			—				(70,947	)
Net premiums written			179,873				917,075				(145,261	)			951,687
Net premiums earned			178,779				755,033				(106,928	)			826,884
Other underwriting income			—				—				1,509				1,509
			178,779				755,033				(105,419	)			828,393
Expenses
Net losses and loss expenses			111,775				468,674				(72,272	)			508,177
Acquisition expenses			12,655				176,066				(34,276	)			154,445
General and administrative expenses			21,782				68,177				—				89,959
			146,212				712,917				(106,548	)			752,581
Underwriting income		$	32,567			$	42,116			$	1,129			$	75,812
Net loss ratio			62.5	%			62.1	%			67.6	%			61.5	%
Acquisition expense ratio			7.1	%			23.3	%			32.0	%			18.7	%
General and administrative expense ratio			12.2	%			9.0	%			—				10.9	%
Combined ratio			81.8	%			94.4	%			99.6	%			91.1	%

⁽¹⁾

The following table reconciles total segment results to income before income taxes for the six months ended June 30, 2007 and 2006, respectively:


	2007				2006
Total underwriting income		$	128,720			$	75,812
Net investment income			153,361				121,835
Net foreign exchange (losses) gains			(541	)			14,883
Net realized losses on investments			(11,122	)			(12,059	)
Amortization of intangibles			(2,254	)			(2,316	)
Interest expense			(15,060	)			(14,985	)
Income before income taxes		$	253,104			$	183,170

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5.	Segment reporting, cont’d.

The following table provides gross premiums written by line of business for the six months ended June 30, 2007 and 2006:


Business Segment	2007				2006
Insurance
Property		$	67,877			$	81,164
Casualty			69,140				64,664
Healthcare liability			46,843				52,109
Workers’ compensation			118,775				6,431
Professional lines			42,365				35,012
Total Insurance			345,000				239,380
Reinsurance
Casualty			119,725				262,767
Property			102,177				172,478
Catastrophe			288,005				223,459
Agriculture			117,179				92,904
Marine			45,299				71,806
Aerospace			26,743				48,259
Surety and other specialty			59,160				56,842
Total Reinsurance			758,288				928,515
Subtotal total company			1,103,288				1,167,895
Deposit accounting⁽¹⁾			(23,194	)			(145,261	)
Total		$	1,080,094			$	1,022,634

⁽¹⁾


6.	Commitments and contingencies

Concentrations of credit risk. As of June 30, 2007, substantially all the Company’s cash and investments were held by three custodians. The Company’s investment guidelines limit the amount of credit exposure to any one issuer other than the U.S. Treasury and certain other foreign government obligations rated AAA.

Major production sources. During the six months ended June 30, 2007, the Company obtained 66.5% (2006 – 73.8%) of its gross premiums written before deposit accounting adjustments through four brokers: Marsh & McLennan Companies, Inc. (including Guy Carpenter) – 30.4% (2006 – 24.9%); Aon Corporation – 16.1% (2006 – 22.9%); Willis Companies – 11.6% (2006 – 15.9%); and Benfield Group – 8.4% (2006 – 10.1%).

Letters of credit. As of June 30, 2007, the Company had issued letters of credit of $528.0 million (December 31, 2006 – $498.5 million) under its credit facility in favor of certain ceding companies.

Investment commitments. As of June 30, 2007 and December 31, 2006, the Company had pledged cash and cash equivalents and fixed maturity investments of $230.7 million and $231.6 million,

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6.	Commitments and contingencies, cont’d.

respectively, in favor of certain ceding companies to collateralize obligations. As of June 30, 2007 and December 31, 2006, the Company had also pledged $482.5 million and $456.4 million of its cash and fixed maturity investments as required to meet collateral requirements for $434.0 million and $409.9 million in letters of credit outstanding under its credit facility, respectively. In addition, at June 30, 2007 and December 31, 2006, cash and fixed maturity investments with fair values of $122.2 million and $40.9 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $30.8 million and $28.5 million were on deposit with Canadian regulators, respectively.

The Company is subject to certain commitments with respect to the investments in other ventures at June 30, 2007. Of the balance outstanding at June 30, 2007, the Company is subject to redemption restriction provisions of between one to three years from the date of acquisition with respect to 99.4% of the amount invested in other ventures. In addition at June 30, 2007, the Company was committed to investing a further $3.7 million (December 31, 2006 – $6.2 million) in alternative investment funds.

Reinsurance commitments. In the ordinary course of business, the Company enters into reinsurance agreements which may include terms which could require the Company to collateralize certain of its obligations as a result of certain triggering events, as defined in such agreements.

Employment agreements. The Company has entered into employment agreements with certain officers that provide for awards of the Company’s equity securities, executive benefits and severance payments under certain circumstances.

Operating Leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at June 30, 2007 are as follows:


Twelve Months Ended June 30,	Amount
2008		$	9,043
2009			9,516
2010			9,531
2011			9,483
2012			9,555
2013 and thereafter			34,793
		$	81,921

Total lease expense under operating leases for the six months ended June 30, 2007 was $5.4 million (2006 – $4.8 million).

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


7.	Income taxes

In July 2006, the FASB issued Interpretation No. 48 ‘‘Accounting for Uncertainty in Income Taxes’’ (‘‘FIN 48’’). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109 ‘‘Accounting for Income Taxes.’’ FIN 48 prescribes a recognition threshold and measurement attribute for financial statement

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7.	Income taxes, cont’d.

recognition and measurement of a tax position taken or expected to be taken on a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 on January 1, 2007 with no resulting material impact on the Company’s results or financial condition. The total amount of unrecognized tax benefits at June 30, 2007 was zero. In addition, the Company does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months and classifies all income tax associated with interest and penalties as income tax expense. During the three and six months ended June 30, 2007, the Company did not recognize or accrue interest and penalties. The Company is no longer subject to U.S. federal, state, local, or foreign income tax examinations by tax authorities for years before 2003.

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Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the financial condition and results of operations for the three and six month periods ended June 30, 2007 of Endurance Specialty Holdings Ltd. (‘‘Endurance Holdings’’) and its wholly owned subsidiaries (collectively, the ‘‘Company’’). This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q (this ‘‘Form 10-Q’’) as well as the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2006, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in Endurance Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the ‘‘2006 Annual Report on Form 10-K’’).

Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to the Company’s plans and strategy for its business, includes forward looking statements that involve risk and uncertainties. Please see the section ‘‘Cautionary Statement Regarding Forward-Looking Statements’’ below for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the ‘‘Risk Factors’’ set forth in the 2006 Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Overview

Endurance Holdings was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings has five wholly-owned operating subsidiaries: Endurance Specialty Insurance Ltd. (‘‘Endurance Bermuda’’), domiciled in Bermuda; Endurance Worldwide Insurance Limited (‘‘Endurance U.K.’’), domiciled in England; Endurance Reinsurance Corporation of America (‘‘Endurance U.S. Reinsurance’’), domiciled in New York, Endurance American Insurance Company (‘‘Endurance American’’), domiciled in Delaware and Endurance American Specialty Insurance Company (‘‘Endurance American Specialty’’), domiciled in Delaware. Endurance Holdings and its wholly-owned subsidiaries are collectively referred to in this discussion and analysis as the ‘‘Company.’’

The Company writes specialty lines of property and casualty insurance and reinsurance on a global basis, and seeks to create a portfolio of specialty lines of business that are profitable and have limited correlation with one another. The Company’s portfolio of specialty lines of business is organized into two business segments, Insurance and Reinsurance.

In the Insurance business segment, the Company writes property, casualty, healthcare liability, workers’ compensation and professional lines insurance. In the Reinsurance business segment, the Company writes property, casualty, catastrophe, agriculture, marine, aerospace and surety and other specialty reinsurance.

The Company’s Insurance and Reinsurance business segments both include property-related coverages which provide insurance or reinsurance of an insurable interest in tangible property for property loss, damage or loss of use. The Company writes property insurance and reinsurance through its property insurance, catastrophe reinsurance, property reinsurance, agriculture reinsurance, marine reinsurance, aerospace reinsurance and surety and other specialty reinsurance business lines.

In addition, the Company’s Insurance and Reinsurance business segments include various casualty insurance and reinsurance coverages, which are primarily concerned with the losses caused by injuries to third parties, i.e., not the insured, or to property owned by third parties and the legal liability imposed on the insured resulting from such injuries. Casualty insurance and reinsurance includes general liability, automobile liability, professional liability, employers’ liability, workers’ compensation, directors’ and officers’ liability, personal liability and aviation liability. The Company writes casualty insurance and reinsurance through its casualty insurance, professional lines insurance, healthcare liability insurance, workers’ compensation insurance, casualty reinsurance, marine reinsurance, aerospace reinsurance and surety and other specialty reinsurance lines of business.

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Application of Critical Accounting Estimates

The Company’s condensed consolidated financial statements are based on the selection of accounting policies and application of significant accounting estimates, which require management to make significant estimates and assumptions. The Company believes that some of the more critical judgments in the areas of accounting estimates and assumptions that affect its financial condition and results of operations are related to the recognition of premiums written and ceded and reserves for losses and loss expenses. For a detailed discussion of the Company’s critical accounting estimates, please refer to the 2006 Annual Report on Form 10-K. There were no material changes in the application of the Company’s critical accounting estimates subsequent to that report. Management has discussed the application of these critical accounting estimates with the Company’s Board of Directors and the Audit Committee of the Board of Directors.

Consolidated results of operations — for the three month periods ended June 30, 2007 and 2006

Results of operations for the three months ended June 30, 2007 and 2006 were as follows:


	Three Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Underwriting income
Revenues
Gross premiums written		$	506,803			$	451,253			12.3	%
Net premiums written			448,226				408,678			9.7	%
Net premiums earned			417,551				406,678			2.7	%
Other underwriting loss			(3,203	)			(1,992	)		60.8	%
			414,348				404,686			2.4	%
Expenses
Losses and loss expenses			207,179				269,445			(23.1	%)
Acquisition expenses			73,941				79,197			(6.6	%)
General and administrative expenses			48,664				46,068			5.6	%
			329,784				394,710			(16.4	%)
Net investment income			78,548				60,291			30.3	%
Net foreign exchange gains			2,072				11,997			(82.7	%)
Net realized losses on investments			(9,038	)			(8,729	)		3.5	%
Amortization of intangibles			(1,127	)			(1,158	)		(2.7	%)
Interest expense			(7,531	)			(7,459	)		1.0	%
Income tax expense			(12,147	)			(868	)		1,299.4	%
Net income		$	135,341			$	64,050			111.3	%
Loss ratio			49.6	%			66.3	%		(16.7	)
Acquisition expense ratio			17.7	%			19.5	%		(1.8	)
General and administrative expense ratio			11.7	%			11.3	%		0.4
Combined ratio			79.0	%			97.1	%		(18.1	)

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

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	Three Months Ended
	June 30, 2007			June 30, 2006			Change
	(U.S. dollars in thousands, except for ratios)
Supplemental information
Gross premiums written		$	506,803		$	451,253		12.3	%
Deposit accounting premiums			19,979			46,112		(56.7	%)
Total premiums written, including deposit premiums		$	526,782		$	497,365		5.9	%

Premiums

Total premiums written, including deposit premiums, in the three months ended June 30, 2007 were $526.8 million, an increase of $29.4 million, or 5.9%, compared to the same period in 2006. The increase was driven by growth in the Insurance business segment offset in part by a decline in the Reinsurance business segment.

Ceded premiums written increased in the second quarter of 2007 from the same period in 2006, as the Company purchased additional reinsurance in relation to its expanding Insurance business segment and on certain of its reinsurance business lines, consistent with the Company’s overall risk management strategy. The Company’s net written premiums increased for the second quarter of 2007 due to the growth in premiums written as compared to the second quarter of 2006.

Net premiums earned for the three months ended June 30, 2007 were $417.6 million, an increase of $10.9 million, or 2.7%, from the second quarter of 2006. The increase in net premiums earned resulted from the growth in gross premiums written for the second quarter of 2007.

Net Investment Income

Net investment income increased 30.3% to $78.5 million in the second quarter of 2007 compared to the second quarter of 2006 principally due to a 2.2% increase in cash, cash equivalents and investments over December 31, 2006, higher portfolio yields on cash and fixed maturity securities, and strong alternative investment performance. The increase in cash, cash equivalents and investments since the second quarter of 2006 resulted from positive net operating cash flows throughout 2006 and 2007. Investment expenses, including investment management fees, for the second quarter of 2007 were $2.2 million compared to $1.7 million for the same period in 2006.

The annualized net earned yield (which is the actual net earned income from the investment portfolio after adjusting for expenses and accretion and amortization from the purchase price divided by the average book value of assets), total return on the investment portfolio (which includes realized and unrealized gains and losses), market yield and portfolio duration for the three months ended June 30, 2007 and 2006 were as follows:


	Three Months Ended
	June 30, 2007			June 30, 2006
Annualized Net earned yield		5.67	%		4.62	%
Total return on investment portfolio		0.45	%		0.88	%
Market yield⁽¹⁾		5.49	%		5.44	%
Portfolio duration⁽¹⁾		2.71			2.64

⁽¹⁾	Includes only cash and fixed maturity securities.

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During the second quarter of 2007, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 70 basis point range, with a high of 5.21% and a low of 4.51%. The Company’s activities were focused on reducing cash, asset backed and residential mortgage exposures from prior periods and increasing allocations to U.S. Treasuries, agencies and commercial mortgage backed securities. The duration of the fixed income portfolio has increased compared to June 30, 2006 primarily due to a reduction in cash balances and shorter duration U.S. government and agencies and the addition of mortgages and corporate securities. The increase in yields across the interest rate curve has also caused the natural extension of mortgage pass-throughs in the portfolio. Given the current market conditions, the portfolio continues to maintain a very high average credit quality.

Net Realized Investment Losses

The Company’s investment portfolio is managed to generate income while providing liquidity. The portfolio is constantly adjusted and rebalanced to meet the Company’s objectives, resulting in the realization of net gains or losses which are dependent on movements in financial markets and interest rates. Proceeds from sales of investments classified as available for sale during the three months ended June 30, 2007 were $705.4 million compared to $353.1 million during the three months ended June 30, 2006. Net realized investment losses for the three months ended June 30, 2007 and 2006 were as follows:


	Three Months Ended
	June 30, 2007				June 30, 2006
	(U.S. dollars in thousands)
Gross realized gains		$	529			$	119
Gross realized losses excluding other-than-temporary impairments			(5,183	)			(4,065	)
Other-than-temporary impairment losses			(4,384	)			(4,783	)
Net realized investment losses		$	(9,038	)		$	(8,729	)

During the three months ended June 30, 2007, the Company identified fixed maturity securities that were considered to be other-than-temporarily impaired. The unrealized loss position of these fixed maturities was principally a result of changes in the interest rate environment. Consequently, the cost of such securities was written down to fair value, and the Company recognized a realized loss on these securities in the current period of $4.4 million (2006 – $4.8 million).

Net Losses and Loss Expenses

Favorable prior year loss reserve development was $29.9 million for the second quarter of 2007 as compared to unfavorable prior year loss reserve development for the second quarter of 2006 of $21.6 million. In the second quarter of 2007, prior year reserves emerged favorably in both short and long tail lines of the Insurance business segment and the short tail line within the Reinsurance business segment. Unfavorable loss development for the three months ended June 30, 2006 resulted from an increase by the Company in its expected ultimate losses related to the 2005 catastrophes.

The Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are the only valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company’s consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Reserve adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss reserves were established by the Company’s actuaries and reflect management’s best estimate of ultimate losses. See ‘‘Reserve for Losses and Loss Expenses’’ below for further discussion.

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Acquisition Expenses

The decrease in the acquisition expense ratio for the three months ended June 30, 2007 as compared to the same period in 2006 was due to the increase in catastrophe and property related gross premiums written, which typically have lower acquisition costs.

General and Administrative Expenses

The Company’s general and administrative expense ratio for the second quarter of 2007 was materially consistent with the ratio for the same quarter in 2006.

Net Income

The Company produced net income of $135.3 million in the three months ended June 30, 2007, compared to net income of $64.1 million in the same period of 2006. The increase in net income for the current period of 2007 compared to 2006 was primarily due to a favorable variance in prior year loss reserve development, period over period, of $49.2 million and growth in net investment income of 30.3% for the current period.

Reserve for losses and loss expenses

In order to capture the key dynamics of loss development and expected volatility that may arise within the Company’s reserve for losses and loss expenses, the key lines of business within each business segment are aggregated based on their potential expected length of loss emergence. The period over which loss emergence occurs is typically referred to as the tail. The Company has classified its lines of business as either having a ‘‘short,’’ ‘‘long’’ or ‘‘other’’ tail pattern. The Company views short tail business as that for which development typically emerges within a period of a few years while long tail business would emerge over many years. Within the Company’s Reinsurance business segment, the Company writes certain specialty lines of business for which the loss emergence is considered unique in nature and thus, has been included as ‘‘other’’ in the tables below.

As of June 30, 2007, the Company had accrued losses and loss expenses reserves of $2.8 billion (December 31, 2006 – $2.7 billion). This amount represents management’s best estimate of the ultimate liability for payment of losses and loss expenses related to loss events. During the three month periods ended June 30, 2007 and 2006, the Company paid losses and loss expenses of $249.6 million and $188.5 million, including deposit accounting adjustments, respectively. The increase in paid claims for the current quarter was primarily due to claims payments in relation to the Company’s growing agriculture line of $70.2 million compared to $16.1 million for the second quarter of 2006.

As of June 30, 2007, the Company had been notified of a number of claims and potential claims under its insurance policies and reinsurance contracts. Of these notifications, management expects some of the claims to penetrate layers in which the Company provides coverage; case reserves have been established for these expected losses. In addition, the Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are currently a valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company’s consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss re serves reflect management’s best estimate of ultimate losses and loss expenses. See ‘‘Critical Accounting Estimates — Reserve for Losses and Loss Expenses’’ included in the 2006 Annual Report on Form 10-K for further details.

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Losses and loss expenses for the three months ended June 30, 2007 are summarized as follows:


	Incurred related to:								Total incurred losses
	Current year				Prior years				Total incurred losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	6,856			$	(15,172	)		$	(8,316	)
Long tail			75,291				(3,553	)			71,738
Total Insurance			82,147				(18,725	)			63,422
Reinsurance:
Short tail			55,938				(10,114	)			45,824
Long tail			93,524				1,136				94,660
Other			30,151				537				30,688
Total Reinsurance			179,613				(8,441	)			171,172
Deposit accounting⁽¹⁾			(24,700	)			(2,715	)			(27,415	)
Totals		$	237,060			$	(29,881	)		$	207,179

⁽¹⁾	Reconciles the Company’s incurred losses by business segment to the Company’s financial statement presentation.

Losses and loss expenses for the three months ended June 30, 2007 include $29.9 million in favorable loss reserve development relating to prior accident years. The favorable loss reserve development experienced during the second quarter of 2007 benefited the Company’s 2007 net loss ratio by approximately 7.2 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected emergence of catastrophic and attritional losses than was previously estimated by the Company. Favorable development of prior year loss reserves for the second quarter of 2007 related primarily to the Company’s short and long tail lines included in its Insurance business segment, as well as the short tail line of business in the Reinsurance business segment.

Losses and loss expenses for the three months ended June 30, 2006 are summarized as follows:


	Incurred related to:								Total incurred losses
	Current year				Prior years				Total incurred losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	28,449			$	(5,102	)		$	23,347
Long tail			54,787				(7,966	)			46,821
Total Insurance			83,236				(13,068	)			70,168
Reinsurance:
Short tail			105,873				58,523				164,396
Long tail			65,258				(10,115	)			55,143
Other			27,608				(6,871	)			20,737
Total Reinsurance			198,739				41,537				240,276
Deposit accounting⁽¹⁾			(34,112	)			(6,887	)			(40,999	)
Totals		$	247,863			$	21,582			$	269,445

⁽¹⁾	Reconciles the Company’s incurred losses by business segment to the Company’s financial statement presentation.

Losses and loss expenses for the three months ended June 30, 2006 include approximately $21.6 million in unfavorable development of reserves relating to prior accident years. The unfavorable loss reserve development experienced by the Company in the second quarter of 2006 increased the net

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loss ratio by approximately 5.3 percentage points. The net increase in estimated losses for prior accident years primarily reflects an increase in the expected ultimate losses related to the 2005 catastrophes in the short tail lines of business within the Company’s Reinsurance business segment.

Reserves for losses and loss expenses were comprised of the following at June 30, 2007:


	Case Reserves				IBNR Reserves				Reserve for losses and loss expenses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	100,339			$	34,066			$	134,405
Long tail			49,928				782,940				832,868
Total Insurance			150,267				817,006				967,273
Reinsurance:
Short tail			614,638				360,303				974,941
Long tail			234,964				598,815				833,779
Other			9,267				117,137				126,404
Total Reinsurance			858,869				1,076,255				1,935,124
Deposit accounting⁽¹⁾			(65,639	)			(69,233	)			(134,872	)
Totals		$	943,497			$	1,824,028			$	2,767,525

⁽¹⁾	Reconciles the Company’s reserve for losses and loss expenses by business segment to the Company’s financial statement presentation.

Reserves for losses and loss expenses were comprised of the following at June 30, 2006:


	Case Reserves				IBNR Reserves				Reserve for losses and loss expenses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	153,272			$	47,858			$	201,130
Long tail			9,127				551,253				560,380
Total Insurance			162,399				599,111				761,510
Reinsurance:
Short tail			773,818				459,855				1,233,673
Long tail			181,465				581,078				762,543
Other			8,287				117,075				125,362
Total Reinsurance			963,570				1,158,008				2,121,578
Deposit accounting⁽¹⁾			(31,308	)			(68,977	)			(100,285	)
Totals		$	1,094,661			$	1,688,142			$	2,782,803

⁽¹⁾	Reconciles the Company’s reserve for losses and loss expenses by business segment to the Company’s financial statement presentation.

Underwriting results by operating segments

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performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by business segments are allocated directly. Remaining corporate overhead is allocated to business segments based on various factors, including each segment’s proportional share of premiums, headcount, and other variables deemed relevant to the allocation of such expenses. In 2006, general and administrative expenses not directly incurred by the segments were allocated based on each segment’s proportional share of gross premiums written.

For internal management reporting purposes, underwriting results by business segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written.

Insurance

The following table summarizes the underwriting results and associated ratios for the Company’s Insurance business segment for the three months ended June 30, 2007 and 2006.


	Three Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written		$	197,967			$	159,223			24.3	%
Ceded premiums written			(45,967	)			(36,042	)		27.5	%
Net premiums written			152,000				123,181			23.4	%
Net premiums earned			124,057				88,353			40.4	%
Expenses
Losses and loss expenses			63,422				70,168			(9.6	%)
Acquisition expenses			16,528				6,532			153.0	%
General and administrative expenses			18,592				13,823			34.5	%
			98,542				90,523			8.9	%
Underwriting income (loss)		$	25,515			$	(2,170	)		NM	⁽²⁾
Net loss ratio			51.1	%			79.4	%		(28.3	)
Acquisition expense ratio			13.3	%			7.4	%		5.9
General and administrative expense ratio			15.0	%			15.7	%		(0.7	)
Combined ratio			79.4	%			102.5	%		(23.1	)

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

⁽²⁾	Not meaningful.

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Premiums. Gross premiums written for the second quarter of 2007 in the Insurance business segment increased by 24.3% over the second quarter of 2006. Gross and net premiums written for each line of business in the Insurance business segment for the three months ended June 30, 2007 and 2006 were as follows:


	Three Months Ended
	June 30, 2007						June 30, 2006
	Gross Premiums Written			Net Premiums Written			Gross Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Property		$	40,835		$	17,262		$	52,591		$	26,699
Casualty			42,343			26,815			42,877			33,113
Healthcare Liability			28,054			28,054			31,047			31,047
Workers’ Compensation			57,142			52,999			6,431			6,045
Professional Lines			29,593			26,870			26,277			26,277
Total		$	197,967		$	152,000		$	159,223		$	123,181

The increase in the Insurance business segment gross premiums written for the three months ended June 30, 2007 compared to 2006 was largely driven by the continued development of the Company’s workers’ compensation line of business. The Company’s workers’ compensation business transitioned from the Company’s Reinsurance business segment in the second quarter of 2006 and yielded $50.7 million of additional gross premiums written in the second quarter of 2007 compared to the same period in 2006. The Company’s workers’ compensation business continues to be written on a specialized and targeted basis in a single state. The remaining insurance lines of business decreased by 7.8% over the second quarter of 2006 as the Company non-renewed contracts within the property and healthcare liability lines of business due to declines in pricing, terms and conditions as a result of increased competition.

Ceded premiums written by the Company in the Insurance business segment increased in the second quarter of 2007 compared to the same period in 2006 because of an increase in reinsurance purchases, including excess of loss reinsurance purchases, which corresponds to the increase in gross premiums written for this segment. The Company expects to continue to use such third party reinsurance in relation to its U.S. insurance operations as a means of managing its aggregate risk and limit exposures.

Net premiums earned by the Company in the Insurance business segment in the three months ended June 30, 2007 also increased compared to 2006, due to the increase in gross premiums written within this segment and the continued earning of gross premiums written in prior periods, partially offset by the effects of increased ceded premiums written in recent periods.

Net Losses and Loss Expenses. The net loss ratio in the Company’s Insurance business segment decreased by 28.3 points for the three months ended June 30, 2007 over the same period in 2006 as a result of the absence of large losses in the current period compared with a $19.0 million industrial fire loss in Canada during 2006 and an increase in favorable development from prior accident quarters.

During the three months ended June 30, 2007, the Company’s previously estimated ultimate losses for the Insurance business segment for prior accident years were reduced by $18.7 million compared to a $13.1 million reduction during the second quarter of 2006. The short tail line in the Company’s Insurance business segment experienced the largest net reductions of $15.2 million, while the long tail line experienced $3.6 million of favorable development for prior accident years in the second quarter of 2007. Reductions in reserves for losses and loss expenses in the Insurance business segment for the current and prior period resulted as claims have not materialized as originally estimated by the Company.

Acquisition Expenses. Acquisition expenses in the Insurance business segment increased for the three months ended June 30, 2007 compared to 2006 due to changes in business mix. During the current quarter, acquisition costs related to the Company’s workers’ compensation business, which has a higher acquisition expense ratio than the Company’s other insurance lines, totaled $10.5 million compared to

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$0.2 million during the same period in 2006. Additionally, decreased earned premiums in business lines with lower acquisition expenses, such as healthcare liability, contributed to the period over period increase.

General and Administrative Expenses. The increase in general and administrative expenses in the Insurance business segment for the second quarter of 2007 as compared to 2006 resulted from expenditures related to the expansion of the Company’s U.S. insurance operations and an increase in indirect expense allocations. However, the general and administrative expense ratio decreased during the current period as a result of the increase in earned premiums related to the workers’ compensation initiative within the Insurance business segment.

Reinsurance

The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance business segment for the three months ended June 30, 2007 and 2006. All amounts are presented applying reinsurance accounting to all reinsurance contracts written.


	Three Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Revenues
Total premiums written		$	328,815			$	338,142			(2.8	%)
Ceded premiums written			(12,610	)			(6,533	)		93.0	%
Net premiums written			316,205				331,609			(4.6	%)
Net premiums earned			324,318				368,496			(12.0	%)
Expenses
Losses and loss expenses			171,172				240,276			(28.7	%)
Acquisition expenses			64,555				86,371			(25.3	%)
General and administrative expenses			30,072				32,245			(6.7	%)
			265,799				358,892			(25.9	%)
Underwriting income		$	58,519			$	9,604			509.3	%
Net loss ratio			52.8	%			65.2	%		(12.4	)
Acquisition expense ratio			19.9	%			23.4	%		(3.5	)
General and administrative expense ratio			9.3	%			8.8	%		0.5
Combined ratio			82.0	%			97.4	%		(15.4	)

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

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Premiums. Total and net premiums written for each line of business in the Reinsurance business segment for the three months ended June 30, 2007 and 2006 were as follows:


	Three Months Ended
	June 30, 2007						June 30, 2006
	Total Premiums Written			Net Premiums Written			Total Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Casualty		$	27,788		$	27,610		$	77,188		$	76,004
Property			65,476			67,074			49,998			49,998
Catastrophe			147,506			137,720			102,763			99,238
Agriculture			24,118			22,018			42,373			42,373
Marine			12,220			12,704			14,560			14,560
Aerospace			20,263			18,326			25,560			23,995
Surety and other specialty			31,444			30,753			25,700			25,441
Total		$	328,815		$	316,205		$	338,142		$	331,609

Total premiums written, which includes deposit premiums, in Endurance’s Reinsurance business segment for the second quarter of 2007 were $328.8 million, a decrease of 2.8% from the $338.1 million of premiums written in the same period in 2006. This decline was partially driven by decreases in the Company’s casualty line of business due to the absence of premiums associated with workers’ compensation business, the majority of which is now written in the Insurance business segment. In addition, premiums decreased in the agriculture line of business from timing differences between the first and second quarters of 2006 and 2007. These declines were partially offset by continued growth in the Reinsurance business segment’s catastrophe and property lines of business as a result of new business written and certain premium adjustments.

Net premiums earned by the Company in the Reinsurance business segment for the three months ended June 30, 2007 decreased compared to the first quarter of 2006, due to the decrease in total premiums written in this business segment and the decrease in earned premium adjustments during the current quarter.

Losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance business segment for the three months ended June 30, 2007 decreased compared to the second quarter of 2006 as a result of favorable loss emergence during the current quarter as compared to unfavorable prior year loss reserve development recorded in the same period of 2006. During the second quarter of 2007, net favorable prior year loss reserve development of $8.4 million emanated primarily from this segment’s short tail lines of business as claims did not emerge as originally estimated by the Company. For the second quarter of 2006, net unfavorable prior year loss reserve development of $41.5 million was recorded primarily in the Reinsurance business segment’s short tail lines as a result of an increase in the expected ultimate losses rel ated to the 2005 catastrophes.

Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance business segment decreased for the second quarter of 2007 as compared to the second quarter of 2006 due to changes in business mix, including $45.0 million less earned premium from several workers’ compensation reinsurance treaties in the casualty line that had higher acquisition expenses than other lines in the Reinsurance business segment.

General and Administrative Expenses. The general and administrative expenses incurred by the Reinsurance business segment in the three months ended June 30, 2007 decreased from the same period in 2006 primarily as a result of decreases in the Company’s indirect expense allocations during the current quarter.

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Deposit Accounting

For internal management reporting purposes, underwriting results by business segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written. The following table presents the activity related to deposit accounted contracts included in the Company’s segment results above, which reconciles the Company’s underwriting results to the Company’s consolidated financial statement presentation for the three months ended June 30, 2007 and 2006.


	Three Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written		$	(19,979	)		$	(46,112	)		(56.7	%)
Net premiums written			(19,979	)			(46,112	)		(56.7	%)
Net premiums earned			(30,824	)			(50,171	)		(38.6	%)
Other underwriting (loss) income			(3,203	)			(1,992	)		60.8	%
			(34,027	)			(52,163	)		(34.8	%)
Expenses
Losses and loss expenses			(27,415	)			(40,999	)		(33.1	%)
Acquisition expenses			(7,142	)			(13,706	)		(47.9	%)
General and administrative expenses			—				—			—
			(34,557	)			(54,705	)		(36.8	%)
Underwriting loss		$	530			$	2,542			(79.2	%)
Ratios
Loss ratio			88.9	%			81.7	%		7.2
Acquisition expense ratio			23.2	%			27.3	%		(4.1	)
General and administrative expense ratio			—				—			—
Combined ratio			112.1	%			109.0	%		3.1

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

During the three months ended June 30, 2007 and 2006, $20.0 million and $46.1 million, respectively, of premiums, in management’s judgment, were most appropriately accounted for as deposits under the deposit accounting provisions of Statement of Position 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk (‘‘SOP 98-7’’). While not underwritten as finite risk reinsurance, these contracts contain adjustable features, primarily sliding scale ceding commissions and profit share commissions, that may cause the amount or variability of risk assumed by the Company to differ from that of its ceding company counterpart. These contracts often contain significant exposures, particularly catastrophic, start-up and other risks that have a low probability of occurrence, however, could produce material losses. Consequently, these contracts were accounted for as contra cts which either transfer only significant timing risk or transfer only significant underwriting risk. The determination of the appropriate method of accounting for these contracts requires significant judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses.

Under the deposit method of accounting, revenues and expenses from reinsurance contracts are not recognized as gross premium written and losses and loss expenses. Income or loss associated with contracts determined to transfer only significant timing risk or only significant underwriting risk are included as a component of net other underwriting income (loss) and recognized over the estimated claim settlement period or contract risk period, respectively.

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The following table reconciles total segment results including Insurance, Reinsurance and Deposit Accounting detailed above to consolidated income before income taxes for the three months ended June 30, 2007 and 2006, respectively:


	Three Months Ended
	June 30, 2007				June 30, 2006
	(U.S. dollars in thousands)
Total underwriting income		$	84,564			$	9,976
Net investment income			78,548				60,291
Net foreign exchange gains			2,072				11,997
Net realized losses on investments			(9,038	)			(8,729	)
Amortization of intangibles			(1,127	)			(1,158	)
Interest expense			(7,531	)			(7,459	)
Consolidated income before income taxes		$	147,488			$	64,918

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Consolidated results of operations — for the six month period ended June 30, 2007 and 2006

Results of operations for the six months ended June 30, 2007 and 2006 were as follows:


	Six Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Underwriting income
Revenues
Gross premiums written		$	1,080,094			$	1,022,634			5.6	%
Net premiums written			981,891				951,687			3.2	%
Net premiums earned			794,596				826,884			(3.9	%)
Other underwriting (loss) income			(9,139	)			1,509			NM	⁽²⁾
			785,457				828,393			(5.2	%)
Expenses
Losses and loss expenses			417,773				508,177			(17.8	%)
Acquisition expenses			141,471				154,445			(8.4	%)
General and administrative expenses			97,493				89,959			8.4	%
			656,737				752,581			(12.7	%)
Net investment income			153,361				121,835			25.9	%
Net foreign exchange (losses) gains			(541	)			14,883		NM⁽²⁾
Net realized losses on investments			(11,122	)			(12,059	)		(7.8	%)
Amortization of intangibles			(2,254	)			(2,316	)		(2.7	%)
Interest expense			(15,060	)			(14,985	)		0.5	%
Income tax expense			(15,928	)			(12,084	)		31.8	%
Net income		$	237,176			$	171,086			38.6	%
Loss ratio			52.6	%			61.5	%		(8.9	)
Acquisition expense ratio			17.8	%			18.7	%		(0.9	)
General and administrative expense ratio			12.3	%			10.9	%		1.4
Combined ratio			82.7	%			91.1	%		(8.4	)

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

⁽²⁾	Not meaningful.


	Six Months Ended
	June 30, 2007			June 30, 2006			Change
	(U.S. dollars in thousands)
Supplemental information
Gross premiums written		$	1,080,094		$	1,022,634		5.6	%
Deposit accounting premiums			23,194			145,261		(84.0	%)
Total premiums written, including deposit premiums		$	1,103,288		$	1,167,895		(5.5	%)

Premiums

Total premiums written, including deposit premiums, in the six months ended June 30, 2007 were $1,103.3 million, a decrease of $64.6 million, or 5.5%, compared to the same period in 2006. The decrease in total premiums for the six months ended June 30, 2007 as compared to the same period in 2006 primarily related to a decrease in premiums written by the Company’s Reinsurance business segment.

Ceded premiums written increased for the six months ended June 30, 2007 from the same period in 2006 as the Company purchased additional reinsurance in relation to its expanding Insurance business

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segment, which is consistent with its overall risk management strategy. The Company’s net written premiums increased for the six months ended June 30, 2007 due to the growth in premiums written, which outpaced the growth in ceded premiums as compared to the six months ended June 30, 2006.

Net premiums earned for the six months ended June 30, 2007 were $794.6 million, a decrease of $32.3 million, or 3.9%, from the same period in 2006. The decrease in net premiums earned resulted from increased reinsurance purchases, including premiums ceded to the Company’s catastrophe bond and loan facility, Shackleton Re, and a decrease in the amount of positive earned premium adjustments and extension premiums which benefited the first six months of 2006.

Net Investment Income

Net investment income increased 25.9% to $153.4 million for the six months ended June 30, 2007 compared to the first six months of 2006 principally due to a 2.2% increase in cash, cash equivalents and investments over 2006, higher portfolio yields on cash and fixed maturity securities, and strong alternative investment performance. The increase in cash, cash equivalents and investments since June 30, 2006 resulted from positive net operating cash flows throughout 2006 and through June 30, 2007. Investment expenses, including investment management fees, for the six months ended June 30, 2007 were $4.9 million compared to $3.6 million for the same period in 2006.

The net earned yield (which is the actual net earned income from the investment portfolio after adjusting for expenses and accretion and amortization from the purchase price divided by the average book value of assets), total return on the investment portfolio (which includes realized and unrealized gains and losses), market yield and portfolio duration for the six months ended June 30, 2007 and 2006 were as follows:


	Six Months Ended
	June 30, 2007			June 30, 2006
Net earned yield		5.53	%		4.75	%
Total return on investment portfolio		2.12	%		1.31	%
Market yield⁽¹⁾		5.49	%		5.44	%
Portfolio duration⁽¹⁾		2.71			2.64

⁽¹⁾ Includes only cash and fixed maturity securities.

During the first six months of 2007, the yield on the benchmark five year U.S. Treasury bond fluctuated within an 81 basis point range, with a high of 5.21% and a low of 4.40%. The Company’s activities were focused on generating cash, increasing exposure to mortgage and US governments while decreasing asset backed and corporate securities. The duration of the fixed income portfolio has increased compared to June 30, 2006 primarily due to an increase in mortgage backed securities. The increase in yields across the interest rate curve has also caused the natural extension of mortgage pass-throughs in the portfolio. Given the current market conditions of limited additional yield for taking risk, the portfolio continues to maintain a very high average credit quality.

Net Realized Investment Losses

The Company’s investment portfolio is managed to generate income while providing liquidity. The portfolio is constantly adjusted and rebalanced to meet the Company’s objectives, resulting in the realization of net gains (losses) which are dependent on movements in financial markets and interest rates. Proceeds from sales of investments classified as available for sale during the six months ended June 30, 2007 were $1,262.1 million compared to $803.4 million during the six months ended June 30, 2006. Net realized investment losses for the six months ended June 30, 2007 and 2006 were as follows:

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	Six Months Ended
	June 30, 2007				June 30, 2006
	(U.S. dollars in thousands)
Gross realized gains		$	1,802			$	2,557
Gross realized losses excluding other-than-temporary impairments			(6,950	)			(7,726	)
Other-than-temporary impairment losses			(5,974	)			(6,890	)
Net realized investment losses		$	(11,122	)		$	(12,059	)

During the six months ended June 30, 2007, the Company identified fixed maturity securities that were considered to be other-than-temporarily impaired. The unrealized loss position of these fixed maturities was principally a result of changes in the interest rate environment. Consequently, the cost of such securities was written down to fair value, and the Company recognized a realized loss on these securities in the current period of $6.0 million (2006 – $6.9 million).

Net Losses and Loss Expenses

The Company’s reported net losses and loss expenses are characterized by various factors and are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. For the six months ended June 30, 2007, the Company’s net loss ratio was adversely impacted by European Windstorm Kyrill, while in the six months ended June 30, 2006 the absence of major catastrophes favorably impacted the net loss ratio. The Company’s combined gross losses from Windstorm Kyrill in the current period were $40.0 million and were recorded primarily within the catastrophe line of the Reinsurance business segment, and to a lesser extent in the Company’s marine and property lines of the Reinsurance business segment and the property line of the Insurance business segment. The Company’s losses net of reinstatement premiums, other loss sensitive accruals, loss recoveries and ta xes were $33.9 million for Windstorm Kyrill.

Favorable prior year loss reserve development was $85.8 million for the first six months of 2007 as compared to favorable prior year loss reserve development for the six months ended June 30, 2006 of $21.0 million. In the six months ended June 30, 2007, prior year reserves emerged favorably in both short and long tail lines of business within the Insurance and Reinsurance business segments as claims did not emerge as originally estimated by the Company. During the six months ended June 30, 2006, the Company had overall net favorable prior year loss reserve development, despite adverse loss development on the 2005 catastrophes. This adverse development primarily impacted the Company’s short tail lines in the Reinsurance business segment while overall favorable prior year loss reserve development was experienced across all other lines within the Insurance and Reinsurance business segments.

Acquisition Expenses

The acquisition expense ratio for the six months ended June 30, 2007 decreased from the same period in 2006. The decrease in acquisition expenses was due to change in the mix of business, with more premiums written in the catastrophe reinsurance line, which typically has lower associated acquisition costs, and fewer premiums written in the casualty reinsurance line, which typically has higher associated acquisition costs, as compared to the same period in 2006.

General and Administrative Expenses

The Company’s general and administrative expense ratio for the six months ended June 30, 2007 increased as compared to the same period in 2006 primarily due to the continued expansion of the

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Company’s U.S. insurance operations, changes in Endurance’s mix of business, and increases in reinsurance purchases. Management seeks to grow the Company’s Insurance business segment in the coming year through continued investment in the infrastructure necessary to support its U.S. Insurance operations.

Net Income

The Company produced net income of $237.2 million in the six months ended June 30, 2007, compared to net income of $171.1 million in the same period of 2006. The increase in net income for the first six months of 2007 was primarily due to the increase in favorable prior year loss reserve development as compared to the same period of 2006 with lower favorable loss reserve development due to an increase in the expected ultimate losses related to the 2005 catastrophes. In addition, net investment income increased during the current period by 25.9% over the six months ended June 30, 2006. These increases were offset during the six months ended June 30, 2007 by losses related to Windstorm Kyrill as compared to the absence of catastrophic events in the same period of 2006 and the decline in the Company’s net premiums earned for the first six months of 2007 compared to 2006.

Reserve for losses and loss expenses

As of June 30, 2007, the Company had accrued losses and loss expenses reserves of $2.8 billion (December 31, 2006 – $2.7 billion). This amount represents management’s best estimate of the ultimate liability for payment of losses and loss expenses related to loss events. During the six month periods ended June 30, 2007 and 2006, the Company paid losses and loss expenses of $389.9 million and $352.0 million, including deposit accounting adjustments, respectively. The increase in paid claims for the six months ended June 30, 2007 was primarily due to claims payments in relation to the Company’s agriculture line of $71.6 million compared to $17.0 million for the same period of 2006.

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Losses and loss expenses for the six months ended June 30, 2007 are summarized as follows:


	Incurred related to:								Total incurred losses
	Current year				Prior years				Total incurred losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	23,004			$	(31,270	)		$	(8,266	)
Long tail			149,179				(13,962	)			135,217
Total Insurance			172,183				(45,232	)			126,951
Reinsurance:
Short tail			227,963				(25,452	)			202,511
Long tail			92,989				(3,900	)			89,089
Other			51,432				(2,161	)			49,271
Total Reinsurance			372,384				(31,513	)			340,871
Deposit accounting⁽¹⁾			(41,006	)			(9,043	)			(50,049	)
Totals		$	503,561			$	(85,788	)		$	417,773

⁽¹⁾	Reconciles the Company’s incurred losses by business segment to the Company’s financial statement presentation.

Losses and loss expenses for the six months ended June 30, 2007 include $85.8 million in favorable loss reserve development relating to prior accident years. The favorable loss reserve development experienced during the first six months of 2007 benefited the Company’s 2007 reported loss ratio by approximately 10.8 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected emergence of catastrophic and attritional losses. Favorable development of prior year loss reserves for the six months ended June 30, 2007 was recorded in the short, long and other tail lines of business within both the Insurance and Reinsurance business segments.

Losses and loss expenses for the six months ended June 30, 2006 are summarized as follows:


	Incurred related to:								Total incurred losses
	Current year				Prior years				Total incurred losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	46,734			$	(28,848	)		$	17,886
Long tail			105,964				(12,075	)			93,889
Total Insurance			152,698				(40,923	)			111,775
Reinsurance:
Short tail			249,361				54,111				303,472
Long tail			152,379				(18,445	)			133,934
Other			42,343				(11,075	)			31,268
Total Reinsurance			444,083				24,591				468,674
Deposit accounting⁽¹⁾			(67,645	)			(4,627	)			(72,272	)
Totals		$	529,136			$	(20,959	)		$	508,177

⁽¹⁾	Reconciles the Company’s incurred losses by business segment to the Company’s financial statement presentation.

Losses and loss expenses for the six months ended June 30, 2006 include approximately $21.0 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development benefited the Company’s reported loss ratio by approximately 2.5 percentage points for the first six months of 2006. The net reduction in estimated losses for prior accident years reflects lower than expected emergence of catastrophic and attritional losses primarily in the short and long tail lines of the

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Insurance business segment and the long tail and other lines of the Reinsurance business segment. Net unfavorable development for the six months ended June 30, 2006 was recorded in the short tail line within the Reinsurance business segment as the Company increased its expected ultimate losses in relation to the 2005 catastrophes.

Underwriting results by operating segments

The determination of the Company’s business segments is based on the manner in which management monitors the performance of the Company’s underwriting operations. Management measures the Company’s results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company’s historic combined ratios may not be indicative of future underwriting performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by business segments are allocated directly. Remaining corporate overhead is allocated to business segments based on various factors, including each segment’s proportional share of premiums, headcount, and other variables deemed relevant to the allocation of such expenses. In 2006, general and administrative expenses not directly incurred by the segments were allocated based on each segment’s proportional share of gross premiums written.

For internal management reporting purposes, underwriting results by business segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written.

Insurance

The following table summarizes the underwriting results and associated ratios for the Company’s Insurance business segment for the six months ended June 30, 2007 and 2006.


	Six Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written		$	345,000			$	239,380			44.1	%
Ceded premiums written			(84,911	)			(59,507	)		42.7	%
Net premiums written			260,089				179,873			44.6	%
Net premiums earned			234,382				178,779			31.1	%
Expenses
Losses and loss expenses			126,951				111,775			13.6	%
Acquisition expenses			30,354				12,655			139.9	%
General and administrative expenses			40,809				21,782			87.4	%
			198,114				146,212			35.5	%
Underwriting income		$	36,268			$	32,567			11.4	%
Net loss ratio			54.2	%			62.5	%		(8.3	)
Acquisition expense ratio			13.0	%			7.1	%		5.9
General and administrative expense ratio			17.3	%			12.2	%		5.1
Combined ratio			84.5	%			81.8	%		2.7

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

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Premiums. Gross and net premiums written for each line of business in the Insurance business segment for the six months ended June 30, 2007 and 2006 were as follows:


	Six Months Ended
	June 30, 2007						June 30, 2006
	Gross Premiums Written			Net Premiums Written			Gross Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Property		$	67,877		$	23,389		$	81,164		$	37,389
Casualty			69,140			44,577			64,664			49,318
Healthcare Liability			46,843			46,843			52,109			52,109
Workers’ Compensation			118,775			107,809			6,431			6,044
Professional Lines			42,365			37,471			35,012			35,013
Total		$	345,000		$	260,089		$	239,380		$	179,873

The increase in the Insurance business segment gross premiums written for the six months ended June 30, 2007 compared to 2006 was largely driven by the continued development of the Company’s workers’ compensation business that was transitioned from the Reinsurance business segment during the second quarter of 2006. During the first six months of 2007, the workers’ compensation line yielded $112.3 million of additional gross premiums written in the Insurance business segment. The Company’s workers’ compensation business is written on a specialized and targeted basis in a single state. The Insurance segment’s casualty and professional lines also grew as a result of new business written during the six months ended June 30, 2007. Gross premiums written in the remaining lines in the Insurance business segment decreased by 2.9% over the prior year as the property and healthcare liability lines non-renewed bu siness due to declines in pricing, terms and conditions as a result of increased competition.

Ceded premiums written by the Company in the Insurance business segment increased in the six months ended June 30, 2007 compared to the same period in 2006 consistent with the increase in gross premiums written. The Company expects to continue to use such third party reinsurance as a means of managing its aggregate risk and to limit exposures.

Net premiums earned by the Company in the Insurance business segment in the six months ended June 30, 2007 also increased compared to 2006, due to the increase in gross premiums written within this segment and the continued earning of gross premiums written in prior periods, partially offset by the effects of increased ceded premiums written in recent periods.

Net Losses and Loss Expenses. The net loss ratio in the Company’s Insurance business segment for the six months ended June 30, 2007 reflected the absence of large losses in the current period and an increase in favorable development from prior accident quarters compared to the same period in 2006. During the six months ended June 30, 2007, Windstorm Kyrill contributed $1.2 million of gross losses to the Insurance business segment while the six months ended June 30, 2006 included a $19.0 million loss due to an industrial fire.

The Company’s previously estimated ultimate losses for the Insurance business segment for prior accident years were reduced by $45.2 million during the six months ended June 30, 2007 compared to a $40.9 million reduction for the same period in 2006. The short tail lines in the Company’s Insurance business segment experienced the largest net reductions of $31.3 million, while the long tail lines experienced $14.0 million of favorable development for prior accident years in the six months ended June 30, 2007. Reductions in reserves for losses and loss expenses in the Insurance business segment for the current and prior period resulted as claims have not materialized as originally estimated by the Company.

Acquisition Expenses. Acquisition expenses in the Insurance business segment increased for the six months ended June 30, 2007 compared to 2006 due to changes in business mix. During the current quarter, earned acquisition costs related to workers’ compensation business, which generally has higher acquisition expenses than the Company’s other insurance lines, totaled $18.2 million compared to $0.2 million during

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the same period in 2006. Additionally, decreased earned premiums in business lines with lower acquisition expenses, such as healthcare liability, contributed to the period to period increase.

General and Administrative Expenses. The increase in general and administrative expenses in the Insurance business segment for the six months ended June 30, 2007 as compared to 2006 resulted from expenditures related to the expansion of the Company’s U.S. insurance operations and an increase in indirect expense allocations. As gross premiums written by the U.S. insurance operations continue to increase and the related expansion costs stabilize, the Company expects that the general and administrative expense ratio will correspondingly become more stable.

Reinsurance

The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance business segment for the six months ended June 30, 2007 and 2006. All amounts are presented applying reinsurance accounting to all reinsurance contracts written.


	Six Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Revenues
Total premiums written		$	758,288			$	928,515			(18.3	%)
Ceded premiums written			(13,292	)			(11,440	)		16.2	%
Net premiums written			744,996				917,075			(18.8	%)
Net premiums earned			615,713				755,033			(18.5	%)
Expenses
Losses and loss expenses			340,871				468,674			(27.3	%)
Acquisition expenses			125,973				176,066			(28.5	%)
General and administrative expenses			56,684				68,177			(16.9	%)
			523,528				712,917			(26.6	%)
Underwriting income		$	92,185			$	42,116			118.9	%
Net loss ratio			55.4	%			62.1	%		(6.7	)
Acquisition expense ratio			20.5	%			23.3	%		(2.8	)
General and administrative expense ratio			9.1	%			9.0	%		0.1
Combined ratio			85.0	%			94.4	%		(9.4	)

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

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Premiums. Total and net premiums written for each line of business in the Reinsurance business segment for the six months ended June 30, 2007 and 2006 were as follows:


	Six Months Ended
	June 30, 2007						June 30, 2006
	Total Premiums Written			Net Premiums Written			Total Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Casualty		$	119,725		$	119,532		$	262,767		$	259,579
Property			102,177			103,601			172,478			172,478
Catastrophe			288,005			277,904			223,459			219,933
Agriculture			117,179			115,079			92,904			92,904
Marine			45,299			45,718			71,806			71,806
Aerospace			26,743			24,701			48,259			46,695
Surety and other specialty			59,160			58,461			56,842			53,680
Total		$	758,288		$	744,996		$	928,515		$	917,075

Total premiums written, which includes deposit premiums, in Endurance’s Reinsurance business segment for the six months ended June 30, 2007 were $758.3 million, a decrease of 18.3% from the $928.5 million of premiums written in the same period in 2006. This decline was driven primarily by the following factors:


	•	the Company transitioned a significant portion of its workers’ compensation reinsurance business from the casualty line of its Reinsurance business segment to the workers’ compensation line of its Insurance business segment during the second quarter of 2006, which contributed $65.4 million of written premiums to the Reinsurance segment’s period over period decline;


	•	the Company non-renewed several international casualty and property treaties and a large U.S. workers’ compensation treaty that no longer met the Company’s underwriting requirements, which contributed $100.1 million to the period over period decline; and


	•	the Company non-renewed all of its offshore energy exposures during the first quarter of 2007 within the marine line which contributed to the $26.5 million period over period decline in marine premiums.

The above noted declines were partially offset by growth in the Company’s agriculture and catastrophe lines of business due to better than expected renewal and new business opportunities.

Net premiums earned by the Company in the Reinsurance business segment for the six months ended June 30, 2007 decreased compared to the same period in 2006, due to the decrease in total premiums written in this business segment during the current period.

Losses and Loss Expenses. The loss ratio in the Company’s Reinsurance business segment for the six months ended June 30, 2007 decreased compared to the six months ended June 30, 2006 as a result of favorable loss emergence and a low level of catastrophe losses despite a gross loss of $38.8 million resulting from Windstorm Kyrill. The majority of the Reinsurance business segment’s losses in respect to Windstorm Kyrill were experienced in the catastrophe line of business, with a smaller portion of the losses recorded in the property and marine lines of business.

In the six months ended June 30, 2007, the Reinsurance business segment experienced favorable loss reserve development from prior years of $31.5 million while in the six months ended June 30, 2006 the Reinsurance business segment experienced unfavorable loss development of $24.6 million on prior year reserves. The favorable prior year loss reserve development during 2007 emanated from this segment’s short tail lines of business as losses did not materialize as originally estimated by the Company. The unfavorable prior year loss development for the six months ended June 30, 2006 resulted from an increase in the estimated ultimate losses from the 2005 catastrophes.

Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance business segment decreased for the six months ended June 30, 2007 as compared to the six months ended

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June 30, 2006 due to changes in business mix, including a reduction in workers compensation reinsurance, a component of the casualty line of business that had a higher acquisition expense ratio than the Company’s other reinsurance lines.

General and Administrative Expenses. The general and administrative expense ratio for the six months ended June 30, 2007 was materially consistent with the ratio for the six months ended June 30, 2006.

Deposit Accounting

For internal management reporting purposes, underwriting results by business segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts in the Company’s segment results above, which reconciles the Company’s underwriting results to the Company’s consolidated financial statement presentation for the six months ended June 30, 2007 and 2006.


	Six Months Ended
	June 30, 2007				June 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written		$	(23,194	)		$	(145,261	)		(84.0	%)
Net premiums written			(23,194	)			(145,261	)		(84.0	%)
Net premiums earned			(55,499	)			(106,928	)		(48.1	%)
Other underwriting (loss) income			(9,139	)			1,509			NM	⁽²⁾
			(64,638	)			(105,419	)		(38.7	%)
Expenses
Losses and loss expenses			(50,049	)			(72,272	)		(30.7	%)
Acquisition expenses			(14,856	)			(34,276	)		(56.7	%)
General and administrative expenses			—				—			—
			(64,905	)			(106,548	)		(39.1	%)
Underwriting loss		$	267			$	1,129			(76.4	%)
Ratios
Loss ratio			90.2	%			67.6	%		22.6
Acquisition expense ratio			26.8	%			32.0	%		(5.2	)
General and administrative expense ratio			—				—			—
Combined ratio			117.0	%			99.6	%		17.4

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

⁽²⁾	Not meaningful.

During the six months ended June 30, 2007 and 2006, $23.2 million and $145.3 million, respectively, of premiums were most appropriately accounted for as deposits under the deposit accounting provisions of SOP 98-7. While not underwritten as finite risk reinsurance, these contracts contain adjustable features, primarily sliding scale ceding commissions and profit share commissions that may cause the amount or variability of risk assumed by the Company to differ from that of its ceding company counterpart. Consequently, these contracts were accounted for as contracts which either transfer only significant timing risk or transfer only significant underwriting risk. These contracts often contain significant exposures, particularly catastrophic, start-up and other risks, that have a low probability of occurrence, however, could produce material losses. The determination of the appropriate method of accounting for these contracts requires significa nt judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses.

Under the deposit method of accounting, revenues and expenses from reinsurance contracts are not recognized as gross premium written and losses and loss expenses. Income or loss associated with

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contracts determined to transfer only significant timing risk or only significant underwriting risk are included as a component of net other underwriting income (loss) and recognized over the estimated claim settlement period or contract risk period, respectively.


	Six Months Ended
	June 30, 2007				June 30, 2006
	(U.S. dollars in thousands)
Total underwriting income		$	128,720			$	75,812
Net investment income			153,361				121,835
Net foreign exchange (losses) gains			(541	)			14,883
Net realized losses on investments			(11,122	)			(12,059	)
Amortization of intangibles			(2,254	)			(2,316	)
Interest expense			(15,060	)			(14,985	)
Consolidated income before income taxes		$	253,104			$	183,170

Significant transactions and events

Up to $675 million of borrowings or letter of credit issuances under the 2007 Credit Facility may be collateralized by a portion of the investment portfolio of such subsidiary borrowing under the facility to the extent of such subsidiary’s borrowing. The facility allows for the issuance of up to $200 million in multicurrency letters of credit and up to $300 million of fronted letters of credit, that may also be multicurrency letters of credit. Endurance Holdings guarantees the obligations of those of its subsidiaries that are parties to the 2007 Credit Facility.

The interest rate for revolving loans under the 2007 Credit Facility is either (i) the higher of (a) the Federal Funds Effective Rate plus 0.5% and (b) the prime commercial lending rate of JPMorgan Chase Bank or (ii) LIBOR, plus a fee ranging from 0.165% to 0.375% depending on the Company’s leverage ratio and if the loan is collateralized or uncollaterized. For letters of credit issued on a collateralized basis, the Company is required to pay a fee ranging from 0.165% to 0.29% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis, the Company is required to pay a fee ranging from 0.275% to 0.375% on the daily stated amount of such letters of credit. In addition, the 2007 Credit Facility requires the Company to pay to the lenders a facility fee and a utilization fee.

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addition, each of the Company’s regulated insurance subsidiaries that have a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the facility generally restrict the declaration or payment of dividends on the Company’s common shares if the Company is already in default or the payment or declaration would cause a default under the terms of the credit facility.

The 2007 Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 2007 Credit Facility, the lenders can terminate their commitments under the revolving credit facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the 2007 Credit Facility.

Liquidity and capital resources

Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries, including Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance, Endurance American and Endurance American Specialty. Endurance Holdings relies primarily on dividends and other permitted distributions from its insurance subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its ordinary shares. There are restrictions on the payment of dividends by Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance, Endurance American and Endurance American Specialty to Endurance Holdings, which are described in more detail below.

The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, and would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or other capital and surplus distributions. As of June 30, 2007, Endurance Bermuda could pay a dividend or otherwise return capital and surplus totaling approximately $881 million (December 31, 2006 – $826 million) without prior regulatory approval based upon insurance and Bermuda Companies Act regulations.

Endurance U.S. Reinsurance is subject to regulation by the State of New York Insurance Department. Dividends may only be declared or distributed out of earned surplus. At December 31, 2006, Endurance U.S. Reinsurance did not have earned surplus; therefore, Endurance U.S. Reinsurance is precluded from declaring or distributing any dividend during 2007 without the prior approval of the Superintendent of the State of New York Insurance Department.

Endurance American and Endurance American Specialty are subject to regulation by the State of Delaware Department of Insurance. Dividends are limited to the greater of 10% of policyholders’ surplus or net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2006, neither Endurance American and Endurance American Specialty had any earned surplus; therefore, both Endurance American and Endurance American Specialty are precluded from declaring or distributing dividends during 2007 without the prior approval of the Delaware Insurance Commissioner. Any dividends paid by Endurance American Specialty are paid to Endurance American and are then subject to Endurance American’s dividend limitations. In turn, any dividends paid by Endurance American are paid to Endurance U.S. Reinsurance and are then subject to Endurance U.S. Reinsurance’s dividend limitations .

Endurance U.K. is subject to regulation by the United Kingdom Financial Services Authority (the ‘‘FSA’’). U.K. company law prohibits Endurance U.K. from declaring a dividend to its shareholders unless it has ‘‘profits available for distribution.’’ The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the

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U.K. insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the FSA strictly controls the maintenance of each insurance company’s solvency margin within its jurisdiction. Any such payment or proposal could result in regulatory intervention. In addition, the FSA requires authorized insurance companies to notify the FSA in advance of any significant dividend payment. At June 30, 2007, Endurance U.K. did not have profits available for distribution and could not pay a dividend.

The Company’s aggregate cash and invested assets as of June 30, 2007 totaled $5.6 billion compared to $5.5 billion as of December 31, 2006. The increase in cash and invested assets since December 31, 2006 resulted from collections of premiums on insurance policies and reinsurance contracts and investment income, offset by losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid and general and administrative expenses paid. The decrease in cash flows from operations for the six months ended June 30, 2007 as compared to the same period in 2006 was primarily a result of timing of ceded premium payments to reinsurers, timing of paid loss disbursements and increased employee bonus payments.

Historically, the operating subsidiaries of the Company have generated sufficient cash flows to meet all of their obligations. Because of the inherent volatility of the business written by the Company, the seasonality in the timing of payments by ceding companies, the irregular timing of loss payments, the impact of a change in interest rates on the Company’s investment returns as well as seasonality in coupon payment dates for fixed income securities, cash flows from the Company’s operating activities may vary significantly between periods. The Company expects to continue to generate positive operating cash flows through 2007, absent the occurrence of one or more significant catastrophic events. In the event that paid losses accelerate beyond the ability to fund such payments from operating cash flows, the Company would use its cash balances available, liquidate a portion of its investment portfolio, access its existing credit facility or arrange fo r additional financing.

Under the Company’s recently amended and restated syndicated credit facility, the Company and its subsidiaries have access to a revolving line of credit of up to $1.175 billion, of which approximately $647 million was available as of June 30, 2007. As of June 30, 2007, there were no borrowings under this line of credit. See ‘‘Significant transactions and events’’ above.

Quantitative and qualitative information about market risk

There have been no material changes in market risk from the information provided under the caption ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Information about Market Risk’’ included in the Company’s 2006 Annual Report on Form 10-K.

Currency and Foreign Exchange

The Company’s functional currencies are U.S. dollars for Endurance Bermuda, Endurance U.S. Reinsurance, Endurance American and Endurance American Specialty and British Sterling for Endurance U.K. The reporting currency for all entities is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K. Endurance U.K. is subject to the United Kingdom’s Financial Services Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.’s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company’s results of operations.

Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.

Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses included in

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earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.

Effects of inflation

The effects of inflation could cause the severity of claims to rise in the future. The Company’s estimates for losses and loss expenses include assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, the Company will be required to increase the reserve for losses and loss expenses with a corresponding reduction in its earnings in the period in which the deficiency is identified.

Cautionary statement regarding forward-looking statements

Some of the statements contained herein, and certain statements that the Company may make in press releases or that Company officials may make orally, may include forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us in general and the insurance and reinsurance sectors specifically, both as to underwriting and investment matters. Statements which include the words ‘‘expect,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘believe,’’ ‘‘project,’’ ‘‘anticipate,’’ ‘‘seek,’’ ‘‘will,’’ and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.

All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:


	•	the effects of competitors’ pricing policies, and of changes in laws and regulations on competition, including those regarding contingent commissions, industry consolidation and development of competing financial products;


	•	greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices have anticipated;


	•	decreased demand for property and casualty insurance or reinsurance or increased competition due to an increase in capacity of property and casualty insurers and reinsurers;


	•	changes in the availability, cost or quality of reinsurance or retrocessional coverage;


	•	the inability to renew business previously underwritten or acquired;


	•	the inability to obtain or maintain financial strength or claims-paying ratings by one or more of our subsidiaries;


	•	our ability to effectively integrate acquired operations and to continue to expand our business;


	•	uncertainties in our reserving process, including the potential for adverse development of our loss reserves or failure of our loss limitation methods;


	•	Endurance Holdings or Endurance Bermuda becomes subject to income taxes in the United States or the United Kingdom;


	•	changes in tax laws or regulations applicable to us, our subsidiaries, brokers or customers;


	•	state, federal and foreign laws and regulations, which may impede our ability to obtain business, charge adequate rates or efficiently allocate capital;


	•	competition from state-sponsored insurance companies and risk pools;


	•	reduced acceptance of our products and services, including new products and services;


	•	loss of business provided by any one of a few brokers on whom we depend for a large portion of our revenue, and our exposure to the credit risk of our brokers;

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	•	assessments by states for high risk or otherwise uninsured individuals;


	•	the impact of acts of terrorism and acts of war;


	•	the effects of terrorist related insurance legislation and laws;


	•	loss of key personnel;


	•	political stability of Bermuda;


	•	changes in accounting policies or practices;


	•	our investment performance;


	•	the need for additional capital in the future which may not be available or only available on unfavorable terms; and


	•	changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates, and other factors.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in the 2006 Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Item 4. Controls and Procedures

a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006.

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

ISSUER PURCHASES OF EQUITY SECURITIES


Period	(a) Total Number of Shares Purchased⁽¹⁾		(b) Average Price Paid per Share			(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾⁽²⁾		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs⁽¹⁾⁽²⁾
April 1, 2007 – April 30, 2007		68,900		$	34.97		68,900		1,317,800
May 1, 2007 – May 31, 2007		1,513,400		$	37.82		1,513,400		15,804,400
June 1, 2007 – June 30, 2007		—			—		—		15,804,400
Total		1,582,300		$	37.69		1,582,300		15,804,400

⁽¹⁾	Ordinary shares or share equivalents.

⁽²⁾

On May 9, 2007, the Company increased the number of shares authorized under its February 28, 2007 share repurchase program. Under this program, the Company may repurchase up to 18,000,000 of its ordinary shares and share equivalents, an increase of 16 million shares from the two million shares previously authorized under the February 28th share repurchase program. The repurchases may be accomplished in open market or privately negotiated transactions, from time to time, depending on market conditions.

Item 3. Defaults Upon Senior Securities

None

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

On May 9, 2007, the Company held its Annual General Meeting of Shareholders in Pembroke, Bermuda. Represented in person or by proxy at the Annual General Meeting were 63,154,639 ordinary shares or 95% percent of the eligible ordinary shares, which was 95% of the ordinary shares then outstanding. At the Annual General Meeting, the Company’s shareholders voted on the following proposals:

Proposal No. 1 — Election of Directors


•	To elect four Class II directors for a term of three years:

John T. Baily
Norman Barham
Galen R. Barnes
Therese M. Vaughan

and two Class I directors for a term of two years:

Gregor S. Bailar
William J. Raver

to the Board of Directors of Endurance Specialty Holdings Ltd.