Endurance Specialty 10Q 2007 Q3 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 September 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 November 2, 2007
Ordinary Shares – $1.00 par value						64,080,540

INDEX


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006		2
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2007 and 2006		3
	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2007 and 2006		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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		19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		38
Item 4.	Controls and Procedures		40
Part II.	OTHER INFORMATION		41
Item 1.	Legal Proceedings		41
Item 1A.	Risk Factors		41
Item 2.	Changes in Securities and Issuer Purchases of Equity Securities		41
Item 3.	Defaults Upon Senior Securities		41
Item 4.	Submission of Matters to a Vote of Security Holders		41
Item 5.	Other Information		41
Item 6.	Exhibits		42
SIGNATURES			43

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


	September 30, 2007			December 31, 2006
	(UNAUDITED)
ASSETS
Investments
Fixed maturity investments, available for sale at fair value (amortized cost: $4,831,266 and $4,749,819 at September 30, 2007 and December 31, 2006)		$	4,803,808		$	4,714,204
Other investments			343,926			253,068
Total investments			5,147,734			4,967,272
Cash and cash equivalents			600,042			547,772
Premiums receivable, net			768,162			660,570
Deferred acquisition costs			212,000			168,809
Securities lending collateral			195,727			226,762
Prepaid reinsurance premiums			92,466			105,058
Losses recoverable			96,008			44,244
Accrued investment income			36,075			40,692
Intangible assets			69,388			70,366
Deferred tax asset			46,926			54,019
Receivable on pending investment sales, net			53,061			—
Other assets			50,852			39,990
Total assets		$	7,368,441		$	6,925,554
LIABILITIES
Reserve for losses and loss expenses		$	2,841,810		$	2,701,686
Reserve for unearned premiums			999,046			843,202
Deposit liabilities			130,272			161,024
Reinsurance balances payable			153,815			172,328
Securities lending payable			195,727			226,762
Debt			447,235			447,172
Other liabilities			74,915			75,506
Total liabilities			4,842,820			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, 64,080,540 issued and outstanding (2006 – 66,480,381)			64,081			66,480
Additional paid-in capital			1,355,468			1,458,063
Accumulated other comprehensive income (loss)			10,652			(14,465	)
Retained earnings			1,087,420			779,796
Total shareholders’ equity			2,525,621			2,297,874
Total liabilities and shareholders’ equity		$	7,368,441		$	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 September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
Revenues
Gross premiums written		$	423,271			$	476,213			$	1,503,365			$	1,498,847
Ceded premiums written			(45,655	)			(90,791	)			(143,858	)			(161,738	)
Net premiums written			377,616				385,422				1,359,507				1,337,109
Change in unearned premiums			22,126				22,553				(165,169	)			(102,250	)
Net premiums earned (includes $Nil and $28,324 from related parties for the nine months ended September 30, 2007 and 2006, respectively)			399,742				407,975				1,194,338				1,234,859
Net investment income			62,605				63,581				215,966				185,416
Net realized losses on investments			(3,055	)			(6,375	)			(14,177	)			(18,434	)
Other underwriting income (loss)			1,697				(1,837	)			(7,442	)			(328	)
Total revenues			460,989				463,344				1,388,685				1,401,513
Expenses
Losses and loss expenses (includes $Nil and $18,122 from related parties for the nine months ended September 30, 2007 and 2006, respectively)			186,456				188,033				604,229				696,210
Acquisition expenses (includes $Nil and $9,556 to related parties for the nine months ended September 30, 2007 and 2006, respectively)			76,604				81,857				218,075				236,302
General and administrative expenses			55,121				48,535				152,614				138,494
Amortization of intangibles			1,127				1,158				3,381				3,474
Net foreign exchange losses (gains)			700				3,633				1,241				(11,250	)
Interest expense			7,533				7,528				22,593				22,513
Total expenses			327,541				330,744				1,002,133				1,085,743
Income before income taxes			133,448				132,600				386,552				315,770
Income tax expense			(2,047	)			(4,370	)			(17,975	)			(16,454	)
Net income			131,401				128,230				368,577				299,316
Preferred dividends			(3,875	)			(3,875	)			(11,625	)			(11,625	)
Net income available to common shareholders		$	127,526			$	124,355			$	356,952			$	287,691
Other comprehensive income
Net income		$	131,401			$	128,230			$	368,577			$	299,316
Net unrealized holding gains (losses) on investments arising during the period (net of applicable deferred income taxes of $2,857 and $735 for the nine months ended September 30, 2007 and 2006, respectively)			53,221				63,789				5,919				(13,422	)
Foreign currency translation adjustments			1,879				778				4,955				3,471
Reclassification adjustment for net realized losses included in net income			3,055				6,375				14,177				18,434
Reclassification adjustment for net losses on derivative designated as cash flow hedge included in net income			22				22				66				66
Other comprehensive income			58,177				70,964				25,117				8,549
Comprehensive income		$	189,578			$	199,194			$	393,694			$	307,865
Per share data
Weighted average number of common and common equivalent shares outstanding:
Basic			64,468,309				66,338,596				65,529,530				66,393,406
Diluted			70,430,986				71,487,103				71,126,078				71,427,613
Basic earnings per common share		$	1.98			$	1.87			$	5.45			$	4.33
Diluted earnings per common share		$	1.81			$	1.74			$	5.02			$	4.03

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)


	Nine Months Ended September 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			652				386
Repurchase of common shares			(3,051	)			(329	)
Balance, end of period			64,081				66,196
Additional paid-in capital
Balance, beginning of period			1,458,063				1,453,722
Issuance of common shares			7,300				4,181
Repurchase of common shares			(109,328	)			(9,679	)
Issuance of restricted share units in lieu of dividends			193				732
Public offering and registration costs			(4,491	)			(133	)
Settlement of equity awards			(3,414	)			(3,451	)
Stock-based compensation expense			7,145				7,066
Balance, end of period			1,355,468				1,452,438
Accumulated other comprehensive income (loss)
Cumulative foreign currency translation adjustments:
Balance, beginning of period			28,852				23,842
Foreign currency translation adjustments			4,955				3,471
Balance, end of period			33,807				27,313
Unrealized holding losses on investments:
Balance, beginning of period			(40,841	)			(40,948	)
Net unrealized holding gains arising during the period, net of reclassification adjustment			20,096				5,012
Balance, end of period			(20,745	)			(35,936	)
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			66				66
Balance, end of period			(2,410	)			(2,500	)
Total accumulated other comprehensive income (loss)			10,652				(11,123	)
Retained earnings
Balance, beginning of period			779,796				364,354
Net income			368,577				299,316
Issuance of restricted share units in lieu of dividends			(193	)			(732	)
Dividends on preferred shares			(11,625	)			(11,625	)
Dividends on common shares			(49,135	)			(49,650	)
Balance, end of period			1,087,420				601,663
Total shareholders’ equity		$	2,525,621			$	2,117,174

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)


	Nine Months Ended September 30,
	2007				2006
Cash flows provided by operating activities:
Net income		$	368,577			$	299,316
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premium on investments			3,145				10,412
Depreciation and amortization of other intangibles			11,720				11,526
Net realized losses on investments			14,177				18,434
Deferred taxes			7,093				3,622
Stock-based compensation expense			7,145				7,066
Equity in earnings of unconsolidated ventures			(22,184	)			(17,903	)
Premiums receivable, net			(107,592	)			(194,353	)
Deferred acquisition costs			(43,191	)			(26,518	)
Prepaid reinsurance premiums			12,592				(81,119	)
Losses recoverable			(51,764	)			(20,199	)
Accrued investment income			4,617				(3,273	)
Other assets			(6,302	)			3,803
Reserve for losses and loss expenses			140,124				165,828
Reserve for unearned premiums			155,844				193,849
Deposit liabilities			(30,752	)			81,469
Reinsurance balances payable			(17,348	)			65,896
Other liabilities			(8,889	)			22,059
Net cash provided by operating activities			437,012				539,915
Cash flows used in investing activities:
Proceeds from sales of fixed maturity investments			2,243,281				1,107,917
Proceeds from maturities and calls on fixed maturity investments			533,954				429,656
Purchases of fixed maturity investments			(2,895,800	)			(1,854,120	)
Purchase of investments in other ventures			(68,800	)			(43,750	)
Purchases of fixed assets			(15,961	)			(13,615	)
Change in securities lending collateral received			31,035				59,033
Net cash paid in acquisition			(3,568	)			(12,055	)
Other			(17,977	)			(32,751	)
Net cash used in investing activities			(193,836	)			(359,685	)
Cash flows used in financing activities:
Issuance of common shares			7,866				4,495
Repurchase of common shares			(112,379	)			(10,008	)
Offering and registration costs paid			(23	)			(133	)
Change in securities lending collateral			(31,035	)			(59,033	)
Settlement of equity awards			(3,414	)			(3,451	)
Dividends paid			(60,760	)			(61,275	)
Net cash used in financing activities			(199,745	)			(129,405	)
Effect of exchange rate changes on cash and cash equivalents			8,839				9,150
Net increase in cash and cash equivalents			52,270				59,975
Cash and cash equivalents, beginning of period			547,772				468,015
Cash and cash equivalents, end of period		$	600,042			$	527,990

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 six 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; American Merchants Casualty Company, 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 nine month periods ended September 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 bal ances 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

Acquisition. On September 7, 2007, Endurance Holdings’ U.S. based holding company entered into an agreement to acquire all outstanding stock of ARMtech Insurance Services, Inc. and its affiliates (‘‘ARMtech’’). The base purchase price is $120 million, plus additional amounts as determined in accordance with the terms of the purchase agreement. ARMtech underwrites crop insurance primarily through the U.S. federally sponsored Multiple Peril Crop Insurance Program. This acquisition is scheduled to close on or before December 15, 2007, pending receipt of applicable regulatory approvals.

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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.

Variable Delivery Forward. On September 11, 2007, Endurance Holdings consummated an equity forward sale arrangement under which Endurance Holdings is entitled to sell ordinary shares to an affiliate of Deutsche Bank Securities, Inc. (the ‘‘forward counterparty’’) for proceeds of approximately $150 million pursuant to a prospectus supplement to the Shelf Registration Statement on Form S-3ASR (Registration No. 333-130464) filed with the U.S. Securities and Exchange Commission on September 12, 2007. Under the terms of the forward sale agreement, Endurance Holdings will sell an aggregate of between 2,984,772 and 4,786,827 ordinary shares to the forward counterparty, subject to Endurance Holdings’ right to cash settle or net share settle all or a portion of such agreement.

On September 14, 2007, the forward counterparty sold 2,200,000 ordinary shares through Deutsche Bank Securities, Inc. in a public offering at $39.50 per ordinary share in order to hedge its position under the forward sale agreement. The forward counterparty advised the Company that it borrowed the shares sold in this transaction from one or more third-party share lenders. Subsequent to such initial sale, the forward counterparty will sell, from time to time, a total of 2,586,827 additional ordinary shares in connection with the forward sale agreement.

Endurance Holdings did not receive any proceeds from the sale of the ordinary shares by the forward counterparty, but Endurance Holdings will receive proceeds upon any prepayment, and may receive proceeds upon settlement of the forward sale agreement. The forward sale agreement will be physically settled by delivery of the requisite number of Endurance Holdings’ ordinary shares beginning July 20, 2010. The forward counterparty will pay Endurance Holdings approximately $150 million upon settlement of the forward sale agreement. The number of Endurance Holdings’ ordinary shares to be delivered to the forward counterparty varies depending upon the price of Endurance Holdings’ ordinary shares over a forty trading-day period beginning July 15, 2010 subject to an aggregate maximum of 4,786,827 and an aggregate minimum of 2,984,772 ordinary shares. The costs associated with the variable delivery forward were charged to additio nal paid in capital and the underlying shares were considered in the calculation of diluted earnings per share using the treasury stock method.

Endurance Holdings may accelerate settlement of or elect early termination with respect to, all or a portion of the forward sale agreement. The forward counterparty may elect early termination of the forward sale agreement upon the occurrence of certain events and the number of ordinary shares deliverable upon settlement of the forward sale agreement may be adjusted depending on the amount of our dividends or the occurrence of certain 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 the occurrence of certain defaults as defined pursuant to the terms of the Credit Agreement. As amended, the credit facility is refe rred to as the ‘‘2007 Credit Facility’’.

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2.	Significant events, cont’d.

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 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 calculation also includes the unsettled bonus restricted share and 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.

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3.	Earnings per share, cont’d.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Numerator:
Net income available to common shareholders		$	127,526		$	124,355		$	356,952		$	287,691
Denominator:
Weighted average shares – basic
Common shares outstanding			64,325,818			66,120,306			65,369,966			66,164,200
Unsettled bonus restricted share and share units outstanding			142,491			218,290			159,564			229,206
			64,468,309			66,338,596			65,529,530			66,393,406
Share equivalents
Unvested incentive restricted share and share units outstanding			526,292			487,856			286,100			416,085
Warrants			4,264,994			3,421,750			4,115,353			3,359,778
Options			1,171,391			1,238,901			1,195,095			1,258,344
Weighted average shares – diluted			70,430,986			71,487,103			71,126,078			71,427,613
Basic earnings per common share		$	1.98		$	1.87		$	5.45		$	4.33
Diluted earnings per common share		$	1.81		$	1.74		$	5.02		$	4.03

During the three and nine months ended September 30, 2007 and 2006, Endurance Holdings declared and paid dividends on its ordinary shares and on its 7.75% Non-Cumulative Preferred Shares, Series A as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Dividends declared per preferred share		$	0.484375		$	0.484375		$	1.453125		$	1.453125
Dividends declared per common share		$	0.25		$	0.25		$	0.75		$	0.75

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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 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. A t 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.

In September 2007, the Company offered to exchange the outstanding restricted share units held by current employees of the Company for restricted shares. The new restricted shares have substantially the same terms and fair value as the restricted share units, except that dividends on the restricted shares are paid in cash rather than in the form of additional restricted share units and holders of restricted shares are entitled to vote such shares at the Company’s annual or special general meeting of shareholders. The offer was made to 102 Endurance employees holding 616,267 restricted share units. Of the employees eligible to exchange restricted share units for restricted shares, 92 employees holding 597,927 restricted share units exchanged those restricted share units for an equal number of restricted shares and 10 employees holding 18,340 restricted share units declined the exchange offer.


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.

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5.	Segment reporting, cont’d.

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

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


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	180,046			$	243,787			$	(562	)		$	423,271
Ceded premiums written			(42,642	)			(3,013	)			—				(45,655	)
Net premiums written			137,404				240,774				(562	)			377,616
Net premiums earned			130,640				275,776				(6,674	)			399,742
Other underwriting income			—				—				1,697				1,697
			130,640				275,776				(4,977	)			401,439
Expenses
Net losses and loss expenses			69,709				119,798				(3,051	)			186,456
Acquisition expenses			19,489				58,531				(1,416	)			76,604
General and administrative expenses			21,988				33,133				—				55,121
			111,186				211,462				(4,467	)			318,181
Underwriting income		$	19,454			$	64,314			$	(510	)		$	83,258
Net loss ratio			53.4	%			43.5	%			45.7	%			46.6	%
Acquisition expense ratio			14.9	%			21.2	%			21.2	%			19.2	%
General and administrative expense ratio			16.8	%			12.0	%			—				13.8	%
Combined ratio			85.1	%			76.7	%			66.9	%			79.6	%
Reserve for losses and loss expenses		$	1,044,736			$	1,923,370			$	(126,296	)		$	2,841,810

⁽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 September 30, 2006:


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	156,781			$	326,061			$	(6,629	)		$	476,213
Ceded premiums written			(58,453	)			(32,338	)			—				(90,791	)
Net premiums written			98,328				293,723				(6,629	)			385,422
Net premiums earned			90,062				353,868				(35,955	)			407,975
Other underwriting loss			—				—				(1,837	)			(1,837	)
			90,062				353,868				(37,792	)			406,138
Expenses
Net losses and loss expenses			57,165				158,804				(27,936	)			188,033
Acquisition expenses			8,492				83,244				(9,879	)			81,857
General and administrative expenses			13,760				34,775				—				48,535
			79,417				276,823				(37,815	)			318,425
Underwriting income		$	10,645			$	77,045			$	23			$	87,713
Net loss ratio			63.5	%			44.9	%			77.7	%			46.1	%
Acquisition expense ratio			9.4	%			23.5	%			27.5	%			20.1	%
General and administrative expense ratio			15.3	%			9.8	%			—				11.9	%
Combined ratio			88.2	%			78.2	%			105.2	%			78.1	%
Reserve for losses and loss expenses		$	809,222			$	2,082,811			$	(122,615	)		$	2,769,418

⁽¹⁾

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


	2007				2006
Total underwriting income		$	83,258			$	87,713
Net investment income			62,605				63,581
Net foreign exchange losses			(700	)			(3,633	)
Net realized losses on investments			(3,055	)			(6,375	)
Amortization of intangibles			(1,127	)			(1,158	)
Interest expense			(7,533	)			(7,528	)
Income before income taxes		$	133,448			$	132,600

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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 September 30, 2007 and 2006:


Business Segment	2007				2006
Insurance
Property		$	28,379			$	47,860
Casualty			30,133				28,294
Healthcare liability			30,262				37,812
Workers’ compensation			70,398				24,993
Professional lines			20,874				17,822
Total Insurance			180,046				156,781
Reinsurance
Casualty			66,006				86,933
Property			112,407				124,235
Catastrophe			43,684				49,385
Agriculture			6,917				16,324
Marine			1,598				16,236
Aerospace			7,581				17,761
Surety and other specialty			5,594				15,187
Total Reinsurance			243,787				326,061
Subtotal total company			423,833				482,842
Deposit accounting⁽¹⁾			(562	)			(6,629	)
Total		$	423,271			$	476,213

⁽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 nine months ended September 30, 2007:


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	525,046			$	1,002,075			$	(23,756	)		$	1,503,365
Ceded premiums written			(127,552	)			(16,306	)			—				(143,858	)
Net premiums written			397,494				985,769				(23,756	)			1,359,507
Net premiums earned			365,021				891,489				(62,172	)			1,194,338
Other underwriting loss			—				—				(7,442	)			(7,442	)
			365,021				891,489				(69,614	)			1,186,896
Expenses
Net losses and loss expenses			196,660				460,670				(53,101	)			604,229
Acquisition expenses			49,844				184,503				(16,272	)			218,075
General and administrative expenses			62,796				89,818				—				152,614
			309,300				734,991				(69,373	)			974,918
Underwriting income		$	55,721			$	156,498			$	(241	)		$	211,978
Net loss ratio			53.9	%			51.7	%			85.4	%			50.6	%
Acquisition expense ratio			13.6	%			20.7	%			26.2	%			18.2	%
General and administrative expense ratio			17.2	%			10.0	%			—				12.8	%
Combined ratio			84.7	%			82.4	%			111.6	%			81.6	%

⁽¹⁾

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5.	Segment reporting, cont’d.

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


	Insurance				Reinsurance				Deposit Accounting⁽¹⁾				Total
Revenues
Gross premiums written		$	396,161			$	1,254,576			$	(151,890	)		$	1,498,847
Ceded premiums written			(117,960	)			(43,778	)			—				(161,738	)
Net premiums written			278,201				1,210,798				(151,890	)			1,337,109
Net premiums earned			268,841				1,108,901				(142,883	)			1,234,859
Other underwriting loss			—				—				(328	)			(328	)
			268,841				1,108,901				(143,211	)			1,234,531
Expenses
Net losses and loss expenses			168,940				627,479				(100,209	)			696,210
Acquisition expenses			21,147				259,310				(44,155	)			236,302
General and administrative expenses			35,542				102,952				—				138,494
			225,629				989,741				(144,364	)			1,071,006
Underwriting income		$	43,212			$	119,160			$	1,153			$	163,525
Net loss ratio			62.8	%			56.6	%			70.1	%			56.4	%
Acquisition expense ratio			7.9	%			23.4	%			30.9	%			19.1	%
General and administrative expense ratio			13.2	%			9.3	%			—				11.2	%
Combined ratio			83.9	%			89.3	%			101.0	%			86.7	%

⁽¹⁾

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


	2007				2006
Total underwriting income		$	211,978			$	163,525
Net investment income			215,966				185,416
Net foreign exchange (losses) gains			(1,241	)			11,250
Net realized losses on investments			(14,177	)			(18,434	)
Amortization of intangibles			(3,381	)			(3,474	)
Interest expense			(22,593	)			(22,513	)
Income before income taxes		$	386,552			$	315,770

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5.	Segment reporting, cont’d.

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


Business Segment	2007				2006
Insurance
Property		$	96,256			$	129,024
Casualty			99,273				92,957
Healthcare liability			77,105				89,921
Workers’ compensation			189,173				31,424
Professional lines			63,239				52,835
Total Insurance			525,046				396,161
Reinsurance
Casualty			185,730				349,700
Property			214,584				296,713
Catastrophe			331,689				272,843
Agriculture			124,095				109,228
Marine			46,898				88,043
Aerospace			34,325				66,021
Surety and other specialty			64,754				72,028
Total Reinsurance			1,002,075				1,254,576
Subtotal total company			1,527,121				1,650,737
Deposit accounting⁽¹⁾			(23,756	)			(151,890	)
Total		$	1,503,365			$	1,498,847

⁽¹⁾


6.	Commitments and contingencies

Concentrations of credit risk. As of September 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 nine months ended September 30, 2007, the Company obtained 66.7% (2006 – 78.7%) of its gross premiums written before deposit accounting adjustments through four brokers: Marsh & McLennan Companies, Inc. (including Guy Carpenter) – 28.1% (2006 – 31.0%); Willis Companies – 15.7% (2006 – 18.9%); Aon Corporation – 15.6% (2006 – 20.3%); and Benfield Group – 7.3% (2006 – 8.5%).

Letters of credit. As of September 30, 2007, the Company had issued letters of credit of $507.2 million (December 31, 2006 – $498.5 million) in favor of certain ceding companies.

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6.	Commitments and contingencies, cont’d.

Investment commitments. As of September 30, 2007 and December 31, 2006, the Company had pledged cash and cash equivalents and fixed maturity investments of $228.2 million and $231.6 million, respectively, in favor of certain ceding companies to collateralize obligations. As of September 30, 2007 and December 31, 2006, the Company had also pledged $569.0 million and $456.4 million of its cash and fixed maturity investments as required to meet collateral obligations for $500.7 million and $409.9 million in letters of credit outstanding under its credit facility, respectively. In addition, at September 30, 2007 and December 31, 2006, cash and fixed maturity investments with fair values of $119.3 million and $40.9 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $33.2 million and $28.5 million were on deposit with Canadian regulators, respectively.

The Company is subject to certain commitments with respect to other investments at September 30, 2007. The Company is generally subject to redemption restrictions provisions of between one to three years from the date of acquisition. With respect to the balance of the Company’s other investments at September 30, 2007, $104.0 million was ineligible for redemption. The remaining $239.9 million of other investments may be redeemed by the Company subject to certain notice and limit provisions. In addition, as of September 30, 2007, the Company was committed to investing a further $47.4 million (December 31, 2006 – $6.2 million) in various investment funds classified as other investments.

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 September 30, 2007 are as follows:


Twelve Months Ended September 30,	Amount
2008		$	9,608
2009			9,543
2010			9,556
2011			9,526
2012			9,596
2013 and thereafter			32,140
		$	79,969

Total lease expense under operating leases for the nine months ended September 30, 2007 was $8.0 million (2006 – $6.6 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.

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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 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 September 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 nine months ended September 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 nine month periods ended September 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 Rep ort 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 six 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; American Merchants Casualty Company (‘‘AMCC’’), domiciled in Ohio; 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 September 30, 2007 and 2006

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


	Three Months Ended
	September 30, 2007				September 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Underwriting income
Revenues
Gross premiums written		$	423,271			$	476,213			(11.1	%)
Net premiums written			377,616				385,422			(2.0	%)
Net premiums earned			399,742				407,975			(2.0	%)
Other underwriting income (loss)			1,697				(1,837	)		NM	⁽²⁾
			401,439				406,138			(1.2	%)
Expenses
Losses and loss expenses			186,456				188,033			(0.8	%)
Acquisition expenses			76,604				81,857			(6.4	%)
General and administrative expenses			55,121				48,535			13.6	%
			318,181				318,425			NM	⁽²⁾
Net investment income			62,605				63,581			(1.5	%)
Net foreign exchange loss			(700	)			(3,633	)		(80.7	%)
Net realized losses on investments			(3,055	)			(6,375	)		(52.1	%)
Amortization of intangibles			(1,127	)			(1,158	)		(2.7	%)
Interest expense			(7,533	)			(7,528	)		0.1	%
Income tax expense			(2,047	)			(4,370	)		(53.2	%)
Net income		$	131,401				128,230			2.5	%
Loss ratio			46.6	%			46.1	%		0.5
Acquisition expense ratio			19.2	%			20.1	%		(0.9	)
General and administrative expense ratio			13.8	%			11.9	%		1.9
Combined ratio			79.6	%			78.1	%		1.5

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

⁽²⁾	Not meaningful.

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	Three Months Ended
	September 30, 2007			September 30, 2006			Change
	(U.S. dollars in thousands, except for ratios)
Supplemental information
Gross premiums written		$	423,271		$	476,213		(11.1	%)
Deposit accounting premiums			562			6,629		(91.5	%)
Total premiums written, including deposit premiums		$	423,833		$	482,842		(12.2	%)

Premiums

Total premiums written, including deposit premiums, in the three months ended September 30, 2007 were $423.8 million, a decrease of $59.0 million, or 12.2%, compared to the same period in 2006. The decrease was driven by declines in the Reinsurance business segment offset in part by growth in the Insurance business segment.

Ceded premiums written decreased in the third quarter of 2007 from the same period in 2006. In the three months ended September 30, 2006, the Company entered into a collateralized catastrophe reinsurance agreement, which resulted in approximately $39 million of additional ceded premiums for the third quarter of 2006.

Net premiums earned for the three months ended September 30, 2007 were $399.7 million, a decrease of $8.2 million, or 2.0%, from the third quarter of 2006. The decrease in net premiums earned resulted from declines in both the amount of total premiums written and positive earned premium adjustments compared to the third quarter of 2006.

Net Investment Income

Net investment income decreased 1.5% or $1.0 million in the third quarter of 2007 compared to the third quarter of 2006. This decline was principally due to a decline in the performance of the Company’s alternative investment portfolio, which yielded $8.2 million less net investment income for the third quarter of 2007 compared to the same period in 2006. The decline in net investment income in the third quarter of 2007 was partially offset by additional earnings associated with the 6.4% increase in cash, cash equivalents and investments over the third quarter of 2006. The increase in cash, cash equivalents and investments since the third quarter of 2006 resulted from positive net operating cash flows throughout 2006 and 2007. Investment expenses, including investment management fees, for the third quarter of 2007 were $2.4 million compared to $2.1 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 September 30, 2007 and 2006 were as follows:


	Three Months Ended
	September 30, 2007			September 30, 2006
Annualized net earned yield		4.43	%		4.82	%
Total return on investment portfolio		2.40	%		2.68	%
Market yield⁽¹⁾		5.37	%		5.25	%
Portfolio duration⁽¹⁾		2.84			2.59

⁽¹⁾	Includes only cash and fixed maturity securities held by the Company’s investment managers.

During the third quarter of 2007, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 110 basis point range, with a high of 5.09% and a low of 3.99%. The Company’s activities during the third quarter were focused on reducing Government securities and selectively adding mortgage and

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corporate exposure as opportunities to increase book yield arose. Subprime collateralized exposure in the fixed income portfolio is limited to $13.7 million of AAA rated securities. The duration of the portfolio has increased compared to September 30, 2006, primarily due to a decrease in shorter duration U.S. government and agencies and the Company’s selective purchases of mortgage-backed securities.

Net Realized Investment Losses

The Company’s investment portfolio is managed to generate income while providing sufficient liquidity for the Company to meet its obligations. 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 September 30, 2007 were $981.2 million compared to $304.5 million during the three months ended September 30, 2006. Net realized investment losses for the three months ended September 30, 2007 and 2006 were as follows:


	Three Months Ended
	September 30, 2007				September 30, 2006
	(U.S. dollars in thousands)
Gross realized gains		$	5,073			$	1,341
Gross realized losses excluding other-than-temporary impairments			(3,115	)			(2,887	)
Other-than-temporary impairment losses			(5,013	)			(4,829	)
Net realized investment losses		$	(3,055	)		$	(6,375	)

During the three months ended September 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 $5.0 million (2006 — $4.8 million). Gross realized losses arising during the current period, excluding other-than-temporary impairment losses, primarily resulted from higher interest rates prevailing at the time of disposition of fixed maturity securities.

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 three months ended September 30, 2007 and 2006, the Company’s net loss ratio benefited from the absence of significant catastrophe losses.

Favorable prior year loss reserve development was $37.5 million for the third quarter of 2007 compared to $10.0 million of favorable prior year loss reserve development for the third quarter of 2006. In the third quarter of 2007, prior year reserves developed favorably in both short and long tail lines of the Insurance and Reinsurance business segments. Favorable loss reserve development for the three months ended September 30, 2006 resulted primarily from a decrease by the Company in its expected ultimate losses within the long tail lines of the Insurance business segment and all lines of the Reinsurance business segment.

The Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are the only valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company’s consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information 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 Company’s acquisition expense ratio for the third quarter of 2007 was materially consistent with its acquisition expense ratio for the same quarter in 2006.

General and Administrative Expenses

The Company’s general and administrative expense ratio for the third quarter of 2007 increased over the third quarter of 2006, generally due to the continued investment in the expansion of the Company’s U.S. insurance operations and a general increase in employee related expenses. At September 30, 2007, the Company had 495 employees compared to 454 employees at September 30, 2006.

Net Income

The Company produced net income of $131.4 million in the three months ended September 30, 2007, compared to net income of $128.2 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 decrease in realized losses on the sales of investments and a decrease in foreign exchange losses.

Consolidated results of operations — for the nine month period ended September 30, 2007 and 2006

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


	Nine Months Ended
	September 30, 2007				September 30, 2006				Change⁽¹⁾
	(U.S. dollars in thousands, except for ratios)
Underwriting income
Revenues
Gross premiums written		$	1,503,365			$	1,498,847			0.3	%
Net premiums written			1,359,507				1,337,109			1.7	%
Net premiums earned			1,194,338				1,234,859			(3.3	%)
Other underwriting loss			(7,442	)			(328	)		NM	⁽²⁾
			1,186,896				1,234,531			(3.9	%)
Expenses
Losses and loss expenses			604,229				696,210			(13.2	%)
Acquisition expenses			218,075				236,302			(7.7	%)
General and administrative expenses			152,614				138,494			10.2	%
			974,918				1,071,006			(9.0	%)
Net investment income			215,966				185,416			16.5	%
Net foreign exchange (losses) gains			(1,241	)			11,250		NM⁽²⁾
Net realized losses on investments			(14,177	)			(18,434	)		(23.1	%)
Amortization of intangibles			(3,381	)			(3,474	)		(2.7	%)
Interest expense			(22,593	)			(22,513	)		0.4	%
Income tax expense			(17,975	)			(16,454	)		9.2	%
Net income		$	368,577			$	299,316			23.1	%
Loss ratio			50.6	%			56.4	%		(5.8	)
Acquisition expense ratio			18.2	%			19.1	%		(0.9	)
General and administrative expense ratio			12.8	%			11.2	%		1.6
Combined ratio			81.6	%			86.7	%		(5.1	)

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

⁽²⁾	Not meaningful.

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	Nine Months Ended
	September 30, 2007			September 30, 2006			Change
	(U.S. dollars in thousands)
Supplemental information
Gross premiums written		$	1,503,365		$	1,498,847		0.3	%
Deposit accounting premiums			23,756			151,890		(84.4	%)
Total premiums written, including deposit premiums		$	1,527,121		$	1,650,737		(7.5	%)

Premiums

Total premiums written, including deposit premiums, in the nine months ended September 30, 2007 were $1,527.1 million, a decrease of $123.6 million, or 7.5%, compared to the same period in 2006. The decrease in total premiums for the nine months ended September primarily related to a decrease in total premiums written by the Company’s Reinsurance business segment compared to the first nine months of 2006, partially offset by growth in the Company’s Insurance business segment.

Ceded premiums written for the nine months ended September 30, 2007 decreased 11.1% from the same period in 2006. In the nine months ended September 30, 2006, the Company entered into a collateralized reinsurance agreement, which resulted in approximately $39 million of additional ceded premiums.

Net premiums earned for the nine months ended September 30, 2007 were $1,194.3 million, a decrease of $40.5 million, or 3.3%, from the same period in 2006. The decrease in net premiums earned resulted from a decrease in the amount of positive earned premium adjustments and extension premiums which benefited the nine months ended September 30, 2006.

Net Investment Income

Net investment income increased 16.5% to $216.0 million for the nine months ended September 30, 2007 compared to the first nine months of 2006 principally due to a 6.4% increase in cash, cash equivalents and investments over 2006, higher portfolio yields on cash and fixed maturity securities, and strong alternative investment performance in the period. The increase in cash, cash equivalents and investments since September 30, 2006 resulted from positive net operating cash flows throughout 2006 and through September 30, 2007. Investment expenses, including investment management fees, for the nine months ended September 30, 2007 were $7.2 million compared to $5.6 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 nine months ended September 30, 2007 and 2006 were as follows:


	Nine Months Ended
	September 30, 2007			September 30, 2006
Annualized net earned yield		5.09	%		4.77	%
Total return on investment portfolio		4.56	%		4.03	%
Market yield⁽¹⁾		5.37	%		5.25	%
Portfolio duration⁽¹⁾		2.84			2.59

⁽¹⁾	Includes only cash and fixed maturity securities held by the Company’s investment managers.

During the first nine months of 2007, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 122 basis point range, with a high of 5.21% and a low of 3.99%. The Company’s year to date activities were focused on reducing Government securities and selectively adding mortgage and corporate exposure as opportunities to increase book yield arose. Subprime collateralized exposure in the

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fixed income portfolio is limited to $13.7 million of AAA rated securities. The duration of the fixed income portfolio has increased compared to September 30, 2006 primarily due to selected purchases of mortgage backed securities.

Net Realized Investment Losses

The Company’s investment portfolio is managed to generate income while providing sufficient liquidity for the Company to meet its obligations. 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 nine months ended September 30, 2007 were $2,243.3 million compared to $1,107.9 million during the nine months ended September 30, 2006. Net realized investment losses for the nine months ended September 30, 2007 and 2006 were as follows:


	Nine Months Ended
	September 30, 2007				September 30, 2006
	(U.S. dollars in thousands)
Gross realized gains		$	6,875			$	3,898
Gross realized losses excluding other-than-temporary impairments			(10,066	)			(10,613	)
Other-than-temporary impairment losses			(10,986	)			(11,719	)
Net realized investment losses		$	(14,177	)		$	(18,434	)

During the nine months ended September 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 $11.0 million (2006 – $11.7 million). Gross realized losses arising during the current period, excluding other-than-temporary impairment losses, primarily resulted from higher interest rates prevailing at the time of disposition of fixed maturity securities.

Net Losses and Loss Expenses

The Company’s reported net loss ratio improved by 5.8 percentage points in the nine months ended September 30, 2007 compared to the same period in 2006. Favorable prior year loss reserve development was $121.0 million for the first nine months of 2007 compared to $31.0 million for the nine months ended September 30, 2006. In the nine months ended September 30, 2007, prior year reserves developed 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 nine months ended September 30, 2006, the Company had overall net favorable prior year loss reserve development, despite adverse loss development on the 2005 catastrophes.

Partially offsetting the prior year favorable loss reserve development for the nine months ended September 30, 2007 were losses due to European Windstorm Kyrill and the European and Australian floods. The Company’s paid losses and case reserves from Windstorm Kyrill and the European and Australian floods were approximately $55 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.

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Acquisition Expenses

The acquisition expense ratio for the nine months ended September 30, 2007 decreased from the same period in 2006. The decrease in acquisition expenses was due to changes 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.

General and Administrative Expenses

The Company’s general and administrative expense ratio for the nine months ended September 30, 2007 increased compared to the same period in 2006 primarily due to the continued expansion of the Company’s U.S. insurance operations. Management seeks to grow the Company’s Insurance business segment in the coming year through the continued investments in underwriting teams and infrastructure necessary to grow its U.S. Insurance operations.

Net Income

The Company produced net income of $368.6 million in the nine months ended September 30, 2007, compared to net income of $299.3 million in the same period of 2006. The increase in net income for the first nine months of 2007 was primarily due to an increase in favorable prior year loss reserve development and an increase in net investment income compared to the nine months ended September 30, 2006. These favorable impacts on net income were partially offset during the nine months ended September 30, 2007 by a decline in net premiums earned.

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 September 30, 2007, the Company had accrued losses and loss expense 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. During the three and nine month periods ended September 30, 2007, the Company paid losses and loss expenses of $158.1 million and $548.0 million, including deposit accounting adjustments, compared to $215.2 million and $567.1 million for the same periods in 2006. The decrease in paid losses for the quarter and nine months ended September 30, 2007 was primarily due to the decline in loss payments related to the 2005 catastrophes as compared to the same periods in 2006.

As of September 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 lo ss reserves 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 and nine months ended September 30, 2007 are summarized as follows:


	Three months ended September 30, 2007
	Incurred related to:							Total incurred
	Current year			Prior years				losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	10,913		$	(1,003	)		$	9,910
Long tail			83,897			(24,098	)			59,799
Total Insurance			94,810			(25,101	)			69,709
Reinsurance:
Short tail			60,626			(12,953	)			47,673
Long tail			37,305			(2,269	)			35,036
Other			29,979			7,110				37,089
Total Reinsurance			127,910			(8,112	)			119,798
Deposit accounting⁽¹⁾			1,226			(4,277	)			(3,051	)
Totals		$	223,946		$	(37,490	)		$	186,456

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


	Nine months ended September 30, 2007
	Incurred related to:								Total incurred
	Current year				Prior years				losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	33,917			$	(32,273	)		$	1,644
Long tail			233,076				(38,060	)			195,016
Total Insurance			266,993				(70,333	)			196,660
Reinsurance:
Short tail			288,833				(38,650	)			250,183
Long tail			130,488				(6,361	)			124,127
Other			80,974				5,386				86,360
Total Reinsurance			500,295				(39,625	)			460,670
Deposit accounting⁽¹⁾			(42,073	)			(11,028	)			(53,101	)
Totals		$	725,215			$	(120,986	)		$	604,229

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

Losses and loss expenses for the three and nine months ended September 30, 2007 include $37.5 million and $121.0 million in favorable loss reserve development relating to prior accident years. The favorable loss reserve development experienced during the third quarter and nine months ended September 30, 2007 benefited the Company’s 2007 net loss ratios by 9.4 percentage points and 10.1 percentage points, respectively. The net reduction in estimated losses for prior accident years for the current quarter and first nine months of 2007 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 these periods related primarily to the Company’s short and long tail lines included in its Insurance and Reinsurance business segments.

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

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	Three months ended September 30, 2006
	Incurred related to:								Total incurred
	Current year				Prior years				losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	5,602			$	2,142			$	7,744
Long tail			57,504				(8,083	)			49,421
Total Insurance			63,106				(5,941	)			57,165
Reinsurance:
Short tail			84,119				(4,372	)			79,747
Long tail			57,395				(2,117	)			55,278
Other			24,666				(887	)			23,779
Total Reinsurance			166,180				(7,376	)			158,804
Deposit accounting⁽¹⁾			(31,213	)			3,277				(27,936	)
Totals		$	198,073			$	(10,040	)		$	188,033

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


	Nine months ended September 30, 2006
	Incurred related to:								Total incurred
	Current year				Prior years				losses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	52,336			$	(26,706	)		$	25,630
Long tail			163,468				(20,158	)			143,310
Total Insurance			215,804				(46,864	)			168,940
Reinsurance:
Short tail			333,480				49,739				383,219
Long tail			209,774				(20,562	)			189,212
Other			67,010				(11,962	)			55,048
Total Reinsurance			610,264				17,215				627,479
Deposit accounting⁽¹⁾			(98,859	)			(1,350	)			(100,209	)
Totals		$	727,209			$	(30,999	)		$	696,210

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

Losses and loss expenses for the three and nine months ended September 30, 2006 include approximately $10.0 million and $31.0 million in favorable development of reserves relating to prior accident years, respectively. The favorable loss reserve development experienced by the Company in the third quarter and first nine months of 2006 decreased the net loss ratio in both periods by 2.5 percentage points. The net decrease in estimated losses for prior accident years primarily reflects lower than expected claims emergence on the long tail Insurance and long and other tail Reinsurance business segment offset by 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 for the nine months ended September 30, 2006.

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


	Case Reserves				IBNR Reserves				Reserve for losses and loss expenses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	116,106			$	29,551			$	145,657
Long tail			46,092				852,988				899,080
Total Insurance			162,198				882,539				1,044,737
Reinsurance:
Short tail			577,103				346,842				923,945
Long tail			244,289				593,528				837,817
Other			18,260				143,347				161,607
Total Reinsurance			839,652				1,083,717				1,923,369
Deposit accounting⁽¹⁾			(67,709	)			(58,587	)			(126,296	)
Totals		$	934,141			$	1,907,669			$	2,841,810

⁽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 September 30, 2006:


	Case Reserves				IBNR Reserves				Reserve for losses and loss expenses
	(U.S. dollars in thousands)
Insurance:
Short tail		$	152,447			$	40,828			$	193,275
Long tail			8,303				607,644				615,947
Total Insurance			160,750				648,472				809,222
Reinsurance:
Short tail			745,512				401,647				1,147,159
Long tail			205,928				590,075				796,003
Other			8,764				130,885				139,649
Total Reinsurance			960,204				1,122,607				2,082,811
Deposit accounting⁽¹⁾			(52,630	)			(69,985	)			(122,615	)
Totals		$	1,068,324			$	1,701,094			$	2,769,418

⁽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

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

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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 and nine months ended September 30, 2007 and 2006.


	Three Months Ended								Nine Months Ended
	Sept. 30, 2007				Sept. 30, 2006				Sept. 30, 2007				Sept. 30, 2006
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written		$	180,046			$	156,781			$	525,046			$	396,161
Ceded premiums written			(42,642	)			(58,453	)			(127,552	)			(117,960	)
Net premiums written			137,404				98,328				397,494				278,201
Net premiums earned			130,640				90,062				365,021				268,841
Expenses
Losses and loss expenses			69,709				57,165				196,660				168,940
Acquisition expenses			19,489				8,492				49,844				21,147
General and administrative expenses			21,988				13,760				62,796				35,542
			111,186				79,417				309,300				225,629
Underwriting income		$	19,454			$	10,645			$	55,721			$	43,212
Net loss ratio			53.4	%			63.5	%			53.9	%			62.8	%
Acquisition expense ratio			14.9	%			9.4	%			13.6	%			7.9	%
General and administrative expense ratio			16.8	%			15.3	%			17.2	%			13.2	%
Combined ratio			85.1	%			88.2	%			84.7	%			83.9	%

Premiums. Gross premiums written for the three and nine months ended September 30, 2007 in the Insurance business segment increased by 14.8% and 32.5% over the same periods in 2006. Gross and net premiums written for each line of business in the Insurance business segment were as follows:


	Three Months Ended
	September 30, 2007						September 30, 2006
	Gross Premiums Written			Net Premiums Written			Gross Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Property		$	28,379		$	7,689		$	47,860		$	4,397
Casualty			30,133			16,467			28,294			16,194
Healthcare Liability			30,262			30,262			37,812			37,812
Workers’ Compensation			70,398			64,131			24,993			22,215
Professional Lines			20,874			18,855			17,822			17,710
Total		$	180,046		$	137,404		$	156,781		$	98,328

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	Nine Months Ended
	September 30, 2007						September 30, 2006
	Gross Premiums Written			Net Premiums Written			Gross Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Property		$	96,256		$	31,078		$	129,024		$	41,786
Casualty			99,273			61,044			92,957			65,512
Healthcare Liability			77,105			77,105			89,921			89,921
Workers’ Compensation			189,173			171,941			31,424			28,260
Professional Lines			63,239			56,326			52,835			52,722
Total		$	525,046		$	397,494		$	396,161		$	278,201

The increase in the Insurance business segment gross premiums written for the three and nine months ended September 30, 2007 compared to the same periods in 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 $45.4 million and $157.7 million of additional gross premiums written in the Insurance business segment in the three and nine months ended September 30, 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 property and healthcare insurance lines of business combined decreased by 31.6% and 20.8% for the three and nine months ended September 30, 2007 over the sa me periods in 2006. The lower premiums in the healthcare liability and property lines resulted from the Company non-renewing business due to insufficient pricing and shifting its participations to higher attaching, lower premium layers.

Ceded premiums written by the Company in the Insurance business segment decreased in the three months ended September 30, 2007 compared to the same periods in 2006 as the Company entered into a collateralized catastrophe reinsurance agreement which contributed approximately $13 million of additional ceded premiums in the third quarter of 2006. The increase in ceded premiums written for the nine months ended September 30, 2007 compared to the same period in 2006 resulted from 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 and nine months ended September 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 ceded premiums written in recent periods.

Net Losses and Loss Expenses. The net loss ratio in the Company’s Insurance business segment improved by 10.1 and 8.9 percentage points for the three and nine months ended September 30, 2007 over the same periods in 2006, due to the increase in favorable prior year loss reserve development recorded in the current periods. During the three and nine months ended September 30, 2007, the Company’s previously estimated ultimate losses for the Insurance business segment for prior accident years were reduced by $25.1 million and $70.3 million compared to a $5.9 million and $46.9 million reduction during the three and nine months ended September 30, 2006, respectively. The long tail line in the Company’s Insurance business segment experienced the largest net reductions of $24.1 million and $38.1 million, while the short tail line experienced $1.0 million and $32.3 million of favorable development for prior accident years in the three and nine months ended September 30, 2007, respectively. Reductions in reserves for losses and loss expenses in the Insurance business segment for the current and prior periods resulted due to claims not materializing as originally estimated by the Company.

Partially offsetting the favorable prior year loss reserve development was a large European fire loss during the third quarter of 2007, which added 9.4 and 3.4 percentage points to the net loss ratio for the three and nine months ended September 30, 2007, respectively. No such large loss was incurred for the

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three months ended September 30, 2006; however, a similar large Canadian fire loss occurred during the nine months ended September 30, 2006, which added 8.0 percentage points to the net loss ratio for that period.

Acquisition Expenses. Acquisition expenses in the Insurance business segment increased for the three and nine months ended September 30, 2007 compared to the same periods in 2006 due to changes in business mix. During the current quarter and first nine months of 2007, 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 $13.2 million and $31.5 million compared to $1.6 million and $1.7 million during the same periods in 2006. Additionally, decreased earned premiums in business lines with lower acquisition expenses, such as property and 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 third quarter and first nine months of 2007 compared to the same periods in 2006 resulted from expenditures related to the expansion of the Company’s U.S. insurance operations and an increase in indirect expense allocations.

Reinsurance

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


	Three Months Ended								Nine Months Ended
	Sept. 30, 2007				Sept. 30, 2006				Sept. 30, 2007				Sept. 30, 2006
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written		$	243,787			$	326,061			$	1,002,075			$	1,254,576
Ceded premiums written			(3,013	)			(32,338	)			(16,306	)			(43,778	)
Net premiums written			240,774				293,723				985,769				1,210,798
Net premiums earned			275,776				353,868				891,489				1,108,901
Expenses
Losses and loss expenses			119,798				158,804				460,670				627,479
Acquisition expenses			58,531				83,244				184,503				259,310
General and administrative expenses			33,133				34,775				89,818				102,952
			211,462				276,823				734,991				989,741
Underwriting income (loss)		$	64,314			$	77,045			$	156,498			$	119,160
Net loss ratio			43.5	%			44.9	%			51.7	%			56.6	%
Acquisition expense ratio			21.2	%			23.5	%			20.7	%			23.4	%
General and administrative expense ratio			12.0	%			9.8	%			10.0	%			9.3	%
Combined ratio			76.7	%			78.2	%			82.4	%			89.3	%

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


	Three Months Ended
	September 30, 2007						September 30, 2006
	Total Premiums Written			Net Premiums Written			Total Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Casualty		$	66,006		$	65,946		$	86,933		$	86,716
Property			112,407			112,398			124,235			116,146
Catastrophe			43,684			41,025			49,385			31,282
Agriculture			6,917			7,028			16,324			15,483
Marine			1,598			559			16,236			12,970
Aerospace			7,581			7,831			17,761			15,976
Surety and other specialty			5,594			5,987			15,187			15,150
Total		$	243,787		$	240,774		$	326,061		$	293,723


	Nine Months Ended
	September 30, 2007						September 30, 2006
	Total Premiums Written			Net Premiums Written			Total Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Casualty		$	185,730		$	185,478		$	349,700		$	346,295
Property			214,584			215,999			296,713			288,625
Catastrophe			331,689			318,929			272,843			251,214
Agriculture			124,095			122,106			109,228			108,387
Marine			46,898			46,277			88,043			84,776
Aerospace			34,325			32,532			66,021			62,671
Surety and other specialty			64,754			64,448			72,028			68,830
Total		$	1,002,075		$	985,769		$	1,254,576		$	1,210,798

Total premiums written, which includes deposit premiums, in Endurance’s Reinsurance business segment for the three and nine months ended September 30, 2007 decreased by 25.2% and 20.1% from the same periods in 2006. These declines for the third quarter of 2007 as compared to the third quarter of 2006 were driven by declines in total premiums for the casualty, property, marine and surety and other specialty lines as a result of non-renewals due to pricing, terms and conditions that no longer met the Company’s underwriting requirements. Additional declines in the casualty and agriculture lines resulted from the absence of positive premium adjustments in the current quarter as compared to the same period in 2006.

The decline in total premiums written in the Reinsurance business segment for the nine months ended September 30, 2007 compared to the same period in 2006 was primarily due to the non-renewal of certain international property and casualty accounts that no longer met the Company’s underwriting standards, as well as from the absence of positive premium adjustments and policy extension premiums associated with workers’ compensation business. The majority of the Company’s workers’ compensation business, beginning in the second quarter of 2006, has been written as direct insurance and therefore has been recorded in the Insurance business segment. In addition, the Company continued to exit the offshore energy business and non-renewed certain aviation exposures, which contributed to the $41.1 million and $31.7 million of declines in the marine and aerospace lines of business in the Reinsurance business segment during the nine months ended September 30, 2007 compared to the same period in 2006. These declines in premiums written in the Reinsurance business segment were partially offset by continued growth in new and renewal business within the Company’s catastrophe and agriculture lines of business during the nine months ended September 30, 2007.

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Net premiums earned by the Company in the Reinsurance business segment for the three and nine months ended September 30, 2007 decreased compared to the same periods in 2006, due to the decrease in total premiums written in this business segment and the decrease in earned premium adjustments during the periods.

Losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance business segment for the three and nine months ended September 30, 2007 improved by 1.4 and 4.9 percentage points. During the three and nine months periods ended September 30, 2007, net favorable prior year loss reserve development of $8.1 million and $39.6 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 third quarter of 2006, net favorable prior year loss reserve development was recorded primarily in the Reinsurance business segment’s short tail lines while for the first nine months of 2006 net unfavorable prior year loss reserve development was recorded primarily in the short tail lines. The 2006 net unfavorable prior year loss reserve development for the nine months ended September 30, 2006 resulted from an increase in the expected ultimate losses related to the 2005 catastrophes.

Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance business segment decreased for the third quarter and first nine months of 2007 compared to the same periods in 2006 due to changes in business mix, including 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 and nine months ended September 30, 2007 decreased from the same periods in 2006 primarily as a result of decreased indirect expense allocations, offset in part by increases in employee related direct costs. The increase in the general and administrative expense ratio for the three and nine month periods was due to the decrease in earned premiums compared to the same periods in 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 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 and nine months ended September 30, 2007 and 2006.


	Three Months Ended								Nine Months Ended
	Sept. 30, 2007				Sept. 30, 2006				Sept. 30, 2007				Sept. 30, 2006
	(U.S. dollars in thousands)
Revenues
Gross premiums written		$	(562	)		$	(6,629	)		$	(23,756	)		$	(151,890	)
Ceded premiums written			—				—				—				—
Net premiums written			(562	)			(6,629	)			(23,756	)			(151,890	)
Net premiums earned			(6,674	)			(35,955	)			(62,172	)			(142,883	)
Other underwriting income (loss)			1,697				(1,837	)			(7,442	)			(328	)
			(4,977	)			(37,792	)			(69,614	)			(143,211	)
Expenses
Losses and loss expenses			(3,051	)			(27,936	)			(53,101	)			(100,209	)
Acquisition expenses			(1,416	)			(9,879	)			(16,272	)			(44,155	)
General and administrative expenses			—				—				—				—
			(4,467	)			(37,815	)			(69,373	)			(144,364	)
Underwriting income (loss)		$	(510	)		$	23			$	(241	)		$	1,153

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During the three and nine months ended September 30, 2007, $0.6 million and $23.8 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, compared to $6.6 million and $151.9 million for the same periods in 2006. While not underwritten as finite risk reinsurance, these contracts contain adjustable features, primarily sliding scale ceding 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 c ontracts were accounted for as contracts which either transfer only significant timing risk or transfer only significant underwriting risk. The determination of the appropriate method of accounting for these contracts requires significant judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses.

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

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


	Three Months Ended								Nine Months Ended
	Sept. 30, 2007				Sept. 30, 2006				Sept. 30, 2007				Sept. 30, 2006
	(U.S. dollars in thousands)
Total underwriting income		$	83,258			$	87,713			$	211,978			$	163,525
Net investment income			62,605				63,581				215,966				185,416
Net foreign exchange (losses) gains			(700	)			(3,633	)			(1,241	)			11,250
Net realized losses on investments			(3,055	)			(6,375	)			(14,177	)			(18,434	)
Amortization of intangibles			(1,127	)			(1,158	)			(3,381	)			(3,474	)
Interest expense			(7,533	)			(7,528	)			(22,593	)			(22,513	)
Consolidated income before income taxes		$	133,448			$	132,600			$	386,552			$	315,770

Significant transactions and events

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sold in this transaction from one or more third-party share lenders. Subsequent to such initial sale, the forward counterparty will sell, from time to time, a total of 2,586,827 additional ordinary shares in connection with the forward sale agreement.

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.

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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.

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, AMCC, 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, AMCC, 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 September 30, 2007, Endurance Bermuda could pay a dividend or otherwise return capital and surplus totaling approximately $1,039.9 million (December 31, 2006 – $826 million) without prior regulatory ap proval 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.

American Merchants Casualty Company is subject to regulation by the State of Ohio Department of Insurance. Dividends are limited to the greater of 10% of the insurer’s surplus as regards policyholders as of the thirty-first day of December next preceding, or the net income of the insurer for the twelve-month period ending the thirty-first day of December next preceding, but shall not include pro rata distributions of any class of the insurer’s own securities. In addition, dividends may only be declared or distributed out of earned surplus, unless the prior approval of the Superintendent of the Ohio Insurance Department is received in advance of payment. At December 31, 2006, American Merchants Casualty Company did not have any earned surplus; therefore, it was precluded from declaring or distributing dividends during 2007 without the prior approval of the Ohio Superintendent of Insurance. Any dividends paid by American Merchants Casualty Co mpany are paid to Endurance Reinsurance Corporation of America and are then subject to Endurance Reinsurance’s dividend limitations.

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

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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 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 September 30, 2007, Endurance U.K. did not have profits av ailable for distribution and could not pay a dividend.

The Company’s aggregate cash and invested assets as of September 30, 2007 totaled $5.7 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 nine months ended September 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 or variable delivery f orward facilities or arrange for additional financing.

The Company’s fixed maturity investment portfolio includes $3,127.7 million of asset-backed and mortgage-backed securities with a dollar weighted average rating of AAA with $13.3 million rated BBB or below. This portfolio includes $13.7 million of sub-prime collateralized securities, of which $13.6 million is rated AAA. Unrealized holding losses on investments as of September 30, 2007 were primarily due to movements in interest rates and market valuations and not as a result of credit impairments. The fixed maturity investment portfolio includes gross unrealized losses of $2.7 million associated with securities rated BBB or below and $0.2 million associated with sub-prime collateralized securities.

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 $695 million was available as of September 30, 2007. As of September 30, 2007, there were no borrowings under this line of credit.

Under the Company’s recently completed variable delivery forward transaction, the Company may elect to receive proceeds through early settlement or by borrowing against the future settlement value. See ‘‘Significant transactions and events’’ above.


Item 3.	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.

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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 effec t 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 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;

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	•	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;


	•	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 third 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⁾
July 1 – July 31, 2007		—			—		—		15,804,400
August 1 – August 31, 2007		608,000		$	37.00		608,000		15,196,400
September 1 – September 30, 2007		—			—		—		15,196,400
		608,000		$	37.00		608,000		15,196,400

⁽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

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

None

Item 5. Other Information

None

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Item 6. Exhibits


	(a)	The following sets forth those exhibits filed pursuant to Item 601 of Regulation S-K:


Exhibit Number			Description
10.1			Stock Purchase Agreement, dated as of September 7, 2007, by and among the Sellers named therein; ARMtech, Inc.; ARMtech Holdings, Inc.; ARMtech Insurance Services, Inc.; American Agri-Business Insurance Company; and Endurance U.S. Holdings Corp. Incorporated herein by reference to the Current Report on Form 8-K filed on September 7, 2007.

10.2			Underwriting Agreement, dated September 10, 2007, among Deutsche Bank Securities Inc.; Deutsche Bank AG, London branch; and Endurance Specialty Holdings Ltd. Incorporated herein by reference to the Current Report on Form 8-K filed on September 12, 2007.

10.3			Forward Sale Agreement, dated September 10, 2007, from Deutsche Bank AG, London branch to Endurance Specialty Holdings Ltd. Incorporated herein by reference to the Current Report on Form 8-K filed on September 12, 2007.

31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.

31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.

32			Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ENDURANCE SPECIALTY HOLDINGS LTD.


Date: November 9, 2007	By:	/s/ Kenneth J. LeStrange
		Kenneth J. LeStrange
		Chairman of the Board, Chief Executive Officer, President
Date: November 9, 2007	By:	/s/ Michael J. McGuire
		Michael J. McGuire
		Chief Financial Officer (Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Endurance Specialty (ENH) Inactive 10-Q2007 Q3 Quarterly report

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