Endurance Specialty (ENH) 10-Q 2012 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, 2012, or

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

Commission file number 1-31599

ENDURANCE SPECIALTY HOLDINGS LTD.

(Exact Name of Registrant as Specified in Its Charter)

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

Wellesley House

90 Pitts Bay Road

Pembroke HM 08, Bermuda

(Address of principal executive offices, including postal code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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.

	Common Shares Outstanding
Description of Class	as of November 1, 2012
Ordinary Shares - $1.00 par value	43,286,394

INDEX

	Page
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2012 (unaudited) and December 31, 2011		2
Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011		3
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2012 and 2011		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2012 and 2011		5
Notes to the Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Item 3. Quantitative and Qualitative Disclosures about Market Risk		64
Item 4. Controls and Procedures		64
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		65
Item 1A. Risk Factors		65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65
Item 3. Defaults Upon Senior Securities		66
Item 4. Mine Safety Disclosures		66
Item 5. Other Information		66
Item 6. Exhibits		66
SIGNATURES		67

1

ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of United States dollars, except share amounts)

	SEPTEMBER 30,		DECEMBER 31,
	2012		2011
	(UNAUDITED)
ASSETS
Investments
Fixed maturity investments, available for sale at fair value (amortized cost: $4,862,600 and $4,700,989 at September 30, 2012 and December 31, 2011, respectively)	$	5,052,963	$	4,831,966
Short-term investments, available for sale at fair value (amortized cost: $62,701 and $67,803 at September 30, 2012 and December 31, 2011, respectively)		62,713		67,802
Equity securities, available for sale at fair value (cost: $73,783 and $56,381 at September 30, 2012 and December 31, 2011, respectively)		83,085		59,767
Other investments		478,911		432,658
Total investments		5,677,672		5,392,193
Cash and cash equivalents		895,776		890,914
Premiums receivable, net		1,136,130		544,017
Insurance and reinsurance balances receivable		112,926		92,710
Deferred acquisition costs		215,811		166,049
Prepaid reinsurance premiums		228,854		149,670
Losses recoverable		1,076,647		666,928
Accrued investment income		23,937		29,708
Goodwill and intangible assets		174,309		181,828
Deferred tax asset		36,092		33,355
Net receivable on sales of investments		76,907		77,821
Other assets		99,294		67,422
Total assets	$	9,754,355	$	8,292,615
LIABILITIES
Reserve for losses and loss expenses	$	4,509,442	$	3,824,224
Reserve for unearned premiums		1,370,491		932,108
Deposit liabilities		23,557		26,887
Reinsurance balances payable		256,674		189,488
Debt		527,341		528,118
Net payable on purchases of investments		102,874		55,243
Other liabilities		153,102		125,382
Total liabilities		6,943,481		5,681,450
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred shares
Series A and B, total liquidation preference $430,000 (2011 - $430,000)		17,200		17,200
Common shares
Ordinary – 43,294,300 issued and outstanding (2011 – 43,086,834)		43,294		43,087
Additional paid-in capital		533,284		526,910
Accumulated other comprehensive income		193,239		130,392
Retained earnings		2,023,857		1,893,576
Total shareholders’ equity		2,810,874		2,611,165
Total liabilities and shareholders’ equity	$	9,754,355	$	8,292,615

See accompanying notes to unaudited condensed consolidated financial statements

2

ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

AND COMPREHENSIVE INCOME (LOSS)

(In thousands of United States dollars, except share and per share amounts)

	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2012			2011			2012			2011
Revenues
Gross premiums written	$	621,255		$	700,866		$	2,286,980		$	2,204,148
Ceded premiums written		(107,175	)		(149,539	)		(445,431	)		(412,191	)
Net premiums written		514,080			551,327			1,841,549			1,791,957
Change in unearned premiums		37,792			10,166			(358,702	)		(361,053	)
Net premiums earned		551,872			561,493			1,482,847			1,430,904
Net investment income		45,882			14,100			134,723			106,443
Net realized and unrealized investment gains		10,097			1,033			30,258			26,340
Total other-than-temporary impairment losses		(126	)		(168	)		(274	)		(1,908	)
Portion of loss recognized in other comprehensive income		(5	)		(72	)		(483	)		(911	)
Net impairment losses recognized in earnings (losses)		(131	)		(240	)		(757	)		(2,819	)
Other underwriting loss		(1,347	)		(2,141	)		(1,663	)		(2,122	)
Total revenues		606,373			574,245			1,645,408			1,558,746
Expenses
Net losses and loss expenses		407,523			456,691			1,016,187			1,220,514
Acquisition expenses		88,782			72,249			229,399			205,754
General and administrative expenses		52,715			58,574			181,365			190,421
Amortization of intangibles		2,434			2,976			7,988			8,800
Net foreign exchange losses (gains)		3,774			(4,085	)		(14,699	)		(7,655	)
Interest expense		9,041			9,055			27,132			27,166
Total expenses		564,269			595,460			1,447,372			1,645,000
Income (loss) before income taxes		42,104			(21,215	)		198,036			(86,254	)
Income tax (expense) benefit		(1,986	)		1,197			(2,893	)		19,896
Net income (loss)		40,118			(20,018	)		195,143			(66,358	)
Preferred dividends		(8,188	)		(8,188	)		(24,564	)		(15,938	)
Net income (loss) available (attributable) to common and participating common shareholders	$	31,930		$	(28,206	)	$	170,579		$	(82,296	)
Comprehensive income (loss)
Net income (loss)	$	40,118		$	(20,018	)	$	195,143		$	(66,358	)
Other comprehensive income
Net unrealized holding gains on investments arising during the period (net of applicable deferred income taxes of ($1,576) and ($6,856) for the nine months ended September 30, 2012 and 2011, respectively)		47,909			9,466			89,003			35,640
Portion of other-than-temporary impairment losses recognized in other comprehensive income (net of applicable deferred taxes of $16 and $69 for the nine months ended September 30, 2012 and 2011, respectively)		5			72			467			842
Foreign currency translation adjustments		4,675			(5,423	)		2,075			(1,956	)
Reclassification adjustment for net realized gains included in net income (loss)		(9,624	)		(1,273	)		(28,764	)		(29,159	)
Reclassification adjustment for net losses on derivative designated as cash flow hedge included in net income (loss)		22			22			66			66
Other comprehensive income		42,987			2,864			62,847			5,433
Comprehensive income (loss)	$	83,105		$	(17,154	)	$	257,990		$	(60,925	)
Per share data
Basic earnings (losses) per common share	$	0.74		$	(0.71	)	$	3.94		$	(2.07	)
Diluted earnings (losses) per common share	$	0.74		$	(0.71	)	$	3.94		$	(2.07	)
Dividend per common share	$	0.31		$	0.30		$	0.93		$	0.90

See accompanying notes to unaudited condensed consolidated financial statements.

3

ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS’ EQUITY

(In thousands of United States dollars)

	NINE MONTHS ENDED SEPTEMBER 30,
	2012			2011
Preferred shares
Balance, beginning of period	$	17,200		$	8,000
Issuance of series B, non-cumulative preferred shares		—			9,200
Balance, beginning and end of period		17,200			17,200
Common shares
Balance, beginning of period		43,087			47,218
Issuance of common shares, net of forfeitures		207			790
Repurchase of common shares		—			(7,491	)
Balance, end of period		43,294			40,517
Additional paid-in capital
Balance, beginning of period		526,910			613,915
Issuance of common shares, net of forfeitures		1,182			12,465
Issuance of series B, non-cumulative preferred shares		—			214,822
Repurchase of common shares and share equivalents		—			(333,313	)
Public offering and registration costs		—			(656	)
Settlement of equity awards		(3,234	)		(6,074	)
Stock-based compensation expense		8,426			11,164
Balance, end of period		533,284			512,323
Accumulated other comprehensive income
Cumulative foreign currency translation adjustments:
Balance, beginning of period		9,609			10,877
Foreign currency translation adjustments		2,075			(1,956	)
Balance, end of period		11,684			8,921
Unrealized holding gains on investments, net of deferred taxes:
Balance, beginning of period		122,815			109,656
Net unrealized holding gains arising during the period, net of reclassification adjustment		60,239			6,481
Other-than-temporary impairment losses during the period		467			842
Balance, end of period		183,521			116,979
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of period		(2,032	)		(2,120	)
Net change from current period hedging transactions, net of reclassification adjustment		66			66
Balance, end of period		(1,966	)		(2,054	)
Total accumulated other comprehensive income		193,239			123,846
Retained earnings
Balance, beginning of period		1,893,576			2,060,607
Net income (loss)		195,143			(66,358	)
Dividends on preferred shares		(24,564	)		(15,938	)
Dividends on common shares		(40,298	)		(36,247	)
Balance, end of period		2,023,857			1,942,064
Total shareholders’ equity	$	2,810,874		$	2,635,950

See accompanying notes to unaudited condensed consolidated financial statements.

4

ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of United States dollars)

	NINE MONTHS ENDED SEPTEMBER 30,
	2012			2011
Cash flows provided by operating activities
Net income (loss)	$	195,143		$	(66,358	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of net premium on investments		16,512			12,470
Amortization of other intangibles and depreciation		17,609			17,095
Net realized and unrealized investment gains		(30,258	)		(26,340	)
Net impairment losses recognized in earnings (losses)		757			2,819
Deferred taxes		(6,151	)		(16,280	)
Stock-based compensation expense		8,426			11,164
Equity in earnings of other investments		(38,101	)		7,583
Premiums and insurance and reinsurance balances receivable, net		(612,329	)		(364,846	)
Deferred acquisition costs		(49,762	)		(48,971	)
Prepaid reinsurance premiums		(79,184	)		(96,984	)
Losses recoverable		(409,719	)		(159,783	)
Accrued investment income		5,771			2,083
Other assets		(2,668	)		(6,035	)
Reserve for losses and loss expenses		685,218			590,610
Reserve for unearned premiums		438,383			457,710
Deposit liabilities		(3,330	)		(3,645	)
Reinsurance balances payable		67,186			15,377
Other liabilities		7,946			9,830
Net cash provided by operating activities		211,449			337,499
Cash flows used in investing activities
Proceeds from sales of available for sale investments		2,460,861			2,382,637
Proceeds from maturities and calls on available for sale investments		654,976			657,051
Proceeds from the redemption of other investments		78,043			13,877
Purchases of available for sale investments		(3,224,163	)		(3,164,298	)
Purchases of other investments		(86,195	)		(31,593	)
Net settlements of other assets		(18,208	)		(448	)
Purchases of fixed assets		(10,446	)		(7,920	)
Change in securities lending collateral received		—			59,886
Net cash paid for subsidiary acquisition		(1,468	)		(3,173	)
Net cash flows used in investing activities		(146,600	)		(93,981	)
Cash flows used in financing activities
Issuance of common shares, net of forfeitures		1,262			13,096
Issuance of series B, non-cumulative preferred shares		—			224,022
Repurchase of common shares		—			(344,272	)
Change in securities lending payable		—			(59,886	)
Settlement of equity awards		(3,234	)		(6,074	)
Offering and registration costs paid		—			(586	)
Proceeds from issuance of debt		812			718
Repayments and repurchases of debt		(1,806	)		(597	)
Dividends on preferred shares		(24,564	)		(15,938	)
Dividends on common shares		(40,298	)		(36,247	)
Net cash flows used in financing activities		(67,828	)		(225,764	)
Effect of exchange rate changes on cash and cash equivalents		7,841			(3,662	)
Net increase in cash and cash equivalents		4,862			14,092
Cash and cash equivalents, beginning of period		890,914			609,852
Cash and cash equivalents, end of period	$	895,776		$	623,944

See accompanying notes to unaudited condensed consolidated financial statements.

5

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” or the “Company”) was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its wholly-owned operating subsidiaries:

Operating Subsidiaries	Domicile
Endurance Specialty Insurance Ltd.		Bermuda
Endurance Worldwide Insurance Limited		England
Endurance Reinsurance Corporation of America		Delaware
Endurance American Insurance Company		Delaware
Endurance American Specialty Insurance Company		Delaware
Endurance Risk Solutions Assurance Co.		Delaware
American Agri-Business Insurance Company		Texas

2. Summary of significant accounting policies

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 months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The unaudited condensed consolidated financial statements include the accounts of Endurance Holdings and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in 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, to record the fair value of investments 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 to be necessary.

The balance sheet at December 31, 2011 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, 2011 contained in Endurance Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”).

Certain comparative information has been reclassified to conform to current year presentation. The Company identified immaterial mis-classifications of certain tax and foreign exchange effects on the Company’s investment portfolio in the 2008 and 2009 financial statements. The Company reclassified these tax and foreign exchange effects on the investment portfolio between accumulated other comprehensive income and retained earnings within the Condensed Consolidated Balance Sheet for the year ended December 31, 2011. The reclassifications had no impact on earnings or total shareholders’ equity for the year ended December 31, 2011.

6

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. Summary of significant accounting policies, cont’d.

There were no material changes in the Company’s significant accounting and reporting policies subsequent to the 2011 Form 10-K.

In October 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts”, (“ASU 2010-26”) which modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new or renewal insurance contracts. The amended guidance specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the transaction and would not have been incurred had the transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts, should be charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should also be charged to expense as incurred. ASU 2010-26 was effective for interim and annual periods beginning on or after December 15, 2011 with prospective or retrospective application permitted. The Company adopted this standard prospectively on January 1, 2012. This standard did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends Accounting Standards Codification Topic 820, “Fair Value Measurement” (“ASC 820”) to change several requirements for measuring fair value and disclosing information about fair value measurements. Among the more significant changes, ASU 2011-04 amends ASC 820 to clarify certain existing fair value measurement and disclosure requirements as follows:

• The “highest-and-best-use” and “valuation-premise” concepts only apply to measuring the fair value of nonfinancial assets. The previous guidance permitted the application of these concepts to financial assets and liabilities.

• A reporting entity is required to measure the fair value of its own equity instruments from the perspective of a market participant that holds that instrument as an asset.

• Reporting entities are required to disclose quantitative information about inputs used in estimating Level 3 fair value measurements.

ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011, with early adoption prohibited. The Company adopted this standard prospectively on January 1, 2012. This standard did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to present other comprehensive income in the statement of changes in shareholders’ equity. The remaining two options are:

• A single continuous statement of net income and comprehensive income; or

• Two separate, but consecutive, statements of net income and other comprehensive income.

7

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. Summary of significant accounting policies, cont’d.

ASU 2011-05 was effective for interim and annual reporting periods ending on or after December 15, 2011. Early adoption was permitted and full retrospective application is required. The Company adopted this standard retrospectively on January 1, 2012. This standard did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08 “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. In addition, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.

ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted this standard prospectively on January 1, 2012. This standard did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02 “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). Under ASU 2012-02, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. In addition, an entity has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing a quantitative impairment test.

ASU 2012-02 will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

3. Investments

Composition of Net Investment Income and of Invested Assets

The components of net investment income for the three and nine months ended September 30, 2012 and 2011 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Available for sale investments	$	33,946		$	39,841		$	105,606		$	123,916
Other investments		15,050			(22,522	)		38,101			(7,583	)
Cash and cash equivalents		289			205			978			639
	$	49,285		$	17,524		$	144,685		$	116,972
Investment expenses		(3,403	)		(3,424	)		(9,962	)		(10,529	)
Net investment income	$	45,882		$	14,100		$	134,723		$	106,443

8

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

The following table summarizes the composition of the investment portfolio by investment type at September 30, 2012 and December 31, 2011:

	September 30, 2012					December 31, 2011
Type of Investment	Fair Value		Percentage			Fair Value		Percentage
Fixed maturity investments	$	5,052,963		77.1	%	$	4,831,966		76.6	%
Cash and cash equivalents(1)		869,809		13.3	%		913,492		14.5	%
Other investments(2)		478,911		7.3	%		432,658		6.9	%
Short-term investments		62,713		1.0	%		67,802		1.1	%
Equity securities		83,085		1.3	%		59,767		0.9	%
Total	$	6,547,481		100.0	%	$	6,305,685		100.0	%

(1) Includes net receivable on sales of investments and net payable on purchases of investments.

(2) Consists of investments in alternative funds and specialty funds.

The following table summarizes the composition by investment rating of the fixed maturity and short-term investments at September 30, 2012 and December 31, 2011. In some cases, where bonds are unrated, the rating of the issuer has been applied.

	September 30, 2012					December 31, 2011
Ratings(1)	Fair Value		Percentage			Fair Value		Percentage
U.S. government and agencies securities	$	1,305,526		25.5	%	$	1,269,123		25.9	%
AAA / Aaa		1,119,525		21.9	%		941,500		19.2	%
AA / Aa		1,671,353		32.6	%		1,665,593		34.0	%
A / A		757,143		14.8	%		776,251		15.8	%
BBB		137,062		2.7	%		130,864		2.7	%
Below BBB		122,876		2.4	%		114,716		2.3	%
Not rated		2,191		0.1	%		1,721		0.1	%
Total	$	5,115,676		100.0	%	$	4,899,768		100.0	%

(1) The credit rating for each security reflected above was determined based on the rating assigned to the individual security by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”). If a rating is not supplied by Standard & Poor’s, the equivalent rating supplied by either Moody’s Investors Service, Inc. (“Moody’s”) or Fitch Ratings is used.

9

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

Contractual maturities of the Company’s fixed maturity and short-term investments are shown below as of September 30, 2012 and December 31, 2011. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2012				December 31, 2011
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due within one year	$	364,721	$	366,555	$	517,156	$	520,755
Due after one year through five years		1,789,082		1,842,841		1,732,335		1,773,553
Due after five years through ten years		657,204		694,565		584,107		612,052
Due after ten years		54,680		61,825		45,837		50,803
Residential mortgage-backed securities
Agency mortgage-backed securities		938,456		977,482		933,479		965,019
Non-agency mortgage-backed securities		82,384		83,208		119,599		114,662
Commercial mortgage-backed securities
Agency mortgage-backed securities		34,678		35,645		28,257		28,807
Non-agency mortgage-backed securities		555,826		598,500		491,810		518,483
Asset-backed securities		448,270		455,055		316,212		315,634
Total	$	4,925,301	$	5,115,676	$	4,768,792	$	4,899,768

In addition to the Company’s fixed maturity, short-term and equity investments, the Company invests in (i) hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan and convertible debt funds (“specialty funds”). The Company’s alternative funds and specialty funds are recorded on the Company’s balance sheet as “Other Investments.” At September 30, 2012 and December 31, 2011, the Company had invested, net of capital returned, a total of $366.9 million and $336.3 million, respectively, in Other Investments. At September 30, 2012 and December 31, 2011, the carrying value of Other Investments was $478.9 million and $432.7 million, respectively. Certain of Other Investments are subject to redemption restriction provisions (see Note 9).

Net Realized and Unrealized Investment Gains

Realized and unrealized investment gains and losses are recognized in earnings using the first in, first out method. The analysis of net realized and unrealized investment gains for the three and nine months ended September 30, 2012 and 2011 is as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Gross realized gains on investment sales	$	11,976		$	6,904		$	34,837		$	40,563
Gross realized losses on investment sales		(2,222	)		(5,735	)		(5,391	)		(13,928	)
Change in fair value of derivative financial instruments(1)		343			(136	)		812			(295	)
Net realized and unrealized investment gains	$	10,097		$	1,033		$	30,258		$	26,340

(1) For additional information on the Company’s derivative financial instruments, see Note 6

10

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

Unrealized Gains and Losses and Other-than-temporary Impairments

The Company classifies its investments in fixed maturity investments, short-term investments and equities as available for sale. The amortized cost, fair value and related gross unrealized gains and losses and non-credit other-than-temporary impairment (“OTTI”) losses on the Company’s securities classified as available for sale at September 30, 2012 and December 31, 2011 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized					Non-Credit
September 30, 2012	Cost		Gains		Losses			Fair Value		OTTI(2)
U.S. government and agencies securities	$	1,263,496	$	42,218	$	(188	)	$	1,305,526	$	—
U.S. state and municipal securities		52,788		1,304		(31	)		54,061		—
Foreign government securities		115,140		3,772		(31	)		118,881		—
Government guaranteed corporate securities		219,424		3,908		(11	)		223,321		—
Corporate securities		1,152,138		49,599		(453	)		1,201,284		—
Residential mortgage-backed securities
Agency mortgage-backed securities		938,456		39,028		(2	)		977,482		—
Non-agency mortgage-backed securities		82,384		2,016		(1,192	)		83,208		(6,154	)
Commercial mortgage-backed securities
Agency mortgage-backed securities		34,678		982		(15	)		35,645		—
Non-agency mortgage-backed securities(1)		555,826		44,148		(1,474	)		598,500		(70	)
Asset-backed securities		448,270		7,333		(548	)		455,055		—
Total fixed maturity investments	$	4,862,600	$	194,308	$	(3,945	)	$	5,052,963	$	(6,224	)
Short-term investments		62,701		12		—			62,713		—
Total fixed income investments	$	4,925,301	$	194,320	$	(3,945	)	$	5,115,676	$	(6,224	)
Equity securities	$	73,783	$	9,647	$	(345	)	$	83,085	$	—

(1) Balances include amounts related to collateralized debt obligations held with total fair values of $26.1 million.

(2) Represents total OTTI recognized in accumulated other comprehensive income. It does not include the change in fair value subsequent to the impairment measurement date. At September 30, 2012, the gross unrealized loss related to fixed income investments for which a non-credit OTTI was recognized in accumulated other comprehensive income was $0.7 million.

11

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

			Gross		Gross
	Amortized		Unrealized		Unrealized					Non-Credit
December 31, 2011	Cost		Gains		Losses			Fair Value		OTTI(2)
U.S. government and agencies securities	$	1,218,069	$	51,140	$	(86	)	$	1,269,123	$	—
U.S. state and municipal securities		52,274		1,262		(19	)		53,517		—
Foreign government securities		73,361		1,820		(184	)		74,997		—
Government guaranteed corporate securities		349,447		2,531		(153	)		351,825		—
Corporate securities		1,118,481		31,526		(10,108	)		1,139,899		—
Residential mortgage-backed securities
Agency mortgage-backed securities		933,479		31,884		(344	)		965,019		—
Non-agency mortgage-backed securities		119,599		1,366		(6,303	)		114,662		(7,932	)
Commercial mortgage-backed securities
Agency mortgage-backed securities		28,257		552		(2	)		28,807		—
Non-agency mortgage-backed securities(1)		491,810		29,741		(3,068	)		518,483		(75	)
Asset-backed securities		316,212		2,336		(2,914	)		315,634		—
Total fixed maturity investments	$	4,700,989	$	154,158	$	(23,181	)	$	4,831,966	$	(8,007	)
Short-term investments		67,803		4		(5	)		67,802		—
Total fixed income investments	$	4,768,792	$	154,162	$	(23,186	)	$	4,899,768	$	(8,007	)
Equity securities	$	56,381	$	4,162	$	(776	)	$	59,767	$	���

(1) Balances include amounts related to collateralized debt obligations held with total fair values of $17.2 million.

(2) Represents total OTTI recognized in accumulated other comprehensive income. It does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2011, the gross unrealized loss related to fixed income investments for which a non-credit OTTI was recognized in accumulated other comprehensive income was $1.5 million.

12

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

The following tables summarize, for all available for sale securities in an unrealized loss position at September 30, 2012 and December 31, 2011, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

	Less than 12 months					12 months or greater					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
September 30, 2012	Losses(1)			Value		Losses(1)			Value		Losses(1)			Value
U.S. government and agencies securities	$	(188	)	$	53,163	$	—		$	—	$	(188	)	$	53,163
U.S. state and municipal securities		(31	)		6,965		—			—		(31	)		6,965
Foreign government securities		(6	)		3,546		(25	)		4,819		(31	)		8,365
Government guaranteed corporate securities		—			—		(11	)		2,411		(11	)		2,411
Corporate securities		(331	)		44,974		(122	)		4,815		(453	)		49,789
Residential mortgage-backed securities
Agency mortgage-backed securities		(2	)		5,513		—			—		(2	)		5,513
Non-agency mortgage-backed securities		(316	)		21,233		(876	)		20,356		(1,192	)		41,589
Commercial mortgage-backed securities
Agency mortgage-backed securities		(15	)		5,118		—			—		(15	)		5,118
Non-agency mortgage-backed securities		(269	)		20,410		(1,205	)		13,179		(1,474	)		33,589
Asset-backed securities		(111	)		23,156		(437	)		9,265		(548	)		32,421
Total fixed maturity investments	$	(1,269	)	$	184,078	$	(2,676	)	$	54,845	$	(3,945	)	$	238,923
Short-term investments		—			—		—			—		—			—
Total fixed income investments	$	(1,269	)	$	184,078	$	(2,676	)	$	54,845	$	(3,945	)	$	238,923
Equity securities	$	(345	)	$	7,217	$	—		$	—	$	(345	)	$	7,217

(1) Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at September 30, 2012.

As of September 30, 2012, 228 available for sale securities were in an unrealized loss position aggregating $4.3 million. Of those, 76 securities with aggregated unrealized losses of $2.7 million at September 30, 2012 had been in a continuous unrealized loss position for twelve months or greater.

13

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

	Less than 12 months					12 months or greater					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
December 31, 2011	Losses(1)			Value		Losses(1)			Value		Losses(1)			Value
U.S. government and agencies securities	$	(86	)	$	23,488	$	—		$	—	$	(86	)	$	23,488
U.S. state and municipal securities		(19	)		6,146		—			—		(19	)		6,146
Foreign government securities		(114	)		12,565		(70	)		4,592		(184	)		17,157
Government guaranteed corporate securities		(70	)		25,157		(83	)		8,232		(153	)		33,389
Corporate securities		(9,949	)		233,894		(159	)		5,784		(10,108	)		239,678
Residential mortgage-backed securities
Agency mortgage-backed securities		(272	)		52,240		(72	)		32,320		(344	)		84,560
Non-agency mortgage-backed securities		(462	)		24,839		(5,841	)		60,850		(6,303	)		85,689
Commercial mortgage-backed securities
Agency mortgage-backed securities		(2	)		138		—			—		(2	)		138
Non-agency mortgage- backed securities		(2,379	)		45,018		(689	)		10,624		(3,068	)		55,642
Asset-backed securities		(2,361	)		165,455		(553	)		10,235		(2,914	)		175,690
Total fixed maturity investments	$	(15,714	)	$	588,940	$	(7,467	)	$	132,637	$	(23,181	)	$	721,577
Short-term investments		(5	)		6,740		—			—		(5	)		6,740
Total fixed income investments	$	(15,719	)	$	595,680	$	(7,467	)	$	132,637	$	(23,186	)	$	728,317
Equity securities	$	(707	)	$	10,993	$	(69	)	$	776	$	(776	)	$	11,769

(1) Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2011.

As of December 31, 2011, 556 available for sale securities were in an unrealized loss position aggregating $24.0 million. Of those, 94 securities with aggregated unrealized losses of $7.5 million had been in a continuous unrealized loss position for twelve months or greater.

The analysis of OTTI for the three and nine months ended September 30, 2012 and 2011 is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Total other-than-temporary impairment losses	$	(126	)	$	(168	)	$	(274	)	$	(1,908	)
Portion of loss recognized in other comprehensive income		(5	)		(72	)		(483	)		(911	)
Net impairment losses recognized in earnings (losses)	$	(131	)	$	(240	)	$	(757	)	$	(2,819	)

14

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

Of the $0.1 million (2011: $0.2 million) of OTTI losses recognized by the Company in the third quarter of 2012, the majority of it was related to reductions in expected recovery values on mortgage-backed securities during the period. At September 30, 2012, the Company did not have the intent to sell securities in an unrealized loss position and determined that it was unlikely that the Company would be required to sell securities in an unrealized loss position.

The following table provides a roll-forward of the amount related to credit losses for the Company’s available for sale investments recognized in earnings (losses) for which a portion of an OTTI loss was recognized in accumulated other comprehensive income for the three and nine months ended September 30, 2012:

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Beginning balance	$	(2,268	)	$	(10,138	)	$	(2,225	)	$	(10,214	)
Addition for the amount related to the credit loss for which an other-than-temporary impairment was not previously recognized		—			—			(3	)		(12	)
Addition for the amount related to the credit loss for which an other-than-temporary impairment was previously recognized		(5	)		(72	)		(503	)		(1,161	)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security		—			—			—			—
Reductions for securities sold during the period		216			7,905			674			9,082
Ending balance	$	(2,057	)	$	(2,305	)	$	(2,057	)	$	(2,305	)

Variable Interest Entities

Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristics of a controlling financial interest are referred to as variable interest entities (“VIE”). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis.

The Company is involved in the normal course of business with VIEs primarily as a passive investor in residential and commercial mortgage-backed securities and through its interests in Other Investments in alternative and specialty funds that are structured as limited partnerships considered to be third party VIEs. The Company determined that it was not the primary beneficiary for any of these investments as of September 30, 2012. The Company believes its exposure to loss with respect to these investments is generally limited to the investment carrying amounts reported in the Company’s Condensed Consolidated Balance Sheets and any unfunded investment commitments.

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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)

4. Fair value measurement

The Company determines the fair value of the fixed maturity investments, short-term investments, equity securities, Other Investments, debt, and other assets and liabilities in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Valuation inputs by security type may include the following:

• Government and agencies fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate option adjusted spreads, daily interest rate data and market/sector news. The Company generally classifies the fair values of government and agencies securities in Level 2. Current issue U.S. government securities are generally valued based on Level 1 inputs, which use the market approach valuation technique.

• Government guaranteed corporate fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing service or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical spread models which may incorporate inputs from the U.S treasury curve or LIBOR. The Company generally classifies the fair values of its government guaranteed corporate securities in Level 2.

• Corporate fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its corporate securities in Level 2.

• Preferred equity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its preferred equity securities in Level 2.

• Common equity securities – The Company invests in equity securities through an equity investment manager and exchange traded funds. These funds and underlying securities are generally priced by pricing services based on quoted market prices in active markets. The Company generally classifies the fair values of its common equity securities in Level 1.

• Other assets and liabilities – These securities consist of a variety of derivative instruments used to enhance the efficiency of the investment portfolio and economically hedge certain risks. These instruments are generally priced by pricing services, broker/dealers and/or recent trading activity. The market value approach valuation technique is used to estimate the fair value for these derivatives based on significant observable market inputs. Certain derivative instruments are priced by pricing services based on quoted market prices in active markets. These derivative instruments are generally classified in Level 1. Other derivative instruments are priced using industry valuation models and are considered Level 2, as the inputs to the valuation model are based on observable market inputs.

16

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)

4. Fair value measurement, cont’d.

• Structured securities including agency and non-agency, residential and commercial, mortgage and asset-backed securities – These securities are generally priced by broker/dealers. Broker/dealers may use current market trades for securities with similar qualities. If no such trades are available, inputs such as bid and offer, prepayment speeds, the U.S. treasury curve, swap curve and cash settlement may be used in a discounted cash flow model to determine the fair value of a security. The Company generally classifies the fair values of its structured securities in Level 2.

• Other Investments – Other Investments, including alternative funds and specialty funds, are generally priced on net asset values (“NAV”) received from the fund managers or administrators. Due to the timing of the delivery of the final NAV by certain of the fund managers, valuations of certain alternative funds and specialty funds are estimated based on the most recently available information, including period end NAVs, period end estimates, or, in some cases, prior month or prior quarter NAVs. As this valuation technique incorporates both observable and significant unobservable inputs, the Company generally classifies the fair value of its Other Investments in Level 3.

• Debt – Outstanding debt consists of the Company’s 6.15% Senior Notes due October 15, 2015 and the 7.0% Senior Notes due July 15, 2034 (the “Senior Notes”). The fair values of these securities were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of the Senior Notes are classified in Level 2.

The carrying values of cash and cash equivalents, accrued investment income, net receivable on sales of investments, net payable on purchases of investments, and other financial instruments not described above approximated their fair values at September 30, 2012.

Transfers between levels are assumed to occur at the end of each period.

17

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)

4. Fair value measurement, cont’d.

The following table sets forth the Company’s available for sale investments, Other Investments, derivative instruments and debt categorized by the level within the hierarchy in which the fair value measurements fall at September 30, 2012:

	Fair Value Measurements at September 30, 2012
			Quoted
			Prices in
			Active
			Markets		Significant
			for		Other		Significant
	Total at		Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. government and agencies securities	$	1,305,526	$	41,796	$	1,263,730	$	—
U.S. state and municipal securities		54,061		—		54,061		—
Foreign government securities		118,881		—		118,881		—
Government guaranteed corporate securities		223,321		—		223,321		—
Corporate securities		1,201,284		—		1,201,284		—
Residential mortgage-backed securities
Agency mortgage-backed securities		977,482		—		977,482		—
Non-agency mortgage-backed securities		83,208		—		82,683		525
Commercial mortgage-backed securities
Agency mortgage-backed securities		35,645		—		35,645		—
Non-agency mortgage-backed securities		598,500		—		589,799		8,701
Asset-backed securities		455,055		—		450,464		4,591
Total fixed maturity investments	$	5,052,963	$	41,796	$	4,997,350	$	13,817
Short-term investments		62,713		—		62,713		—
Equity securities		83,085		63,239		19,846		—
Other investments		478,911		—		—		478,911
Other assets (see Note 6)		24,946		—		24,946		—
Total assets	$	5,702,618	$	105,035	$	5,104,855	$	492,728
Liabilities
Other liabilities (see Note 6)	$	8,848	$	—	$	8,848	$	—
Debt		582,280		—		582,280		—
Total liabilities	$	591,128	$	—	$	591,128	$	—

18

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)

4. Fair value measurement, cont’d.

During the nine months ended September 30, 2012, there were no transfers in or out of Level 1; however the Company purchased current issue U.S. government securities and exchange traded equity securities, which are classified as Level 1.

During the nine months ended September 30, 2012, there were net transfers out of Level 3 to Level 2 of $0.7 million, excluding Other Investments. In addition, the Company purchased commercial mortgage-backed securities and asset-backed securities, which are classified as Level 3 securities, as no observable price was available. The Company used pricing models with significant unobservable inputs in order to determine the fair value of these securities.

During the nine months ended September 30, 2012, the Company included its Other Investments within the fair value hierarchy as required by ASU 2011-04, which the Company adopted on January 1, 2012. These securities are generally priced on NAV received from the fund managers or administrators. As this valuation technique incorporates both observable and significant unobservable inputs, these investments are generally classified as Level 3.

During the nine months ended September 30, 2012, the Company included its Senior Notes within the fair value hierarchy as required by ASU 2011-04, which the Company adopted on January 1, 2012. The fair value of the Senior Notes is obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. As the spreads and the yields for the risk-free yield curve are observable market inputs, the fair value of the Senior Notes are classified in Level 2.

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

4. Fair value measurement, cont’d.

The following table sets forth the Company’s available for sale investments and derivative instruments categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2011:

	Fair Value Measurements at December 31, 2011
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
	Total at		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. government and agencies securities	$	1,269,123	$	—	$	1,269,123	$	—
U.S. state and municipal securities		53,517		—		53,517		—
Foreign government securities		74,997		—		74,997		—
Government guaranteed corporate securities		351,825		—		351,825		—
Corporate securities		1,139,899		—		1,139,899		—
Residential mortgage-backed securities
Agency mortgage-backed securities		965,019		—		965,019		—
Non-agency mortgage-backed securities		114,662		—		114,153		509
Commercial mortgage-backed securities
Agency mortgage-backed securities		28,807		—		28,807		—
Non-agency mortgage-backed securities		518,483		—		508,598		9,885
Asset-backed securities		315,634		—		315,634		—
Total fixed maturity investments	$	4,831,966	$	—	$	4,821,572	$	10,394
Short-term investments		67,802		9,800		58,002		—
Equity securities		59,767		34,681		25,086		—
Other assets (see Note 6)		513		—		513		—
Total assets	$	4,960,048	$	44,481	$	4,905,173	$	10,394
Liabilities
Other liabilities (see Note 6)	$	891	$	—	$	891	$	—

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ENDURANCE SPECIALTY HOLDINGS LTD.

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

4. Fair value measurement, cont’d.

Level 3 assets represented 8.64% and 0.21% of the Company’s total available for sale investments, Other Investments and derivative instruments at September 30, 2012 and December 31, 2011, respectively. Level 3 securities are primarily comprised of non-agency commercial mortgage-backed securities and investments in alternative and specialty funds. The Company utilizes pricing from various pricing sources for all of its securities classified within Level 3, and makes no adjustments to the pricing obtained. The NAV used to fair value the Company’s Other Investments are generally derived from the underlying investments held within the funds. Although the Company does not have direct access to detailed financial information related to the underlying investments of the funds, the Company obtains and reviews fund financial statements, internal control review reports, and industry benchmarking reports to determine the reasonability of the NAV of the funds.

Impairment losses on Level 3 securities of $0.1 million were recognized in earnings for the three and nine months ended September 30, 2012. Impairment losses of $25,000 and $0.2 million were recognized in earnings for the three and nine months ended September 30, 2011, respectively, representing realized losses due to OTTI.

There were no material changes in the Company’s valuation techniques for the nine months ended September 30, 2012.

The following tables present a reconciliation of the beginning and ending balances for all available for sale investments measured at fair value on a recurring basis using Level 3 inputs during the three and nine months ended September 30, 2012 and 2011, respectively:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Level 3, beginning of period	$	488,679		$	28,466		$	10,394		$	9,639
Total net realized gains included in earnings (losses)		15,094			22			15,104			33
Total net realized and unrealized losses included in earnings (losses)		—			(25	)		(87	)		(495	)
Change in unrealized gains included in other comprehensive income		570			571			1,732			2,067
Change in unrealized losses included in other comprehensive income		(14	)		(2,036	)		(243	)		(2,207	)
Purchases		37,321			—			84,481			—
Sales		(53,855	)		(1,165	)		(55,581	)		(3,105	)
Transfers in to Level 3(1)		5,695			266			440,199			36,931
Transfers out of Level 3		(762	)		(17,582	)		(3,271	)		(34,346	)
Level 3, end of period	$	492,728		$	8,517		$	492,728		$	8,517

(1) Included in this balance for the nine months ended September 30, 2012 is the fair value of the Other Investments, which was added to Level 3 as required by ASU 2011-04, effective January 1, 2012.

At December 31, 2011, the carrying value of the Company’s Other Investments was $432.7 million, which approximates fair value.

At December 31, 2011, the carrying value of the Company’s Senior Notes was $528.0 million, and the fair value was $535.3 million.

21

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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)

5. Earnings per share

The two-class method utilized by the Company is an earnings allocation formula that determines earnings (losses) per share for the holders of Endurance Holdings’ ordinary and class A shares (also referred to as “common shares”) and participating common shares, which includes unvested restricted shares that receive cash dividends, according to dividends declared and participation rights in undistributed earnings. Net income (loss) available (attributable) to common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company’s common and participating common shares. Any remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. In periods of loss, no losses are allocated to participating common shareholders. Instead, all such losses are allocated solely to the common shareholders.

Basic earnings (losses) per common share are calculated by dividing net income (loss) available (attributable) to common shareholders by the weighted average number of common shares outstanding. The weighted average number of common shares excludes any dilutive effect of outstanding warrants, options and convertible securities such as unvested restricted shares.

Diluted earnings (losses) per common share are based on the weighted average number of common shares and assumes the exercise of all dilutive stock warrants and options and the vesting or conversion of all convertible securities such as unvested restricted shares using the two-class method described above.

The following table sets forth the computation of basic and diluted earnings (losses) per share for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Numerator:
Net income (loss) available (attributable) to common and participating common shareholders	$	31,930		$	(28,206	)	$	170,579		$	(82,296	)
Less amount allocated to participating common shareholders(1)		(494	)		(224	)		(2,828	)		(740	)
Net income (loss) allocated (attributed) to common shareholders	$	31,436		$	(28,430	)	$	167,751		$	(83,036	)
Denominator:
Weighted average shares – basic		42,628,248			39,764,756			42,555,617			40,071,340
Share equivalents:
Options		28,880			—			36,130			—
Restricted share units		778			—			2,546			—
Weighted average shares – diluted		42,657,906			39,764,756			42,594,293			40,071,340
Basic earnings (losses) per common share	$	0.74		$	(0.71	)	$	3.94		$	(2.07	)
Diluted earnings (losses) per common share	$	0.74		$	(0.71	)	$	3.94		$	(2.07	)

(1) Represents earnings attributable to holders of unvested restricted shares issued under the Company’s equity compensation plans that are considered participating. In periods of loss, no losses are allocated to participating common shareholders (unvested restricted shares).

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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)

5. Earnings per share cont’d.

Endurance Holdings declared a dividend of $0.484375 per Series A preferred share and $0.46875 per Series B preferred share on August 9, 2012 (2011—Series A: $0.484375, Series B: $0.46875). The Series A and Series B preferred share dividends were paid on September 14, 2012 to shareholders of record on August 31, 2012. Endurance Holdings also declared a dividend of $0.31 per common share on August 9, 2012 (2011—$0.30). The dividend was paid on September 28, 2012 to shareholders of record on September 14, 2012.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Dividends declared per Series A preferred share	$	0.484375	$	0.484375	$	1.453125	$	1.453125
Dividends declared per Series B preferred share	$	0.468750	$	0.468750	$	1.406250	$	0.468750
Dividends declared per common share	$	0.31	$	0.30	$	0.93	$	0.90

6. Derivatives

The Company’s derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value and gains and losses recognized in net realized and unrealized investment gains, net foreign exchange (gains) losses and other underwriting income (loss) in the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). The Company’s derivatives are not designated as hedges under current accounting guidance. The Company may enter derivative transactions directly or as part of strategies employed by its external investment managers. The Company’s objectives for holding these derivatives are as follows:

Interest Rate Futures, Swaps, Swaptions and Options—to manage exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk through modification of the portfolio composition and duration.

Foreign Exchange Forwards, Futures and Options—as part of overall currency risk management and investment strategies.

Credit Default Swaps—to manage market exposures. The Company may assume or economically hedge credit risk through credit default swaps to replicate or hedge investment positions. The original term of these credit default swaps is generally five years or less.

Commodity Futures and Options—to economically hedge certain underwriting risks.

To-Be-Announced Mortgage-backed Securities (“TBAs”)—to enhance investment performance and as part of overall investment strategy. TBAs represent commitments to purchase or sell a future issuance of agency mortgage-backed securities. For the period between purchase of a TBA and issuance of the underlying securities, the Company’s position is accounted for as a derivative.

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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)

6. Derivatives, cont’d.

The fair values and the related notional values of derivatives at September 30, 2012 and December 31, 2011 are noted below.

	September 30, 2012				December 31, 2011
			Notional					Notional
	Fair		Principal		Fair			Principal
	Value		Amount		Value			Amount
Foreign exchange forward contracts	$	77	$	1,778	$	216		$	8,412
Credit default swaps		8		350		15			850
Interest rate swaps		8		2,000		223			3,000
Interest rate swaptions		68		1,600		36			1,100
Interest rate futures		—		—		23			200,000
TBAs		24,785		23,000		—			—
Total recorded in other assets	$	24,946			$	513
Foreign exchange forward contracts	$	144	$	5,569	$	199		$	8,216
Credit default swaps		—		—		71			1,800
Interest rate swaps		—		—		594			2,000
Interest rate swaptions		143		14,500		27			5,500
TBAs		8,561		8,000		—			—
Total recorded in other liabilities	$	8,848			$	891
Net derivative asset (liability)	$	16,098			$	(378	)

The fair values of all derivatives at September 30, 2012 were recorded in other assets or other liabilities in the Company’s Condensed Consolidated Balance Sheets. None of the above derivatives have been designated as hedges under current accounting guidance.

The gains and losses on the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for derivatives for the three and nine months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Total (losses) gains included in net foreign exchange losses (gains) from foreign exchange forward contracts	$	(10	)	$	204		$	141		$	(162	)
Futures contracts	$	—		$	572		$	87		$	822
Credit default swaps		3			(106	)		46			(100	)
Interest rate swaps		29			(620	)		(14	)		(1,054	)
Interest rate swaptions		(16	)		18			31			37
TBAs		327			—			662			—
Total gains (losses) included in net realized and unrealized investment gains	$	343		$	(136	)	$	812		$	(295	)
Total losses included in other underwriting (loss) income from commodity put options	$	(1,384	)	$	(2,875	)	$	(2,684	)	$	(2,875	)
Total losses from derivatives	$	(1,051	)	$	(2,807	)	$	(1,731	)	$	(3,332	)

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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)

7. Stock-based employee compensation and other stock plans

The Company has a stock-based employee compensation plan, which provides the Company with the ability to grant options to purchase the Company’s ordinary shares, share appreciation rights, restricted shares, share bonuses and other equity incentive awards to key employees.

No options were granted, expired or vested during the quarters ended September 30, 2012 and 2011. The total intrinsic value of options exercised during the quarter ended September 30, 2012 was $64,000 (2011—$32,000). The Company received proceeds of $63,000 (2011—$39,000) from the exercise of options during the quarter ended September 30, 2012. The Company issued new ordinary shares in connection with the exercise of the above options.

No options were granted, expired or vested during the nine months ended September 30, 2012 and 2011. The total intrinsic value of options exercised during the nine months ended September 30, 2012 was $0.7 million (2011—$21.6 million). The Company received proceeds of $0.5 million (2011—$12.2 million) from the exercise of options during the nine months ended September 30, 2012. The Company issued new ordinary shares in connection with the exercise of the above options. There were no unrecognized stock-based compensation expenses related to unvested stock options at September 30, 2012 and 2011.

During the quarter ended September 30, 2012, the Company granted an aggregate of 6,790 (2011 – 430) restricted shares and restricted share units with weighted average grant date fair values of $0.2 million (2011—$15,000). During the quarter ended September 30, 2012, the aggregate fair value of restricted shares and restricted share units that vested was $0.2 million (2011—$0.4 million). For the quarter ended September 30, 2012, compensation costs recognized in earnings for all restricted shares and restricted share units were $1.9 million (2011—$3.0 million). At September 30, 2012, compensation costs not yet recognized related to unvested restricted shares and restricted share units was $10.2 million (2011—$13.0 million).

During the nine months ended September 30, 2012, the Company granted an aggregate of 407,358 (2011 – 305,422) restricted shares and restricted share units with weighted average grant date fair values of $15.6 million (2011—$14.8 million). During the nine months ended September 30, 2012, the aggregate fair value of restricted shares and restricted share units that vested was $11.7 million (2011—$14.4 million). For the nine months ended September 30, 2012, compensation costs recognized in earnings for all restricted shares and restricted share units were $9.7 million (2011—$11.2 million).

The Company also has an Employee Share Purchase Plan under which employees of Endurance Holdings and certain of its subsidiaries may purchase Endurance Holdings’ ordinary shares. For the quarter ended September 30, 2012, total expenses related to the Company’s Employee Share Purchase Plan were approximately $39,000 (2011—$52,000) and $127,000 (2011—$159,000) for the nine months ended September 30, 2012.

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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)

8. 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, which are comprised of the following lines of business:

Insurance segment lines of business

• Agriculture

• Professional Lines

• Casualty

• Property

• Healthcare Liability

• Surety and Other Specialty

Reinsurance segment lines of business

• Catastrophe

• Casualty

• Property

• Aerospace and Marine

• Surety and Other Specialty

Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the net losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. 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 segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by the segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the business segment to which they apply.

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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)

8. Segment reporting, cont’d.

The following table provides a summary of segment revenues, results and reserves for losses and loss expenses for the three months ended September 30, 2012:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	324,808		$	296,447		$	621,255
Ceded premiums written		(103,543	)		(3,632	)		(107,175	)
Net premiums written		221,265			292,815			514,080
Net premiums earned		283,273			268,599			551,872
Other underwriting (loss) income		(1,384	)		37			(1,347	)
		281,889			268,636			550,525
Expenses
Net losses and loss expenses		288,750			118,773			407,523
Acquisition expenses		24,506			64,276			88,782
General and administrative expenses		29,409			23,306			52,715
		342,665			206,355			549,020
Underwriting (loss) income	$	(60,776	)	$	62,281		$	1,505
Net loss ratio		101.9	%		44.2	%		73.8	%
Acquisition expense ratio		8.7	%		23.9	%		16.1	%
General and administrative expense ratio		10.4	%		8.7	%		9.6	%
Combined ratio		121.0	%		76.8	%		99.5	%
Reserve for losses and loss expenses	$	2,635,086		$	1,874,356		$	4,509,442

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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)

8. Segment reporting, cont’d.

The following table provides a summary of segment revenues, results and reserves for losses and loss expenses for the three months ended September 30, 2011:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	450,451		$	250,415		$	700,866
Ceded premiums written		(147,241	)		(2,298	)		(149,539	)
Net premiums written		303,210			248,117			551,327
Net premiums earned		318,602			242,891			561,493
Other underwriting (loss) income		(2,875	)		734			(2,141	)
		315,727			243,625			559,352
Expenses
Net losses and loss expenses		260,206			196,485			456,691
Acquisition expenses		18,738			53,511			72,249
General and administrative expenses		29,328			29,246			58,574
		308,272			279,242			587,514
Underwriting income (loss)	$	7,455		$	(35,617	)	$	(28,162	)
Net loss ratio		81.7	%		81.0	%		81.3	%
Acquisition expense ratio		5.9	%		22.0	%		12.9	%
General and administrative expense ratio		9.2	%		12.0	%		10.4	%
Combined ratio		96.8	%		115.0	%		104.6	%
Reserve for losses and loss expenses	$	2,032,636		$	1,877,901		$	3,910,537

The following table reconciles total segment results to income (loss) before income taxes for the three months ended September 30, 2012 and 2011:

	Three Months Ended
	September 30,
	2012			2011
Total underwriting income (loss)	$	1,505		$	(28,162	)
Net investment income		45,882			14,100
Net foreign exchange (losses) gains		(3,774	)		4,085
Net realized and unrealized investment gains		10,097			1,033
Net impairment losses recognized in earnings (losses)		(131	)		(240	)
Amortization of intangibles		(2,434	)		(2,976	)
Interest expense		(9,041	)		(9,055	)
Income (loss) before income taxes	$	42,104		$	(21,215	)

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

8. Segment reporting, cont’d.

The following table provides gross and net premiums written by line of business for the three months ended September 30, 2012 and 2011:

	Gross		Net		Gross		Net
	premiums		premiums		premiums		premiums
	written		written		written		written
Business Segment	2012		2012		2011		2011
Insurance
Agriculture	$	171,826	$	106,180	$	289,656	$	185,017
Professional lines		43,209		34,804		39,559		30,812
Casualty		54,704		32,397		57,520		37,664
Property		18,900		13,595		30,049		17,681
Healthcare liability		34,076		32,196		33,652		32,021
Surety and other specialty		2,093		2,093		15		15
Total Insurance		324,808		221,265		450,451		303,210
Reinsurance
Catastrophe		38,871		36,484		46,275		43,868
Casualty		77,781		77,781		56,293		56,292
Property		157,742		157,742		129,203		129,203
Aerospace and marine		9,914		9,914		5,891		6,002
Surety and other specialty		12,139		10,894		12,753		12,752
Total Reinsurance		296,447		292,815		250,415		248,117
Total	$	621,255	$	514,080	$	700,866	$	551,327

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

8. Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the nine months ended September 30, 2012:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	1,252,814		$	1,034,166		$	2,286,980
Ceded premiums written		(417,109	)		(28,322	)		(445,431	)
Net premiums written		835,705			1,005,844			1,841,549
Net premiums earned		710,988			771,859			1,482,847
Other underwriting (loss) income		(2,684	)		1,021			(1,663	)
		708,304			772,880			1,481,184
Expenses
Net losses and loss expenses		610,956			405,231			1,016,187
Acquisition expenses		58,265			171,134			229,399
General and administrative expenses		96,663			84,702			181,365
		765,884			661,067			1,426,951
Underwriting (loss) income	$	(57,580	)	$	111,813		$	54,233
Net loss ratio		85.9	%		52.4	%		68.5	%
Acquisition expense ratio		8.2	%		22.2	%		15.5	%
General and administrative expense ratio		13.6	%		11.0	%		12.2	%
Combined ratio		107.7	%		85.6	%		96.2	%

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

8. Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the nine months ended September 30, 2011:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	1,302,032		$	902,116		$	2,204,148
Ceded premiums written		(393,020	)		(19,171	)		(412,191	)
Net premiums written		909,012			882,945			1,791,957
Net premiums earned		730,491			700,413			1,430,904
Other underwriting (loss) income		(2,875	)		753			(2,122	)
		727,616			701,166			1,428,782
Expenses
Net losses and loss expenses		550,438			670,076			1,220,514
Acquisition expenses		50,907			154,847			205,754
General and administrative expenses		102,361			88,060			190,421
		703,706			912,983			1,616,689
Underwriting income (loss)	$	23,910		$	(211,817	)	$	(187,907	)
Net loss ratio		75.3	%		95.6	%		85.3	%
Acquisition expense ratio		7.0	%		22.1	%		14.4	%
General and administrative expense ratio		14.0	%		12.6	%		13.3	%
Combined ratio		96.3	%		130.3	%		113.0	%

The following table reconciles total segment results to income (loss) before income taxes for the nine months ended September 30, 2012 and 2011, respectively:

	Nine Months Ended
	September 30,
	2012			2011
Total underwriting income (loss)	$	54,233		$	(187,907	)
Net investment income		134,723			106,443
Net foreign exchange gains		14,699			7,655
Net realized and unrealized investment gains		30,258			26,340
Net impairment losses recognized in earnings (losses)		(757	)		(2,819	)
Amortization of intangibles		(7,988	)		(8,800	)
Interest expense		(27,132	)		(27,166	)
Income (loss) before income taxes	$	198,036		$	(86,254	)

31

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)

8. Segment reporting, cont’d.

The following table provides gross and net premiums written by line of business for the nine months ended September 30, 2012 and 2011:

	Gross		Net		Gross			Net
	premiums		premiums		premiums			premiums
	written		written		written			written
Business Segment	2012		2012		2011			2011
Insurance
Agriculture	$	838,932	$	528,349	$	855,486		$	577,538
Professional lines		130,573		107,841		124,209			99,560
Casualty		160,619		102,409		159,580			107,234
Property		46,926		26,418		90,643			56,262
Healthcare liability		70,651		65,575		72,243			68,542
Surety and other specialty		5,113		5,113		(129	)		(124	)
Total Insurance		1,252,814		835,705		1,302,032			909,012
Reinsurance
Catastrophe		354,275		329,067		330,771			314,328
Casualty		258,352		257,113		218,264			217,463
Property		318,514		318,521		251,475			251,475
Aerospace and marine		53,831		53,794		53,472			51,567
Surety and other specialty		49,194		47,349		48,134			48,112
Total Reinsurance		1,034,166		1,005,844		902,116			882,945
Total	$	2,286,980	$	1,841,549	$	2,204,148		$	1,791,957

9. Commitments and contingencies

Concentrations of credit risk. The Company’s reinsurance recoverables at September 30, 2012 and December 31, 2011 amounted to $1,076.6 million and $666.9 million, respectively. At September 30, 2012, substantially all reinsurance recoverables were due from the U.S. government or from reinsurers rated A- or better by A.M. Best or Standard & Poor’s.

Major production sources. The following table shows the percentage of net premiums written generated through the Company’s largest brokers for the nine months ended September 30, 2012 and 2011, respectively:

Broker	2012			2011
Aon Benfield		17.3	%		18.2	%
Marsh & McLennan Companies, Inc.		16.6	%		15.9	%
Willis Companies		15.8	%		13.0	%
Total of largest brokers		49.7	%		47.1	%

Letters of credit. As of September 30, 2012, the Company had issued letters of credit of $300.0 million (December 31, 2011 – $447.3 million) under its credit facility in favor of certain ceding companies to collateralize obligations.

32

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)

9. Commitments and contingencies, cont’d.

Investment commitments. As of September 30, 2012 and December 31, 2011, the Company had pledged cash and cash equivalents and fixed maturity investments of $236.1 million and $171.4 million, respectively, in favor of certain ceding companies to collateralize obligations. As of September 30, 2012 and December 31, 2011, the Company had also pledged $341.0 million and $517.2 million of its cash and fixed maturity investments as required to meet collateral obligations for $300.0 million and $447.3 million in letters of credit outstanding under its credit facility, respectively. In addition, as of September 30, 2012 and December 31, 2011, cash and fixed maturity investments with fair values of $350.5 million and $370.4 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of nil and $7.6 million were on deposit with Canadian regulators, respectively.

The Company is subject to certain commitments with respect to Other Investments at September 30, 2012 and December 31, 2011. The Company is generally subject to redemption restriction provisions of between one to five years from the date of the original commitment and rolling redemption restrictions on a one or two year basis thereafter. Due to redemption restrictions, the Company is prohibited from requesting redemptions during 2012 of $222.1 million (December 31, 2011 – $83.6 million) of its Other Investments held at September 30, 2012. Certain of the Company’s investments in private equity funds cannot be redeemed until the liquidation of the underlying assets of the fund. It is estimated that the majority of the underlying assets of these funds would liquidate within the next two to thirteen years. In addition, as of September 30, 2012, the Company was committed to investing a further $18.5 million (December 31, 2011 – $18.1 million) in various investment funds classified as Other Investments.

Reinsurance commitments. In the ordinary course of business, the Company enters into reinsurance agreements that may include terms which could require the Company to collateralize certain of its obligations.

Employment agreements. The Company has entered into employment agreements with certain officers that provide for equity incentive awards, 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, 2012 are as follows:

Twelve months ended September 30,	Amount
2013	$	14,244
2014		11,397
2015		10,037
2016		8,052
2017		7,156
2018 and thereafter		36,253
	$	87,139

Total lease expense under operating leases for the nine months ended September 30, 2012 was $11.3 million (2011 – $9.2 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 settled by arbitration.

33

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)

10. Subsequent events

On October 29, 2012, Hurricane Sandy made landfall in the Northeastern United States. Preliminary information indicates that this storm has the potential to cause significant losses within the insurance industry generally. To date, reported claims as a result of this storm have been limited. Accordingly, while losses emanating from the storm cannot be accurately estimated at this time, the Company may need to establish appropriate loss reserves related to Hurricane Sandy in the fourth quarter of 2012, which may have a negative impact on its results of operations.

34

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 months ended September 30, 2012 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, 2011, 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, 2011 (the “2011 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 2011 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 and has seven wholly-owned operating subsidiaries:

• Endurance Specialty Insurance Ltd. (“Endurance Bermuda”), domiciled in Bermuda with branch offices in Switzerland and Singapore;

• Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware;

• Endurance Worldwide Insurance Limited (“Endurance U.K.”), domiciled in England;

• Endurance American Insurance Company (“Endurance American”), domiciled in Delaware;

• Endurance American Specialty Insurance Company (“Endurance American Specialty”), domiciled in Delaware;

• Endurance Risk Solutions Assurance Co. (“Endurance Risk Solutions”), domiciled in Delaware; and

• American Agri-Business Insurance Company (“American Agri-Business”), domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together with American Agri-Business, “ARMtech”).

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.

35

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

The Company’s Insurance and Reinsurance 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. In addition, the Company’s Insurance and Reinsurance 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.

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, reserves for losses and loss expenses, other-than-temporary impairments within the investment portfolio and fair value measurements of certain portions of the investment portfolio. For a detailed discussion of the Company’s critical accounting estimates, please refer to the 2011 Form 10-K and the Notes to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q. There were no material changes in the application of the Company’s critical accounting estimates subsequent to the 2011 Form 10-K. 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 Months Ended September 30, 2012 and 2011

Results of operations for the three months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30,
	2012			2011			Change(1)
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written	$	621,255		$	700,866			(11.4	)%
Ceded premiums written		(107,175	)		(149,539	)		(28.3	)%
Net premiums written		514,080			551,327			(6.8	)%
Net premiums earned		551,872			561,493			(1.7	)%
Net investment income		45,882			14,100			225.4	%
Net realized and unrealized investment gains		10,097			1,033			877.4	%
Net impairment losses recognized in earnings (losses)		(131	)		(240	)		(45.4	)%
Other underwriting loss		(1,347	)		(2,141	)		(37.1	)%
Total revenues		606,373			574,245			5.6	%
Expenses
Net losses and loss expenses		407,523			456,691			(10.8	)%
Acquisition expenses		88,782			72,249			22.9	%
General and administrative expenses		52,715			58,574			(10.0	)%
Amortization of intangibles		2,434			2,976			(18.2	)%
Net foreign exchange losses (gains)		3,774			(4,085	)		NM	(2)
Interest expense		9,041			9,055			(0.2	)%
Income tax expense (benefit)		1,986			(1,197	)		NM	(2)
Net income (loss)	$	40,118		$	(20,018	)		NM	(2)
Net loss ratio		73.8	%		81.3	%		(7.5	)
Acquisition expense ratio		16.1	%		12.9	%		3.2
General and administrative expense ratio		9.6	%		10.4	%		(0.8	)
Combined ratio		99.5	%		104.6	%		(5.1	)

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

⁽²⁾  Not meaningful.

36

Premiums

Gross premiums written in the three months ended September 30, 2012 were $621.3 million, a decrease of $79.6 million, or 11.4%, compared to the same period in 2011. Net premiums written in the three months ended September 30, 2012 were $514.1 million, a decrease of $37.2 million, or 6.8%. The change in net premiums written was driven by the following factors:

• Within the agriculture line of the Insurance segment, premiums declined due to a lack of positive premium adjustments in the current period while in the third quarter of 2011 significant positive premium adjustments were recorded as a result of the commodity price increases and greater acreage planted;

• Growth in the property line of the Reinsurance segment resulting from increased renewal premiums and new business recorded across the Company’s businesses; and

• Growth in the casualty line of the Reinsurance segment resulting from new business and a number of positive premium adjustments, offset by a modest amount of non-renewals.

The decline in ceded premiums written by the Company in the quarter ended September 30, 2012 as compared to the same period in 2011 was primarily driven by the decrease in gross premiums written in the agriculture insurance line that drove a corresponding reduction in cessions to the Federal Crop Insurance Corporation.

Net premiums earned for the three months ended September 30, 2012 were $551.9 million, a decrease of $9.6 million, or 1.7%, from the third quarter of 2011. The decrease in net premiums earned resulted from the decline in net written premiums recorded in the agriculture line in the current period, offset by growth in premiums recorded across other lines in more recent periods.

Net Investment Income

The Company’s net investment income of $45.9 million increased by 225.4% or $31.8 million for the quarter ended September 30, 2012 as compared to the same period in 2011. Net investment income during the third quarter of 2012 included net mark to market gains of $15.1 million on Other Investments, comprised of alternative funds and specialty funds, as compared to mark to market losses of $22.5 million in the third quarter of 2011. Investment income generated from the Company’s fixed income investments, which consist of fixed maturity investments and short-term investments, declined by $5.9 million for the three months ended September 30, 2012 compared to the same period in 2011. This decline resulted primarily from lower reinvestment rates over the past 12 months. Investment expenses, including investment management fees, for the three months ended September 30, 2012 were $3.4 million compared to $3.4 million for the same period in 2011.

37

The annualized net earned yield and total return of the investment portfolio for the three months ended September 30, 2012 and 2011 and the market yield and portfolio duration as of September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30,
	2012			2011
Annualized net earned yield(1)		2.97	%		0.90	%
Total return on investment portfolio(2)		1.75	%		0.37	%
Market yield(3)		1.10	%		1.91	%
Portfolio duration(4)		2.52	years		2.48	years

(1) The actual net earned income from the investment portfolio after adjusting for expenses and accretion of discount and amortization of premium from the purchase price divided by the average book value of assets.

(2) Includes realized and unrealized gains and losses.

(3) The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes Other Investments and operating cash.

(4) Includes only cash and cash equivalents and fixed income investments managed by the Company’s investment managers.

During the third quarter of 2012, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 28 basis point range, with a high of 0.82% and a low of 0.54%. Trading activity in the Company’s portfolio during the third quarter included reductions in agency residential mortgage-backed securities, foreign government bonds and corporate securities, and increased allocations to short-term investments, U.S. government and government agencies securities, government guaranteed corporate securities, non-agency commercial mortgage-backed securities, asset-backed securities and equity securities. The duration of the fixed income investments increased to 2.52 years at September 30, 2012 from 2.39 years at December 31, 2011.

Net Realized and Unrealized Investment Gains

The Company’s investment portfolio is actively managed on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing and recognition of net realized investment gains and losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale during the three months ended September 30, 2012 were $908.0 million compared to $566.0 million during the same period a year ago. Net realized investment gains increased during the three months ended September 30, 2012 compared to the same period in 2011. Realized investment gains and losses and the change in the fair value of derivative financial instruments for the three months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30,
	2012			2011
	(U.S. dollars in thousands)
Gross realized gains on investment sales	$	11,976		$	6,904
Gross realized losses on investment sales		(2,222	)		(5,735	)
Change in fair value of derivative financial instruments		343			(136	)
Net realized and unrealized investment gains	$	10,097		$	1,033

38

Net Impairment Losses Recognized in Earnings (Losses)

During the three months ended September 30, 2012, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The Company considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at September 30, 2012. The Company did not identify any such securities meeting these criteria. As such, the Company performed various analyses and reviews, which are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in our 2011 Form 10-K, to determine whether the securities in an unrealized loss position were other-than-temporarily impaired as a result of credit related factors or non-credit related factors. Net impairment losses recognized in earnings for the three months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30,
	2012			2011
	(U.S. dollars in thousands)
Total other-than-temporary impairment losses	$	(126	)	$	(168	)
Portion of loss recognized in other comprehensive income		(5	)		(72	)
Net impairment losses recognized in earnings (losses)	$	(131	)	$	(240	)

The $0.1 million and $0.2 million of other-than-temporary impairment (“OTTI”) losses recognized by the Company in the third quarters of 2012 and 2011, respectively, relating to specific credit events occurred primarily due to reductions in expected recovery values on residential mortgage-backed securities during the period.

The Company assessed its intent and ability to hold certain equity securities that were in an unrealized loss position at September 30, 2012 and 2011 and determined it did not need to recognize any OTTI losses in the three months ended September 30, 2012 and 2011.

Net Foreign Exchange Gains and Losses

For the three months ended September 30, 2012, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in a net foreign exchange loss of $3.8 million compared to a net foreign exchange gain of $4.1 million for the same period of 2011. This loss resulted from offsetting exposures across the Company as the U.S. dollar weakened against the major currencies in the period. In the prior year, the net foreign exchange gain resulted from the strengthening of the U.S. dollar against other major currencies which reduced foreign denominated net liabilities.

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, 2012, the Company incurred lower levels of catastrophe losses compared to the prior year. The Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals of $13.2 million related primarily to Hurricane Isaac and unfavorable development on an earthquake in Italy which added 2.5 percentage points to the Company’s net loss ratio for the third quarter of 2012. For the three months ended September 30, 2011, Hurricane Irene, Danish floods, brushfires in Texas and multiple storms in the Midwest United States which, when accumulated, triggered certain aggregate catastrophe contracts, adversely affected the Company’s net loss ratio in the Reinsurance and Insurance segments. The Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals, of $98.6 million in relation to these events, which added 17.7 percentage points to the Company’s net loss ratio for the third quarter of 2011. The reduction in net losses incurred was partially offset by increased losses recorded in the agriculture line of the Insurance segment which was impacted by extreme drought conditions in the Midwest United States.

39

Favorable prior year loss reserve development was $55.6 million for the third quarter of 2012 compared to $44.4 million during the same period in 2011. In the third quarter of 2012, prior year loss reserves emerged favorably across the short, long and other tail business of the Insurance segment and the short and long tail business of the Reinsurance segment. Favorable reserve development in the third quarter of 2012 was higher than the third quarter of 2011 principally due to the short tail business of the Reinsurance segment where increased favorable reserve development was experienced in the property and marine lines of business partially offset by a decline in the catastrophe line.

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.

Acquisition Expenses

The acquisition expense ratio for the three months ended September 30, 2012 increased by 3.2 percentage points compared to the acquisition expense ratio for the same period in 2011. The change in the acquisition expense ratio was driven by the following factors:

• Higher commissions and the accelerated expensing of deferred commissions in the agriculture line of the Insurance segment due to the increased level of losses incurred during the period;

• An increase in net earned premiums in the Company’s contract binding authority business, which carries higher commission rates, and a decline in net earned premiums in the Company’s excess casualty business written in Bermuda, which attracts relatively lower acquisition expenses, in the Company’s casualty line of business in the Insurance segment; and

• The combination of new business, non-renewed contracts and the restructuring of certain business in the casualty line of the Reinsurance segment.

General and Administrative Expenses

The Company’s general and administrative expense ratio for the third quarter of 2012 decreased compared to the same period in 2011 due to increased third party ceding commissions and expense reimbursement offsets in the agriculture line of the Insurance segment and favorable compensation cost adjustments arising from a lower headcount, a lower concentration of more senior staff and changes to the performance measures driving the annual incentive provision. Lower expenditure was partially offset by increased consulting and facilities costs. At September 30, 2012, the Company had a total of 849 employees compared to 864 employees at September 30, 2011.

Income Tax Expense (Benefit)

The Company recorded a tax expense for the quarter ended September 30, 2012 of $2.0 million compared to a tax benefit of $1.2 million for the quarter ended September 30, 2011. The current period tax expense resulted from income generated in the current period by the Company in the U.K.

Net Income (Loss)

The Company generated net income of $40.1 million in the three months ended September 30, 2012 compared to a net loss of $20.0 million in the same period of 2011 primarily as a result of a decrease in catastrophe losses and an improvement in investment returns during the current period, partially offset by agriculture insurance losses from the Midwestern drought.

40

Consolidated Results of Operations – For the Nine Months Ended September 30, 2012 and 2011

Results of operations for the nine months ended September 30, 2012 and 2011 were as follows:

	Nine Months Ended September 30,
	2012			2011			Change(1)
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written	$	2,286,980		$	2,204,148			3.8	%
Ceded premiums written		(445,431	)		(412,191	)		8.1	%
Net premiums written		1,841,549			1,791,957			2.8	%
Net premiums earned		1,482,847			1,430,904			3.6	%
Net investment income		134,723			106,443			26.6	%
Net realized and unrealized investment gains		30,258			26,340			14.9	%
Net impairment losses recognized in earnings (losses)		(757	)		(2,819	)		(73.1	)%
Other underwriting loss		(1,663	)		(2,122	)		(21.6	)%
Total revenues		1,645,408			1,558,746			5.6	%
Expenses
Losses and loss expenses		1,016,187			1,220,514			(16.7	)%
Acquisition expenses		229,399			205,754			11.5	%
General and administrative expenses		181,365			190,421			(4.8	)%
Amortization of intangibles		7,988			8,800			(9.2	)%
Net foreign exchange gains		(14,699	)		(7,655	)		92.0	%
Interest expense		27,132			27,166			(0.1	)%
Income tax expense (benefit)		2,893			(19,896	)		NM	(2)
Net income (loss)	$	195,143		$	(66,358	)		NM	(2)
Net loss ratio		68.5	%		85.3	%		(16.8	)
Acquisition expense ratio		15.5	%		14.4	%		1.1
General and administrative expense ratio		12.2	%		13.3	%		(1.1	)
Combined ratio		96.2	%		113.0	%		(16.8	)

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

⁽²⁾  Not meaningful.

Premiums

Gross premiums written in the nine months ended September 30, 2012 were $2,287.0 million, an increase of $82.8 million, or 3.8%, compared to the same period in 2011. Net premiums written in the nine months ended September 30, 2012 were $1,841.5 million, an increase of $49.6 million, or 2.8%, compared to the same period in 2011. The change in net premiums written was driven by the following factors:

• Growth in the Reinsurance segment where property premiums were higher due to new premiums and growth in renewals, particularly from the Company’s U.S., Zurich and Singapore offices;

• Increased catastrophe premiums in the Reinsurance segment as a result of improved pricing during renewals;

• Growth in casualty premiums in the Reinsurance segment due to new business, increased renewal premiums and an increase in positive premium adjustments;

• Decreased premiums in the agriculture line of the Insurance segment where the impact of lower commodity prices was partially offset by growth in policy count; and

• A decline in premiums in the property line of the Insurance segment as the Company curtailed the underwriting of several insurance products in order to reallocate capital to more profitable lines of business.

41

Net premiums earned for the nine months ended September 30, 2012 were $1,482.8 million, an increase of $51.9 million, or 3.6%, from the nine months ended September 30, 2011 principally due to growth in net premiums written experienced over the last twelve months compared to the same period last year.

Net Investment Income

The Company’s net investment income of $134.7 million increased by 26.6% or $28.3 million for the nine months ended September 30, 2012 as compared to the same period in 2011. Net investment income during the first nine months of 2012 included net mark to market gains of $38.1 million on Other Investments, comprised of alternative and specialty funds, as compared to mark to market losses of $7.6 million in the first nine months of 2011. Investment income generated by the Company’s fixed income investments declined by $18.3 million in the first nine months of 2012 compared to the same period in 2011 primarily due to lower reinvestment rates, partly offset by a higher average investment portfolio balance. Investment expenses for the nine months ended September 30, 2012, including investment management fees, were $10.0 million compared to $10.5 million for the same period in 2011.

The annualized net earned yield and total return on the investment portfolio for the nine months ended September 30, 2012 and 2011 and the market yield and portfolio duration as of September 30, 2012 and 2011 were as follows:

	Nine Months Ended September 30,
	2012			2011
Annualized net earned yield(1)		2.87	%		2.31	%
Total return on investment portfolio(2)		4.08	%		2.60	%
Market yield(3)		1.10	%		1.91	%
Portfolio duration(4)		2.52	years		2.48	years

⁽¹⁾  The actual net earned income from the investment portfolio after adjusting for expenses and accretion of discount and amortization of premium from the purchase price divided by the average book value of assets.

⁽²⁾  Includes realized and unrealized gains and losses.

⁽³⁾  The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates to a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes Other Investments and operating cash.

⁽⁴⁾  Includes only cash and cash equivalents and fixed income investments held by the Company’s investment managers.

During the nine months ended September 30, 2012, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 65 basis point range, with a high of 1.20% and a low of 0.54%. Trading activity in the Company’s portfolio for the nine months ended September 30, 2012 included reductions in government guaranteed corporate securities and non-agency residential mortgage-backed securities, and increased allocations to government and agency guaranteed corporate securities, foreign government bonds, corporate securities, non-agency commercial mortgage-backed securities, asset-backed securities, equity securities and Other Investments.

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Net Realized and Unrealized Investment Gains

The Company’s investment portfolio is managed on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing and recognition of net realized investment gains and losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale during the nine months ended September 30, 2012 were $2,460.9 million compared to $2,382.6 million during the same period a year ago. Net realized investment gains increased during the nine months ended September 30, 2012 compared to the same period in 2011.

43

Realized investment gains and losses and the change in the fair value of derivative financial instruments for the nine months ended September 30, 2012 and 2011 were as follows:

	Nine Months Ended September 30,
	2012			2011
	(U.S. dollars in thousands)
Gross realized gains on investment sales	$	34,837		$	40,563
Gross realized losses on investment sales		(5,391	)		(13,928	)
Change in fair value of derivative financial instruments		812			(295	)
Net realized and unrealized investment gains	$	30,258		$	26,340

Net Impairment Losses Recognized in Earnings (Losses)

During the nine months ended September 30, 2012, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The Company initially considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at September 30, 2012. The Company did not identify any such securities meeting these criteria. As such, the Company performed various analyses and reviews, which are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in our 2011 Form 10-K, to determine whether the securities in an unrealized loss position were other-than-temporarily impaired as a result of credit factors or other factors. Net impairment losses recognized in earnings (losses) for the nine months ended September 30, 2012 and 2011 were as follows:

	Nine Months Ended September 30,
	2012			2011
	(U.S. dollars in thousands)
Total other-than-temporary impairment losses	$	(274	)	$	(1,908	)
Portion of loss recognized in other comprehensive income		(483	)		(911	)
Net impairment losses recognized in earnings (losses)	$	(757	)	$	(2,819	)

The $0.8 million of OTTI losses recognized by the Company in the nine months ended September 30, 2012 relating to specific credit events occurred primarily due to reductions in expected recovery values on residential and commercial mortgage-backed securities during the period, along with certain credit related downgrades in corporate securities. Of this total, $0.5 million was shifted from a non-credit OTTI loss previously recognized in comprehensive income (loss) to a credit OTTI loss recorded in net income (loss) for 2012.

For the nine months ended September 30, 2011, the Company recorded $2.8 million of OTTI losses in earnings (losses). This amount related to specific credit events occurring primarily due to reductions in expected recovery values on mortgage and asset backed securities during the period, along with certain credit related downgrades in corporate securities. Of this total, $0.9 million was shifted from a non-credit OTTI loss previously recognized in comprehensive income (loss) to a credit OTTI loss recorded in net income (loss) for 2011.

The Company assessed its intent and ability to hold certain equity securities that were in an unrealized loss position at September 30, 2012 and determined it did not need to recognize any OTTI losses in the nine months ended September 30, 2012 (2011—$35,000).

Net Foreign Exchange Gains

For the nine months ended September 30, 2012, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in a net foreign exchange gain of $14.7 million compared to a $7.7 million gain for the same period of 2011. The current period net foreign exchange gain resulted from a decrease in the value of Japanese Yen net liabilities as the U.S. dollar strengthened against the Yen in the first half of the year. Other net gains were realized as the U.S. dollar fluctuated against other currencies over the period. In addition, foreign exchange gains were recognized in income as revaluations on investments recorded in other comprehensive income were realized. In the prior year, the net foreign exchange gain resulted from the timing of gains realized as the U.S. dollar fluctuated over the nine month period.

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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 nine months ended September 30, 2012, the Company incurred catastrophe losses arising from Hurricane Isaac, other windstorms in the U.S. and an earthquake in Italy, which impacted the Company’s net loss ratio in the Reinsurance segment. The Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals, of $49.6 million in relation to these events which added 3.5 percentage points to the Company’s net loss ratio for the nine months ended September 30, 2012. For the nine months ended September 30, 2011, multiple events adversely affected the Company’s net loss ratio in the Reinsurance segment. These included Hurricane Irene, Danish floods, brushfires in Texas, the Tohuko, Japan earthquake and tsunami, the Christchurch, New Zealand earthquake, Queensland, Australia floods, Midwest United States tornadoes and multiple storms in the Midwest, which when accumulated triggered certain aggregate catastrophe contracts. The Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals, of $354.7 million in relation to these events, which added 25.2 percentage points to the Company’s net loss ratio for the nine months ended September 30, 2011. In addition, the Company recorded lower reserves for attritional losses in the Insurance segment’s property and professional lines and the Reinsurance segment’s casualty line in the nine months ended September 30, 2012 compared to the same period in 2011. The overall reduction in current year net losses incurred was partially offset by increased crop related losses experienced in the agriculture line of the Insurance segment which was impacted by the extreme drought conditions in the U.S. Midwest in the third quarter.

Favorable prior year loss reserve development was $92.1 million for the nine months ended September 30, 2012 as compared to $137.9 million for the same period in 2011. In the nine months ended September 30, 2012 and 2011, prior year loss reserves emerged favorably across the short, long and other tail business of the Insurance segment and in the short and long tail business of the Reinsurance segment. Favorable reserve development in the first nine months of 2012 was less than the first nine months of 2011 principally due to the agriculture line of the Insurance segment which experienced a later and stronger harvest in the 2010 crop year compared to the 2011 crop year. The impact of the later and stronger harvest in the 2010 crop year was an extension of claims settlements into the first half of 2011, which consequently experienced significant favorable development.

The Company participates in lines of business in which 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.

Acquisition Expenses

The acquisition expense ratio for the nine months ended September 30, 2012 increased compared to the acquisition expense ratio for the same period in 2011. The change in acquisition expense ratio resulted from the Reinsurance segment, which generally incurs a higher acquisition expense rate, accounting for a higher proportion of net premiums earned in 2012 and the following factors within the Insurance segment:

• Higher commissions and the accelerated expensing of deferred commissions in the agriculture line of the Insurance segment due to the increased level of losses incurred during the period; and

• An increase in net earned premiums in the Company’s contract binding authority business, which carries higher commission rates, and a decline in net earned premiums in the Company’s excess casualty business written in Bermuda, which attracts relatively lower acquisition expenses in the Company’s casualty line of business in the Insurance segment.

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General and Administrative Expenses

The Company’s general and administrative expense ratio for the nine months ended September 30, 2012 was lower than the same period in 2011 as a result of increased earned premiums in the current period, lower compensation costs and an increase in third party commissions and expense reimbursement offsets in the agriculture line of the Insurance segment. Personnel costs were down particularly as a result of lower annual incentive expense as the actual payout of the Company’s 2011 annual incentive compensation was lower than previously accrued. At September 30, 2012, the Company had a total of 849 employees compared to 864 employees at September 30, 2011.

Income Tax Expense (Benefit)

The Company recorded a tax expense for the nine months ended September 30, 2012 of $2.9 million compared to a tax benefit of $19.9 million for the same period in 2011 due to significant net losses experienced in its United States operations in 2011.

Net Income (Loss)

The Company produced net income of $195.1 million for the nine months ended September 30, 2012 compared to a net loss of $66.4 million in the same period of 2011 primarily due to the decrease in catastrophe losses, improved investment portfolio performance and growth in net premiums earned, partially offset by losses in the Company’s agriculture insurance line of business due to the Midwestern drought.

Subsequent Events

On October 29, 2012, Hurricane Sandy made landfall in the Northeastern United States. Preliminary information indicates that this storm has the potential to cause significant losses within the insurance industry generally. To date, reported claims as a result of this storm have been limited. Accordingly, while losses emanating from the storm cannot be accurately estimated at this time, the Company may need to establish appropriate loss reserves related to Hurricane Sandy in the fourth quarter of 2012, which may have a negative impact on its results of operations.

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Reserve for Losses and Loss Expenses

In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the 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 several quarters while long tail business would emerge over many years. The Company’s lines of business are generally included in the following reserving categories:

Insurance Segment – Short Tail Lines

• Property

• Surety

Insurance Segment – Long Tail Lines

• Casualty

• Healthcare liability

• Professional lines

• Workers compensation (discontinued)

Insurance Segment – Other Tail Line

• Agriculture

Reinsurance Segment – Short Tail Lines

• Catastrophe

• Property

• Aerospace and marine

• Surety

Reinsurance Segment – Long Tail Lines

• Casualty

• Other specialty

Reinsurance Segment – Other Tail Line

• Agriculture

As of September 30, 2012, the Company had accrued losses and loss expense reserves of $4.5 billion (December 31, 2011—$3.8 billion). This amount represents management’s best estimate of the ultimate liability for payment of losses and loss expenses related to loss events. During the nine months ended September 30, 2012 and 2011, the Company’s net paid losses and loss expenses were $745.7 million and $785.2 million, respectively.

As more fully described under “Reserving Process” in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Form 10-K, the Company incorporates a variety of actuarial methods and judgments in its reserving process. Two key inputs in the various actuarial methods employed by the Company are initial expected loss ratios and expected loss reporting patterns. These key inputs impact the potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company’s business segments. The Company’s loss and loss expense reserves consider and reflect, in part, deviations resulting from differences between expected loss and actual loss reporting as well as judgments relating to the weights applied to the reserve levels indicated by the actuarial methods. Expected loss reporting patterns are based upon internal and external historical data and assumptions regarding claims reporting trends over a period of time that extends beyond the Company’s own operating history.

47

Differences between actual reported losses and expected losses are anticipated to occur in any individual period and such deviations may influence future initial expected loss ratios and/or expected loss reporting patterns as the recent actual experience becomes part of the historical data utilized as part of the ongoing reserve estimation process. The Company has demonstrated the impact of changes in the speed of the loss reporting patterns, as well as changes in the expected loss ratios, within the table under the heading “Potential Variability in Reserves for Losses and Loss Expenses” in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Form 10-K.

Losses and loss expenses for the three and nine months ended September 30, 2012 are summarized as follows:

	Incurred related to:
Three Months Ended						Total incurred
September 30, 2012	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	4,271	$	(4,655	)	$	(384	)
Long tail		64,896		(10,083	)		54,813
Other		237,022		(2,701	)		234,321
Total Insurance		306,189		(17,439	)		288,750
Reinsurance:
Short tail		90,198		(30,022	)		60,176
Long tail		53,845		(9,876	)		43,969
Other		12,933		1,695			14,628
Total Reinsurance		156,976		(38,203	)		118,773
Totals	$	463,165	$	(55,642	)	$	407,523

	Incurred related to:
Nine Months Ended						Total incurred
September 30, 2012	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	21,809	$	(11,720	)	$	10,089
Long tail		196,928		(18,663	)		178,265
Other		431,138		(8,536	)		422,602
Total Insurance		649,875		(38,919	)		610,956
Reinsurance:
Short tail		269,520		(43,267	)		226,253
Long tail		165,062		(18,145	)		146,917
Other		23,825		8,236			32,061
Total Reinsurance		458,407		(53,176	)		405,231
Totals	$	1,108,282	$	(92,095	)	$	1,016,187

Losses and loss expenses for the three and nine months ended September 30, 2012 included $55.6 million and $92.1 million in favorable development of reserves relating to prior accident years, respectively. The favorable loss reserve development experienced during the three and nine months ended September 30, 2012 benefited the Company’s reported loss ratio by approximately 10.1 and 6.2 percentage points, respectively. This net reduction in estimated losses for prior accident years resulted primarily from lower than expected claims emergence for the three and nine months ended September 30, 2012 across all reserving groups included within the Insurance segment and the short tail and long tail reserving groups in the Reinsurance segment.

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For the three months ended September 30, 2012, the Company did not materially alter any key inputs utilized to establish reserve for losses and loss expenses (initial expected loss ratios and loss reporting patterns) related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses for those reserve categories were within the range of possible results anticipated by the Company. During the nine months ended September 30, 2012, as part of the Company’s periodic review of key parameters and in order to recognize accumulated historical experience and other relevant industry information, the Company adjusted the initial expected loss ratios for a number of business units within the Insurance and Reinsurance segments. Within the Insurance segment, initial expected loss ratios were lowered for historical years for the healthcare liability and professional lines of business, and raised for the workers’ compensation line of business that is included in the surety and other specialty line of business. The initial expected loss ratios were raised or lowered in specific sectors of the casualty line of business. Within the Reinsurance segment, initial expected loss ratios were lowered for historical years for the catastrophe line of business.

Insurance

Short Tail Insurance. For the three and nine months ended September 30, 2012, the favorable loss emergence within the short tail insurance reserve category was primarily due to lower than expected reported claim emergence related to the property line of business.

Long Tail Insurance.For the three and nine months ended September 30, 2012, the Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity within the healthcare liability and professional lines of business. Favorable loss emergence was partially offset by adverse development within the casualty line of business and the workers’ compensation line of business that the Company exited in 2009.

Other Insurance. The Company recorded favorable prior period loss emergence within this reserve category for the three and nine months ended September 30, 2012 primarily due to lower than anticipated agriculture claims settlements for the 2011 crop year.

Reinsurance

Short Tail Reinsurance. For the three and nine months ended September 30, 2012, the Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity within the catastrophe, aerospace and marine, and surety and other specialty lines of business. This favorable development was partially offset by adverse development within the property line of business for the nine months ended September 30, 2012.

Long Tail Reinsurance. For the three and nine months ended September 30, 2012, the Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims reported within the Company’s casualty line of business.

Other Reinsurance. For the three and nine months ended September 30, 2012, the Company recorded unfavorable loss emergence within this reserve category primarily due to higher than expected claims reported within the international agriculture business that is part of the surety and other specialty line of business.

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Losses and loss expenses for the three and nine months ended September 30, 2011 are summarized as follows:

	Incurred related to:
Three Months Ended						Total incurred
September 30, 2011	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	10,648	$	(4,182	)	$	6,466
Long tail		64,522		(8,501	)		56,021
Other		197,447		272			197,719
Total Insurance		272,617		(12,411	)		260,206
Reinsurance:
Short tail		176,214		(19,342	)		156,872
Long tail		50,720		(11,234	)		39,486
Other		1,553		(1,426	)		127
Total Reinsurance		228,487		(32,002	)		196,485
Totals	$	501,104	$	(44,413	)	$	456,691

	Incurred related to:
Nine Months Ended						Total incurred
September 30, 2011	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	37,705	$	(18,606	)	$	19,099
Long tail		199,149		(16,551	)		182,598
Other		383,797		(35,056	)		348,741
Total Insurance		620,651		(70,213	)		550,438
Reinsurance:
Short tail		563,209		(52,750	)		510,459
Long tail		164,599		(10,624	)		153,975
Other		9,954		(4,312	)		5,642
Total Reinsurance		737,762		(67,686	)		670,076
Totals	$	1,358,413	$	(137,899	)	$	1,220,514

Losses and loss expenses for the three and nine months ended September 30, 2011 included $44.4 million and $137.9 million in favorable development of reserves relating to prior accident years, respectively. The favorable loss reserve development experienced during the three and nine months ended September 30, 2011 benefited the Company’s reported loss ratio by approximately 7.9 and 9.6 percentage points, respectively. This net reduction in estimated losses for prior accident years resulted primarily from lower than expected claims emergence across the short tail and long tail reserving groups for the current quarter and all reserving groups for the nine months ended September 30, 2011 included within the Insurance segment and all reserving groups in the Reinsurance segment for both the three and nine months ended September 30, 2011.

For the three and nine months ended September 30, 2011, the Company did not materially alter the two key inputs utilized to establish its reserve for losses and loss expenses (initial expected loss ratios and loss reporting patterns) for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses for those reserve categories were within the range of possible results anticipated by the Company.

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Insurance

Short Tail Insurance. For the three and nine months ended September 30, 2011, the favorable loss emergence within the short tail insurance reserve category was primarily due to lower than expected reported claims and favorable case reserve development related to the property line of business.

Long Tail Insurance.For the three and nine months ended September 30, 2011, the Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity within the healthcare liability, casualty and professional lines of business. Favorable loss emergence was partially offset by adverse development within the workers’ compensation line of business that the Company exited in 2009.

Other Insurance. The Company recorded modest unfavorable loss emergence within this reserve category for the third quarter of 2011 and favorable loss reserve development for the nine months ended September 30, 2011, primarily due to lower than anticipated agriculture claims settlements for the 2010 crop year.

Reinsurance

Short Tail Reinsurance. For the nine months ended September 30, 2011, the Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity and favorable case reserve development within the catastrophe and surety and other specialty lines of business.

Long Tail Reinsurance. For the three and nine months ended September 30, 2011, the Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims reported within the Company’s casualty line of business.

Other Reinsurance. For the three and nine months ended September 30, 2011, the Company recorded a modest amount of favorable loss emergence within this reserve category primarily due to lower than expected claims reported within the agriculture business that is part of the surety and other specialty line of business.

The total reserves for losses and loss expenses recorded on the Company’s balance sheet were comprised of the following at September 30, 2012:

					Reserve for losses
	Case Reserves		IBNR Reserves		and loss expenses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	24,670	$	27,019	$	51,689
Long tail		401,257		1,313,644		1,714,901
Other		730,852		137,644		868,496
Total Insurance		1,156,779		1,478,307		2,635,086
Reinsurance:
Short tail		514,053		323,933		837,986
Long tail		305,309		705,218		1,010,527
Other		8,159		17,684		25,843
Total Reinsurance		827,521		1,046,835		1,874,356
Totals	$	1,984,300	$	2,525,142	$	4,509,442

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The total reserves for losses and loss expenses recorded on the Company’s balance sheet were comprised of the following at December 31, 2011:

					Reserve for losses
	Case Reserves		IBNR Reserves		and loss expenses
	(U.S. dollars in thousands)
Insurance:
Short tail	$	31,408	$	26,313	$	57,721
Long tail		404,377		1,219,844		1,624,221
Other		203,844		51,757		255,601
Total Insurance		639,629		1,297,914		1,937,543
Reinsurance:
Short tail		497,218		405,274		902,492
Long tail		284,619		694,788		979,407
Other		403		4,379		4,782
Total Reinsurance		782,240		1,104,441		1,886,681
Totals	$	1,421,869	$	2,402,355	$	3,824,224

Underwriting Results by Business 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. As a result, we report two business segments – Insurance and Reinsurance.

Management measures the Company’s results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company’s historic combined ratios may not be indicative of future underwriting performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by the business segments are allocated directly. Remaining general and administrative expenses not directly incurred by the business segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the business segment to which they apply.

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Insurance

The following table summarizes the underwriting results and associated ratios for the Company’s Insurance segment for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written	$	324,808		$	450,451		$	1,252,814		$	1,302,032
Ceded premiums written		(103,543	)		(147,241	)		(417,109	)		(393,020	)
Net premiums written		221,265			303,210			835,705			909,012
Net premiums earned		283,273			318,602			710,988			730,491
Other underwriting loss		(1,384	)		(2,875	)		(2,684	)		(2,875	)
		281,889			315,727			708,304			727,616
Expenses
Losses and loss expenses		288,750			260,206			610,956			550,438
Acquisition expenses		24,506			18,738			58,265			50,907
General and administrative expenses		29,409			29,328			96,663			102,361
		342,665			308,272			765,884			703,706
Underwriting (loss) income	$	(60,776	)	$	7,455		$	(57,580	)	$	23,910
Net loss ratio		101.9	%		81.7	%		85.9	%		75.3	%
Acquisition expense ratio		8.7	%		5.9	%		8.2	%		7.0	%
General and administrative expense ratio		10.4	%		9.2	%		13.6	%		14.0	%
Combined ratio		121.0	%		96.8	%		107.7	%		96.3	%

Premiums. Gross premiums written for the three and nine months ended September 30, 2012 in the Insurance segment decreased by 27.9% and 3.8% over the same periods in 2011, respectively. Gross and net premiums written for each line of business in the Insurance segment were as follows:

	Three Months Ended September 30,
	2012				2011
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Agriculture	$	171,826	$	106,180	$	289,656	$	185,017
Professional lines		43,209		34,804		39,559		30,812
Casualty		54,704		32,397		57,520		37,664
Property		18,900		13,595		30,049		17,681
Healthcare liability		34,076		32,196		33,652		32,021
Surety and other specialty		2,093		2,093		15		15
Total	$	324,808	$	221,265	$	450,451	$	303,210

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	Nine Months Ended September 30,
	2012				2011
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written			Net Premiums Written
	(U.S. dollars in thousands)
Agriculture	$	838,932	$	528,349	$	855,486		$	577,538
Professional lines		130,573		107,841		124,209			99,560
Casualty		160,619		102,409		159,580			107,234
Property		46,926		26,418		90,643			56,262
Healthcare liability		70,651		65,575		72,243			68,542
Surety and other specialty		5,113		5,113		(129	)		(124	)
Total	$	1,252,814	$	835,705	$	1,302,032		$	909,012

The decrease in the Insurance segment net premiums written for the three and nine months ended September 30, 2012 compared to the same periods in 2011 was driven by the following factors:

• Decreased premiums in the agriculture line of the Insurance segment where the impact of lower commodity prices was partially offset by growth in policy count; and

• A decline in premiums in the property line as the Company curtailed in the underwriting of several insurance products in order to reallocate capital to more profitable lines of business.

Net premiums earned by the Company in the Insurance segment decreased in both the three and nine months ended September 30, 2012 compared to the same periods in 2011. The decreases were primarily due to the decrease in net premiums written in the agriculture and property lines in 2012 compared to 2011.

Losses and Loss Expenses. The increases in the net loss ratios in the Company’s Insurance segment for the three and nine months ended September 30, 2012 compared to the same periods in 2011 was primarily driven by increased crop related losses experienced in the agriculture line which was impacted by the extreme drought conditions in the Midwest in the third quarter. The increases in the net loss ratios in the Company’s Insurance segment were partially offset by lower losses incurred in the property and professional lines, which experienced a lower incidence of attritional losses than in 2011. In addition, for the nine month period ended September 30, 2012, the increase in the net loss ratios reflected lower levels of favorable prior year reserve releases than in 2011.

During the first nine months of 2012, the Company’s previously estimated loss and loss expense reserves for the Insurance segment for prior accident years were reduced by $38.9 million, which decreased the net loss ratio by 5.5 percentage points, as compared to a reduction of $70.2 million, which decreased the net loss ratio by 9.6 percentage points, for the nine months ended September 30, 2011. The higher level of favorable loss development in the first nine months of 2011 compared to 2012 was primarily driven by the agriculture line of business. The higher development in the first nine months of 2011 resulted from the combination of strong performance in the agriculture line for the 2010 crop year and a delayed harvest that extended claims settlements until the first two quarters of 2011 compared to the 2011 crop year, which did not experience the same level of harvest delays or extension of claim settlements into the first half of 2012. Partially offsetting the lower level of net favorable development experienced in 2012 was less adverse loss reserve development related to the discontinued workers’ compensation business in the surety and other line compared to 2011.

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Acquisition Expenses.The Company’s acquisition expense ratios in the Insurance segment in the third quarter and first nine months of 2012 increased compared to the same periods in 2011. The change in the acquisition expense ratio over both periods was driven by the following factors:

• Higher commissions and the accelerated expensing of deferred commissions in the agriculture line of the Insurance segment due to the increased level of losses incurred during the period; and

• An increase in net earned premiums in the Company’s contract binding authority business, which carries higher commission rates, and a decline in net earned premiums in the Company’s excess casualty business written in Bermuda, which attracts relatively lower acquisition expenses, in the Company’s casualty line of business in the Insurance segment.

General and Administrative Expenses.The decrease in general and administrative expenses and expense ratios in the Insurance segment in the third quarter and first nine months of 2012 compared to the same periods in 2011 was a result of lower annual incentive expense as the actual payout of the Company’s 2011 annual incentive compensation was lower than previously accrued and higher third party commissions and expense reimbursement offsets.

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, 2012 and 2011.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written	$	296,447		$	250,415		$	1,034,166		$	902,116
Ceded premiums written		(3,632	)		(2,298	)		(28,322	)		(19,171	)
Net premiums written		292,815			248,117			1,005,844			882,945
Net premiums earned		268,599			242,891			771,859			700,413
Other underwriting income		37			734			1,021			753
		268,636			243,625			772,880			701,166
Expenses
Losses and loss expenses		118,773			196,485			405,231			670,076
Acquisition expenses		64,276			53,511			171,134			154,847
General and administrative expenses		23,306			29,246			84,702			88,060
		206,355			279,242			661,067			912,983
Underwriting income (loss)	$	62,281		$	(35,617	)	$	111,813		$	(211,817	)
Net loss ratio		44.2	%		81.0	%		52.4	%		95.6	%
Acquisition expense ratio		23.9	%		22.0	%		22.2	%		22.1	%
General and administrative expense ratio		8.7	%		12.0	%		11.0	%		12.6	%
Combined ratio		76.8	%		115.0	%		85.6	%		130.3	%

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Premiums. In the third quarter of 2012, net premiums written in the Reinsurance segment increased by 18.0% over the same period of 2011. In the nine months ended September 30, 2012, net premiums written in the Reinsurance segment increased by 13.9% over the same period in 2011. Gross and net premiums written for each line of business in the Reinsurance segment for the three and nine months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30,
	2012				2011
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Catastrophe	$	38,871	$	36,484	$	46,275	$	43,868
Casualty		77,781		77,781		56,293		56,292
Property		157,742		157,742		129,203		129,203
Aerospace and marine		9,914		9,914		5,891		6,002
Surety and other specialty		12,139		10,894		12,753		12,752
Total	$	296,447	$	292,815	$	250,415	$	248,117

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	Nine Months Ended September 30,
	2012				2011
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Catastrophe	$	354,275	$	329,067	$	330,771	$	314,328
Casualty		258,352		257,113		218,264		217,463
Property		318,514		318,521		251,475		251,475
Aerospace and marine		53,831		53,794		53,472		51,567
Surety and other specialty		49,194		47,349		48,134		48,112
Total	$	1,034,166	$	1,005,844	$	902,116	$	882,945

The movements in net premiums written in the Reinsurance segment for the third quarter and nine months ended September 30, 2012 compared to the same periods in 2011 were primarily due to the following factors:

• Increased catastrophe premiums as a result of improved pricing during the mid-year renewals in both the Asian and U.S. markets;

• Growth in the property line as a result of new premiums and growth in renewal premiums written by the Company’s U.S., Zurich and Singapore offices; and

• Growth in casualty premiums due to new business, renewal premiums and an increase in positive premium adjustments.

Net premiums earned by the Company in the Reinsurance segment for the three and nine months ended September 30, 2012 increased compared to the same period in 2011 due to the growth in gross premiums written in more recent periods.

Losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for the three and nine months ended September 30, 2012 decreased compared to the same periods in 2011 as a result of lower catastrophe losses incurred in the period. The Company recorded losses, net of reinstatement premiums and other loss sensitive accruals, of $13.2 million and $49.6 million in the quarter and nine months ended September 30, 2012 in relation to Hurricane Isaac, various U.S. tornado and storm losses and an Italian earthquake. The net losses from these events added 5.6 and 6.9 percentage points to the Reinsurance segment’s net loss ratio for the third quarter and nine months ended September 30, 2012, respectively. During the third quarter and nine months ended September 30, 2011, the Company incurred losses of $91.1 million and $347.2 million related to the Tohuko, Japan earthquake and tsunami, the Christchurch, New Zealand earthquake, Queensland, Australia floods, Midwest United States tornadoes and multiple storms in the Midwest which when accumulated triggered certain aggregate catastrophe contracts. The net losses from those events added 38.4 and 50.8 percentage points to the Reinsurance segment’s net loss ratio for the third quarter and nine months ended September 30, 2011, respectively.

The Company recorded $38.2 million and $53.2 million of favorable prior year loss reserve development in the three and nine months ended September 30, 2012 compared to $32.0 million and $67.7 million in the three and nine months ended September 30, 2011. During the three and nine months ended September 30, 2012, the majority of the favorable loss reserve development emanated from the short tail lines of business, as claims emergence in these lines was less than originally estimated by the Company.

Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance segment for the three months ended September 30, 2012 was higher than in the same period in 2011. The change in acquisition ratio for the three month period resulted primarily from the combination of new business, non-renewed contracts and the restructuring of certain business in the casualty line which produced a higher overall acquisition expense ratio. In the nine month period ended September 30, 2012, the acquisition ratio was comparable to the same period in 2011.

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General and Administrative Expenses. The general and administrative expense ratios in the Reinsurance segment for the three and nine months ended September 30, 2012 reduced compared to those in the same periods in 2011 due to modest growth in net premiums earned and lower annual incentive expense as the actual payout of the Company’s 2011 annual incentive compensation was lower than previously accrued.

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. Endurance Holdings relies primarily on dividends and other permitted distributions from its subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its ordinary shares, its 7.75% Non-Cumulative Preferred Shares, Series A (“Series A Preferred Shares”) and its 7.5% Non-Cumulative Preferred Shares, Series B (“Series B Preferred Shares”). There are restrictions on the payment of dividends by the Company’s operating subsidiaries to Endurance Holdings, which are described in more detail below.

Ability of Subsidiaries to Pay Dividends.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, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. As of September 30, 2012, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $501.8 million (December 31, 2011 – $605.6 million) without prior regulatory approval based upon the Bermuda insurance and corporate regulations. In 2011, Endurance Holdings loaned Endurance Bermuda $200.0 million, which remains outstanding and is callable on demand.

Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance and American Agri-Business is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2011, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends at September 30, 2012 without the prior approval of the applicable insurance regulator. At September 30, 2012, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.9 million without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.

Under the jurisdiction of the United Kingdom’s Financial Services Authority (“FSA”), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The FSA regulatory requirements impose no explicit restrictions on Endurance U.K.’s ability to pay a dividend, but Endurance U.K. would have to notify the FSA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At September 30, 2012, Endurance U.K. did not have profits available for distributions.

Cash and Invested Assets. The Company’s aggregate invested assets, including fixed maturity investments, short-term investments, equity securities, Other Investments, cash and cash equivalents and pending securities transactions, as of September 30, 2012 totaled $6.5 billion, which is consistent with the aggregate invested assets of $6.3 billion as of December 31, 2011.

The Company’s aggregate direct exposure to the indebtedness and equity securities of those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) was $222.2 million at September 30, 2012, compared to $239.8 million at December 31, 2011. On October 10, 2012, S&P downgraded the sovereign rating of Spain from “BBB+” to “BBB-”. The Company does not have any exposure to Spain and therefore this downgrade did not impact the Company’s exposure. The Company does not have any direct exposure to sovereign debt issued by Greece or Portugal.

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In addition to the direct exposures above, the Company has indirect exposure to sovereign and non-sovereign investments whose currency is the Euro or whose sovereign debt rating is below AAA through a hedge fund with a primary focus on European indebtedness, principally focused on benefitting from the declining value of European sovereign indebtedness. At September 30, 2012, the fair value of the Company’s investment in the hedge fund was in excess of the invested amount.

Cash Flows

	Nine Months Ended September 30,
	2012			2011
	(U.S. dollars in thousands)
Net cash provided by operating activities	$	211,449		$	337,499
Net cash used in investing activities		(146,600	)		(93,981	)
Net cash used in financing activities		(67,828	)		(225,764	)
Effect of exchange rate changes on cash and cash equivalents		7,841			(3,662	)
Net increase in cash and cash equivalents		4,862			14,092
Cash and cash equivalents, beginning of period		890,914			609,852
Cash and cash equivalents, end of period	$	895,776		$	623,944

In the nine months to September 30, 2012, the Company’s cash and cash equivalents increased $4.9 million to $895.8 million. In the nine months to September 30, 2011, cash and cash equivalents increased by $14.1 million to $623.9 million.

Cash flows provided by operating activities for the nine months ended September 30, 2012 were $211.4 million compared to cash flows provided by operating activities of $337.5 million for the nine months ended September 30, 2011. The decrease in cash flows provided by operating activities during 2012 was primarily due to decreased premium collections, offset by an increase in net income.

During the nine months ended September 30, 2012, cash flows used in investing activities were $146.6 million, compared to cash flows used in investing activities of $94.0 million for the same period in 2011. The Company actively manages its investment portfolio on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing of investment sales and purchases. The increase in cash flows used in investing activities in 2012 principally reflected increased purchases of Other Investments and an absence of positive cash flows from securities lending collateral received, partially offset by lower net purchases of available for sale investments compared to 2011.

Cash flows used in financing activities for the nine months ended September 30, 2012 were $67.8 million, compared to cash flows used in financing activities of $225.8 million for the same period in 2011. The cash flows used in financing activities in 2011 was higher than in 2012 principally due to the repurchases of common shares in 2011, offset by the issuance of Series B, non-cumulative preferred shares.

During the nine months ended September 30, 2012, the Company repurchased $1.0 million of its 6.15% Senior Notes due October 15, 2015. During the nine months ended September 30, 2011, the Company used its capital to repurchase its ordinary shares and share equivalents in open market and private transactions. On January 28, 2011, the Company repurchased 7,143,056 ordinary shares and options to purchase 10,000 ordinary shares from two affiliated funds of Perry Corp., a founding shareholder of the Company. The aggregate repurchase price for the shares and the options was $321.5 million. The ordinary shares acquired by the Company represented approximately 15% of its ordinary shares outstanding at December 31, 2010. Endurance Holdings funded the repurchase of these shares primarily from calling an outstanding loan between Endurance Holdings and Endurance Bermuda. Endurance Bermuda funded the settlement of the loan from its existing cash and investments. The repurchase did not impact the disclosed dividend payment capacity of Endurance Bermuda as of December 31, 2011.

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As of September 30, 2012 and December 31, 2011, the Company had pledged cash and cash equivalents and fixed maturity investments of $236.1 million and $171.4 million, respectively, in favor of certain ceding companies to collateralize obligations. As of September 30, 2012 and December 31, 2011, the Company had also pledged $341.0 million and $517.2 million of its cash and fixed maturity investments to meet collateral obligations for $300.0 million and $447.3 million in letters of credit outstanding under its credit facility, respectively. In addition, at September 30, 2012 and December 31, 2011, cash and fixed maturity investments with fair values of $350.5 million and $370.4 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of nil and $7.6 million were on deposit with Canadian regulators, respectively.

Credit Facility.On April 19, 2012 the Company and certain designated subsidiaries of the Company entered into a $700.0 million four-year revolving credit facility with JPMorgan Chase Bank, N.A. (“JPMorgan”) as administrative agent (“Credit Facility”). Upon entering into the Credit Facility, the Company terminated its existing $1,175.0 million amended and restated credit agreement dated May 8, 2007 with JPMorgan as administrative agent. As of September 30, 2012, there were no borrowings under the Credit Facility and letters of credit outstanding under the Credit Facility were $300.0 million.

The Credit Facility consists of two tranches: (i) a tranche 1 secured credit facility in an aggregate principal amount of $560.0 million (the “Tranche 1 Facility”), which is secured on a several basis by the respective entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas and (ii) a tranche 2 unsecured facility in an aggregate principal amount of $140.0 million (the “Tranche 2 Facility”). The proceeds of the Credit Facility may be used for general corporate purposes, to finance potential acquisitions and for the repurchase of the Company’s outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $350.0 million, provided that no participating lender is obligated to increase its commitments under the Credit Facility.

For letters of credit issued on a collateralized basis under the Tranche 1 Facility, the Company is required to pay a fee of 0.45% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis under the Tranche 2 Facility, the Company is required to pay a fee ranging from 1.125% to 1.750% over LIBOR on the daily stated amount of such letters of credit based upon the Company’s debt ratings as issued by Moody’s or Standard & Poor’s. The interest rate for revolving loans under the Tranche 2 Facility is (a) the highest of (i) 0.5% in excess of the federal funds effective rate, (ii) the prime rate as announced by JP Morgan and (iii) the Eurodollar rate applicable for an interest period of one month plus 1%, plus a margin ranging from 0.125% to 0.750% depending upon the type of loan and the Company’s ratings as issued by Moody’s and Standard & Poor’s or (b) LIBOR plus a margin ranging from 1.125% to 1.750%. In addition, the Credit Facility required the Company to pay to the lenders a commitment fee.

The 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 $1.8 billion at any time). In addition, each of the Company’s regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the Credit Facility restrict the declaration or payment of dividends if the Company is already in default or the payment or declaration would cause a default under the terms of the Credit Facility.

The Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the Credit Facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the Credit Facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the Credit Facility, the lenders can terminate their commitments under the 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 Credit Facility.

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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 maturity investments, 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 2012, absent the occurrence of additional significant loss events. In the event that paid losses accelerate beyond the ability to fund such payments from operating cash flows, the Company would use its cash balances available, liquidate a portion of its investment portfolio, access its existing credit facility, or arrange for additional financing. However, there can be no assurance that the Company will be successful in executing these strategies.

Currency and Foreign Exchange

The Company’s functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all operations 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, which is subject to the FSA’s rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.’s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience gains or losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company’s results of operations.

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

Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses included in 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. In addition, inflation could lead to higher interest rates causing the current unrealized gain position on the Company’s fixed maturity portfolio to decrease or become an unrealized loss position. The current short duration of the Company’s fixed maturity portfolio has the potential to help reduce the negative effects of higher interest rates on the Company’s fixed maturity portfolio. The Company may also choose to hold its fixed income investments to maturity which would result in the unrealized gains largely amortizing through net investment income.

Cautionary Statement Regarding Forward-Looking Statements

Some of the statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a “safe harbor” for forward-looking statements. These forward-looking statements reflect our current views with respect to us specifically and the insurance and reinsurance business generally, investments, capital markets and the general economic environments in which we operate. 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 PSLRA or otherwise.

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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, 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;

• greater frequency or severity of loss activity, as a result of changing climate conditions;

• changes in market conditions in the agriculture industry, which may vary depending upon demand for agricultural products, weather, commodity prices, natural disasters, technological advances in agricultural practices, changes in U.S. and foreign legislation and policies related to agricultural products and producers;

• termination of or changes in the terms of the U.S. multiple peril crop insurance program and termination or changes to the U.S. farm bill, including modifications to the Standard Reinsurance Agreement put in place by the Risk Management Agency of the U.S. Department of Agriculture;

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

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

• the inability to renew business previously underwritten or acquired;

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

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

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

• the ability of the counterparty institutions with which we conduct business to continue to meet their obligations to us;

• the failure or delay of the Florida Citizens Property Insurance Corporation, the Florida Hurricane Catastrophe Fund or private market participants in Florida to promptly pay claims, particularly following a large windstorm or of multiple smaller storms;

• our continued ability to comply with applicable financial standards and restrictive covenants, the breach of which could trigger significant collateral or prepayment obligations;

• Endurance Holdings or Endurance Bermuda becomes subject to income taxes in jurisdictions outside of Bermuda;

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

• state, federal and foreign regulations that impede our ability to charge adequate rates and efficiently allocate capital;

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• changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including the establishment of the Federal Insurance Office and other regulatory changes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the United States and the implementation of Solvency II by the European Commission;

• reduced acceptance of our existing or 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;

• actions by our competitors, many of which are larger or have greater financial resources than we do;

• 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 the political environment of certain countries in which we operate or underwrite business;

• changes in accounting regulation, policies or practices;

• our investment performance;

• the valuation of our invested assets and the determination of impairments of those assets, if any;

• the breach of our investment guidelines or the inability of those guidelines to mitigate investment risk;

• the possible further downgrade of U.S. or foreign government securities by credit rating agencies, and the resulting effect on the value of U.S. or foreign government and other securities in our investment portfolio as well as the uncertainty in the market generally;

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

• the ability to maintain the availability of our systems and safeguard the security of our data in the event of a disaster or other unanticipated event; 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 our 2011 Form 10-K, including the risk factors set forth in Item 1A thereof. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Information about Market Risk” included in the Company’s 2011 Form 10-K.

Item 4. Controls and Procedures

a) Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

(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 2011 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

							(d) Maximum Number
					(c) Total Number		(or Approximate Dollar
					of Shares		Value) of Shares
	(a) Total		(b) Average		Purchased as Part of		that May Yet Be
	Number of		Price Paid		Publicly Announced		Purchased Under the
	Shares  Purchased(1)		per Share		Plans or Programs(1) (2)		Plans or Programs(1) (2)
Period
July 1, 2012 – July 31, 2012		—	$	—		—		7,000,000
August 1, 2012 – August 31, 2012		—	$	—		—		7,000,000
September��1, 2012 – September 30, 2012		—	$	—		—		7,000,000
Total		—	$	—		—		7,000,000

⁽¹⁾  Ordinary shares or share equivalents.

⁽²⁾  At its meeting on November 9, 2011, the Board of Directors of the Company authorized the repurchase of up to a total of 7,000,000 ordinary shares and share equivalents through November 30, 2013, superseding all previous authorizations.

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Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

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

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
32	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as at September 30, 2012 (unaudited) and December 31, 2011; (ii) the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011; (iii) the Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2012 and 2011; (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011; and (v) the Notes to the Unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2012 and 2011.

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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 7, 2012	By:	/s/ David Cash
		David Cash
		Chief Executive Officer
Date: November 7, 2012	By:	/s/ Michael J. McGuire
		Michael J. McGuire
		Chief Financial Officer (Principal Financial Officer)

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