Endurance Specialty (ENH) 10-K/A 2008 FY Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

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

for the fiscal year ended December 31, 2008,

or

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

for the transition period from _____ to _____

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 Number)

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

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of Each Class	Name of Each Exchange on Which Registered
Ordinary Shares, par value $1.00 per share	New York Stock Exchange
Preferred Shares, Series A, par value $1.00 per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.

Yesþ Noo

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.

Yeso Noþ

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.

Yesþ Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):

Large accelerated filerþ Accelerated filero Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yeso Noþ

The aggregate market value of the ordinary shares held by non-affiliates of the registrant, as of June 30, 2008, was $1,590,943,501.

As of February 20, 2009, 57,480,879 ordinary shares were outstanding.

Certain portions of the registrant’s definitive proxy statement relating to its 2009 annual general meeting of shareholders are incorporated by reference into Part III of this report.

EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2008 of Endurance Specialty Holdings Ltd. (the “Company”), dated as of March 2, 2009 (the “Original Filing”) is being filed solely for the purpose of correcting the stated statutory capital and surplus and related dividend payment capacity of one of the Company’s principal operating subsidiaries referenced in Part II, Item 5. “Market for the Registrant’s Ordinary Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities —Dividends”, Part II, Item 7. “Managements’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”, Part II, Item 8. “Financial Statements and Supplementary Data — Note 18 Statutory requirements and dividend restrictions” and Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.” In addition, this Amendment No. 1 corrects several minor typographical errors in the Original Filing.

Except as described in this explanatory note, no other information in the Original Filing is being modified or amended by this Amendment No. 1. The Original Filing, as amended by this Amendment No. 1, continues to speak as of the date of the Original Filing and the Company has not updated the disclosure in this report to speak to any later date. The revisions to the Original Filing had no impact on the Company’s reported financial condition as of December 31, 2008 and 2007 or reported results of operations for each of the three years in the period ended December 31, 2008.

PART II

Item 5. Market for the Registrant’s Ordinary Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

Our ordinary shares are publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “ENH.” The following table sets forth, for the fiscal quarters and periods indicated, the high and low sale price per ordinary share as reported on the NYSE for the two most recent fiscal years:

	High		Low
2008
First quarter	$	42.29	$	36.26
Second quarter	$	38.85	$	30.79
Third quarter	$	36.00	$	26.73
Fourth quarter	$	31.53	$	20.00
2007
First quarter	$	36.68	$	33.35
Second quarter	$	41.22	$	35.08
Third quarter	$	41.99	$	36.94
Fourth quarter	$	43.20	$	37.60

Number of Holders of Ordinary Shares

The approximate number of record holders of our ordinary shares as of February 20, 2009 was 100, not including beneficial owners of shares registered in nominee or street name.

Dividends

We paid a quarterly dividend of $0.25 per ordinary share in each of the four quarters of 2008 and 2007. Our Board of Directors reviews our ordinary share dividend each quarter. Among the factors considered by the Board of Directors in determining the amount of each dividend are the results of operations and the capital requirements, growth and other characteristics of our businesses. The declaration and payment of future dividends is also subject to certain legal, regulatory and other restrictions.

Endurance Holdings is a holding company and has no direct operations. The ability of Endurance Holdings to pay dividends or distributions depends almost exclusively on the ability of its subsidiaries to pay dividends to Endurance Holdings. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or other distributions. As of December 31, 2008, the maximum amount of distributions that Endurance Bermuda could pay to Endurance Holdings under applicable insurance and Companies Act regulations without prior regulatory approval was approximately $339 million. During 2008, Endurance U.K. was precluded by regulatory restrictions from declaring or distributing dividends. Endurance U.K. is currently completing statutory income (loss) statements for the year ended December 31, 2008. The Company does not expect Endurance U.K. to have material dividend capacity in 2009. As of December 31, 2008, Endurance U.S. Reinsurance, Endurance American, and Endurance American Specialty did not have earned surplus and thus were precluded from dividend distributions in 2009 without prior regulatory approval. As of December 31, 2008, American Merchants and ARMtech (with notice to the Texas Department of Insurance) could pay $5.7 million and $3.5 million of dividends, respectively, without prior regulatory approval.

Our credit facilities prohibit Endurance Holdings from declaring or paying any dividends if a default or event of default has occurred and is continuing at the time of such declaration or payment or would result from such declaration or payment. In addition, the terms of our Series A Preferred Shares prohibit dividends from being declared or paid on ordinary shares unless the full dividends for the latest completed dividend period on all outstanding Series A Preferred Shares have been declared and paid.

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For a description of working capital restrictions and other limitations upon the payment of dividends, see “Item 1. Business — Regulatory Matters,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” “Item 8. Financial Statements and Supplementary Data” and Note 18 to the Company’s Audited Consolidated Financial Statements.

Recent Sales of Unregistered Securities

None.

Purchase of Equity Securities by Issuer and Affiliated Purchasers

ISSUER PURCHASES OF EQUITY SECURITIES

							(d) Maximum Number
					(c) Total Number		(or Approximate Dollar
	(a) Total				of Shares		Value) of Shares
	Number of		(b) Average		Purchased as Part of		that May Yet Be
	Shares		Price Paid		Publicly Announced		Purchased Under the
Period	Purchased(1)		per Share		Plans or Programs(1)(2)		Plans or Programs(1)(2)
October 1 – October 31, 2008		676,319	$	25.89		676,319		5,586,727
November 1 – November 30, 2008		21,405	$	29.92		21,405		5,565,322
December 1 – December 31, 2008		—		—		—		5,565,322
		697,724	$	26.01		697,724

(1)

Ordinary shares or share equivalents.

(2)

On May 9, 2007, the Company increased the number of shares authorized under its February 28, 2007 share repurchase program. On February 26, 2009, the Company extended the share repurchase program until May 13, 2011. Under this program, the Company may repurchase up to a total of 18,000,000 of its ordinary shares and share equivalents. The repurchases may be accomplished in open market or privately negotiated transactions, from time to time, depending on market conditions.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Annual Report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, 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 “Cautionary Statement Regarding Forward-Looking Statements” in this Annual Report on Form 10-K 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 this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Overview

Endurance Specialty Holdings Ltd. (“Endurance Holdings”) was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings has seven wholly-owned operating subsidiaries:

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

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

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

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

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

• American Merchants Casualty Company (“American Merchants”), domiciled in Delaware; and

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

Endurance Holdings and its wholly-owned subsidiaries are collectively referred to in this discussion and analysis as the “Company”.

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

In the Insurance segment, the Company writes property, casualty, agriculture, healthcare liability, workers’ compensation and professional lines insurance. In the Reinsurance segment, the Company writes casualty, property, catastrophe, agriculture, 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.

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Business and Accounting Factors

The Company’s results of operations are affected by the following business and accounting factors:

Revenues.The Company derives its revenues primarily from premiums from its insurance policies and reinsurance contracts. The premiums the Company charges for the risks assumed are priced based on many assumptions and are a function of the amount and type of policies and contracts the Company writes as well as prevailing market prices, and in the case of agricultural insurance contracts, federally mandated pricing. The Company prices these risks before its ultimate costs are known, which may extend many years into the future.

The Company’s revenues also include income generated from its investment portfolio. The Company’s investment portfolio is comprised of fixed maturity investments, short term investments and preferred equity securities that are held as available for sale. In accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), these investments are carried at fair market value and unrealized gains and losses on the Company’s investments are generally excluded from earnings. These unrealized gains and losses are included on the Company’s balance sheet in accumulated other comprehensive (loss) income as a separate component of shareholders’ equity. If unrealized losses are considered to be other-than-temporarily impaired, such losses are included in earnings as a realized loss.

Expenses.The Company’s expenses consist primarily of losses and loss expenses, acquisition expenses, interest expense, amortization of intangible assets and general and administrative expenses. Losses and loss expenses are estimated by management and reflect its best estimate of ultimate losses and loss adjustment costs arising during the current reporting period and revisions of prior period estimates. The Company records losses and loss expenses based on an actuarial analysis of the estimated losses the Company expects to be reported on policies and contracts written. The ultimate losses and loss expenses will depend on the actual costs to settle claims. Acquisition expenses consist principally of commissions and brokerage expenses that are typically a percentage of the premiums on insurance policies or reinsurance contracts written. General and administrative expenses consist primarily of personnel expenses and general operating expenses.

Marketplace Conditions and Trends.In general, at the end of 2008, we believe operating conditions continue to be competitive. In certain catastrophe-exposed classes of property business, we experienced a pricing environment that was flat to slightly upward; however, for the remaining insurance and reinsurance lines of property and casualty business we experienced downward pricing driven largely by relatively high levels of underwriting capacity and competition driven by distressed insurers. We continue to maintain our adherence to underwriting standards by declining business when pricing, terms and conditions did not meet our underwriting criteria.

In 2009, we believe the following two primary influences may affect the market for our insurance and reinsurance products — continuing unsettled and deteriorating global economic conditions and the financial condition of certain of our competitors. The United States and other markets around the world have been experiencing worsening economic conditions, including substantial and continuing disruptions to financial market and asset valuations. These dislocations in the investment markets have in turn eroded capital and surplus positions of many of our competitors, in places limiting their ability to compete effectively for business. We believe these two factors have and will continue to contribute to changes in market conditions within both the reinsurance and insurance market places.

At this time, the Company cannot predict with any reasonable certainty whether and to what extent current marketplace conditions and trends will persist in the future.

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Critical Accounting Estimates

The Company’s consolidated financial statements contain certain amounts that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values and related disclosures. Management considers an accounting estimate to be critical if:

• it requires assumptions to be made that were uncertain at the time the estimate was made; and

• changes in the estimate or different estimates that could have been selected could have a material impact on the Company’s consolidated results of operations or financial condition.

If factors such as those described in the “Risk Factors” section in this Annual Report on Form 10-K cause actual events or results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on the Company’s results of operations and financial condition and liquidity.

Management believes that the following critical accounting policies affect significant estimates used in the preparation of its consolidated financial statements.

Premiums.The Company’s insurance premiums are earned pro rata over the terms of the applicable risk period specified in the insurance policy. The Company’s insurance policies are written on a losses occurring or claims made basis during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will only adjust if the underlying insured basis adjusts. Accordingly, we monitor the underlying insured basis and record additional or return premiums in the period in which amounts are reasonably determinable. Insurance premiums written accounted for 63%, 42%, and 32% of the Company’s gross premiums written during the years ended December 31, 2008, 2007, and 2006, respectively.

The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the terms of the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Losses occurring reinsurance contracts accounted for approximately 19%, 32%, and 33% of the Company’s gross premiums written during the years ended December 31, 2008, 2007, and 2006, respectively. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24 month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period. Policies attaching reinsurance contracts accounted for approximately 18%, 26%, and 35% of the Company’s gross premiums written during the years ended December 31, 2008, 2007, and 2006, respectively.

In addition to determining the applicable risk period, the Company’s estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract’s written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Excess of loss reinsurance contracts accounted for approximately 23%, 31%, and 36% of the Company’s gross premiums written during the years ended December 31, 2008, 2007, and 2006, respectively. For proportional reinsurance contracts, the Company estimates premiums, commissions and related expenses based on broker and ceding company estimates. In addition to ceding company estimates, the Company also utilizes its judgment in establishing proportional reinsurance contract premium estimates after considering the following factors:

• the ceding company’s historical premium versus projected premium;

• the ceding company’s history of providing accurate estimates;

• anticipated changes in the marketplace and the ceding company’s competitive position therein;

• reported premiums to date; and

• correspondence and communication between the Company and its brokers, intermediaries and ceding companies.

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Proportional reinsurance contracts accounted for approximately 14%, 27%, and 32% of the Company’s gross premiums written during the years ended December 31, 2008, 2007, and 2006, respectively.

Premiums on the Company’s excess of loss and proportional reinsurance contracts are estimated by management at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the contracts incept. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustment to these estimates is recorded in the period in which it becomes known. The Company has not historically experienced material adjustments to its initial premium estimates for its excess of loss reinsurance contracts. For proportional contracts, as is customary in the reinsurance market, there is a time lag from the point when premium and related commission and expense activity is recorded by a ceding company to the point when such information is reported by the ceding company to the Company, either directly or through a reinsurance intermediary. This time lag can vary from one to several months or calendar quarters. In addition, uncertainty in premium estimates arises due to changes in renewal rates or rate of new business acceptances by the cedant insurance companies and changes in the rates being charged by cedants. Changes to original premium estimates for proportional contracts could be material and such adjustments may directly and significantly impact earnings in the period they are determined because the subject premium may be fully or substantially earned.

The Company’s limited historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 10%, although larger variations, both positive and negative, are possible as a result of changes in one or more of the premium assumptions as noted above. A 10% variation in the Company’s proportional premiums receivable, net as of December 31, 2008, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $2.0 million on the Company’s net income (loss).

The following summarizes the Company’s net proportional premium estimates within premiums receivable, net on the Company’s Audited Consolidated Balance Sheet as of December 31, 2008 and 2007:

									Surety and
									Other
Classes of Coverages	Casualty		Property		Agriculture		Aerospace		Specialty		Total
	(U.S. dollars in thousands)
As of December 31, 2008
Proportional premiums receivable, net	$	44,600	$	53,200	$	11,800	$	22,500	$	44,800	$	176,900
As of December 31, 2007
Proportional premiums receivable, net	$	48,500	$	52,500	$	105,600	$	24,700	$	43,200	$	274,500

A portion of the Company’s assumed proportional reinsurance agreements contain occurrence limitations or loss sensitive provisions, such as adjustable or sliding scale commissions, that may impact the ultimate amounts paid to or received from ceding companies based on loss experience. In some loss scenarios, these features would result in the ceding company’s results not being proportional to the Company’s results from the proportional agreement, and such differences may be meaningful. The Company evaluates these contracts on an individual basis in accordance with the provisions of Statement of Financial Accounting Standards No. 113 — ''Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts’’ (''SFAS No. 113’’).

For the year ended December 31, 2008, the Company entered into a small number of reinsurance contracts that did not fall within the criteria for reinsurance accounting under SFAS No. 113. The Company has accounted for these contracts by the deposit method of accounting specified by Statement of Position 98-7 — ''Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.’’ Consequently, these contracts were accounted for as contracts which either transfer only significant timing risk or transfer only significant underwriting risk. The determination of the appropriate method of accounting for these contracts requires significant judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses. Under the deposit method of accounting, revenues and expenses from reinsurance contracts are not recognized as written premium and incurred losses. Instead, income or loss associated with contracts determined to transfer only significant timing risk is recognized as a component of net other underwriting income (loss) over the estimated claim settlement period while income or loss associated with contracts determined to transfer only significant underwriting risk is recognized as net other underwriting income (loss) over the contract risk period.

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Although management has determined that accounting for these contracts as deposits is the most appropriate treatment, the Company considers the risk of loss resulting from any one of these contracts to be more than remote, and such loss could be material. For the years ended December 31, 2008, 2007, and 2006, the Company recorded deposit accounting adjustments to gross premiums written of $5.1 million, $28.6 million, and $159.0 million, respectively, associated with contracts not qualifying for reinsurance accounting treatment as noted above.

Reserve for Losses and Loss Expenses.The Company’s reserve for losses and loss expenses includes case reserves and reserves for losses incurred but not reported (referred to as “IBNR reserves”). Case reserves are established for losses that have been reported to us, but not yet paid. IBNR reserves represent the estimated ultimate cost of events or conditions that have not been reported to or specifically identified by the Company, but have occurred. Case reserves and IBNR reserves are established by management based on reports from reinsurance intermediaries, ceding companies and insureds and consultations with independent legal counsel. In addition, IBNR reserves are established by management based on reported losses and loss expenses and actuarially determined estimates of ultimate losses and loss expenses.

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

The Company’s loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company’s financial condition for any particular period. While we believe that we have made a reasonable estimate of loss and loss expense reserves, the ultimate loss experience may not be as reliably predicted as may be the case with other insurance and reinsurance operations, and it is possible that losses and loss expenses will be higher or lower than the total reserve for losses and loss expenses recorded by the Company.

Information Used in Determining the Reserve for Losses and Loss Expenses.In order to estimate the Company’s reserve for losses and loss expenses, management uses information either developed from internal or independent external sources, or pricing information created by the Company or provided to the Company by insureds and brokers at the time individual contracts and policies are bound. In addition, we use commercially available risk analysis models, contract by contract review by our underwriting teams and, to a limited extent, overall market share assumptions to estimate our loss and loss expense reserves related to specific loss events.

Actuarial Methods Used to Estimate Loss and Loss Expense Reserves.When the applicable information has been obtained, the Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company in connection with business it has underwritten and thus, the applicable reserve for losses and loss expenses. One actuarial method used by the Company to estimate its reserve for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). Another actuarial method used by the Company is known as the Bornhuetter-Ferguson method. The Bornhuetter-Ferguson method uses an initial loss estimate (expected loss technique) for each underwriting quarter by business line and type of contract. The portion of the initial loss estimate that is the IBNR reserve is then reduced in each subsequent quarter by the losses reported for that business segment during that quarter. Over time, the IBNR reserve will be reduced and will be replaced with the actual losses reported to the Company or, if losses do not develop as expected, reserves for those losses are reduced with the amounts by which reserves are reduced then reflected in net income (loss). Management uses these multiple actuarial methods, supplemented with its own professional judgment, to establish its best estimate of reserves for losses and loss expenses.

The information gathered by the Company and the actuarial analyses performed on the gathered information is used to develop individual point estimates of carried loss and loss expense reserves for each of the Company’s business segments and underlying lines of business. These individual point estimates are then aggregated along with actual losses reported to reach the total reserve for losses and loss expenses carried in the Company’s consolidated financial statements. All of the Company’s loss reserving is currently performed on a point estimate basis. The Company does not utilize range estimation in its loss reserving process.

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Since inception, the Company has used reserving methods that are commonly applied when limited loss development experience exists. 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. As the Company has accumulated its own loss reserve history, it has determined it is more appropriate to incorporate the Company’s actual loss experience. As of 2006, the Company determined that its own loss development history in relation to its short tail and other lines of business had reached a level of maturity sufficient to provide a credible basis on which to estimate its reserve for losses and loss expenses related to these lines of buinsess. As such, the Company’s actual reporting patterns were considered when determining the reserve for losses and loss expenses in the short tail and other lines of business in its Reinsurance and Insurance segments for the year ended December 31, 2008. The Company continues to utilize industry loss and development patterns in the establishment of loss and loss expense reserves for its long tail and certain other lines of business in both its Insurance and Reinsurance segments.

Significant Assumptions Employed in the Estimation of Loss and Loss Expense Reserves.The most significant assumptions used as of December 31, 2008 to estimate the reserve for losses and loss expenses within the Company’s Insurance and Reinsurance segments are as follows:

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

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

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

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

The above four assumptions most significantly influence the Company’s determination of initial expected loss ratios and expected loss reporting patterns that are the key inputs which impact potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company’s business segments. While there can be no assurance that any of the above assumptions will prove to be correct, we believe that these assumptions represent a realistic and appropriate basis for estimating the reserve for losses and loss expenses.

Factors Creating Uncertainty in the Estimation of the Reserve for Losses and Loss Expenses. While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for losses and loss expenses, certain of the Company’s business lines are by their nature subject to additional uncertainties, including the Company’s casualty, property, catastrophe, aerospace and surety and other specialty lines in the Reinsurance segment and the Company’s casualty and professional lines in the Insurance segment, which are discussed in detail below. In addition, the Company’s Reinsurance segment is subject to additional factors which add to the uncertainty of estimating loss and loss expense reserves. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating loss and loss expense reserves.

The aspects of the Company’s casualty line in the Reinsurance segment and the casualty and professional lines in the Insurance segment that complicate the process of estimating loss reseves include the lack of long-term historical data for losses of the same type intended to be covered by the policies and contracts written by the Company and the expectation that a portion of losses in excess of the Company’s attachment levels in many of its contracts will be low in frequency and high in severity, limiting the usefulness of claims experience of other insurers and reinsurers for similar claims. In addition, the portion of the Company’s casualty line in its Insurance segment which is underwritten in Bermuda includes policy forms that vary from more traditional policy forms. The primary difference in the casualty policy form used by Endurance Bermuda from more traditional policy forms relates to the coverage being provided on an occurrence reported basis instead of the typical occurrence or claims-made basis used in traditional policy forms. The occurrence reported policy forms typically cover occurrences causing unexpected and unintended personal injury or property damage to third parties arising from events or conditions that commence at or subsequent to an inception date, and prior to the expiration of the policy provided that proper notice is given during the term of the policy or the discovery period.

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The inherent uncertainty of estimating the Company’s loss and loss expense reserves for its Reinsurance segment increases principally due to:

(i)	the lag in time between the time claims are reported to the ceding company and the time they are reported through one or more reinsurance broker intermediaries to the Company,
(ii)	the differing reserving practices among ceding companies,
(iii)	the diversity of loss development patterns among different types of reinsurance treaties or contracts, and
(iv)	the Company’s need to rely on its ceding companies for loss information.

In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company’s underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews of the Company’s ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserve. On occasion, these reviews reveal that the ceding company’s reported losses and loss expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company’s policy is to vigorously defend its position in litigation or arbitration. As of December 31, 2008, the Company was not involved in any material claims litigation or arbitration proceedings.

Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and loss expense reserve estimates. As of December 31, 2008, there were no significant backlogs related to the processing of policy or contract information in the Company’s Insurance or Reinsurance segments.

The Company assumes in its loss and loss expense reserving process that, on average, the time periods between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time. The time period over which all losses are expected to be reported to the Company varies significantly by line of business. This period can range from a few quarters for some lines, such as catastrophe, to many years for some casualty lines of business. For the Company’s Reinsurance business segment, due to ceding company and reinsurance intermediary reporting frequency, the time period is generally longer than for its Insurance segment, resulting in a reliance by the Company for a longer period of time on its actuarial estimates of loss and loss expense reserves. To the extent that actual reported losses are reported more quickly than expected, the Company may adjust upward its estimate of ultimate loss and to the extent that actual reported losses are reported more slowly than expected, the Company may reduce its estimate of ultimate loss.

Potential Volatility in the Reserve for Losses and Loss Expenses.In addition to the factors creating uncertainty in the Company’s estimate of loss and loss expense reserves, the Company’s estimated reserve for losses and loss expenses can change over time because of unexpected changes in the external environment. Potential changing external factors include:

• changes in the inflation rate for goods and services related to the covered damages;

• changes in the general economic environment that could cause unanticipated changes in claim frequency or severity;

• changes in the litigation environment regarding the representation of plaintiffs and potential plaintiffs;

• changes in the judicial and/or arbitration environment regarding the interpretation of policy and contract provisions relating to the determination of coverage and/or the amount of damages awarded for certain types of claims;

• changes in the social environment regarding the general attitude of juries in the determination of liability and damages;

• changes in the legislative environment regarding the definition of damages;

• new types of injuries caused by new types of injurious activities or exposures; and

• in the case of assumed reinsurance, changes in ceding company case reserving and reporting patterns.

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The Company’s estimates of reserves for losses and loss expenses can also change over time because of changes in internal company operations, such as:

• alterations in claims handling procedures;

• growth in new lines of business where exposure and loss development patterns are not well established; or

• changes in the quality of risk selection or pricing in the underwriting process.

Due to the inherent complexity of the assumptions used in establishing the Company’s loss and loss expense reserve estimates, final claim settlements made by the Company may vary significantly from the present estimates, particularly when those settlements may not occur until well into the future. For an illustration of the effect of a 10% change in the Company’s two key inputs used in determining its loss and loss expense reserves - the expected loss ratio and the expected loss reporting pattern — please see “Reserve for Losses and Loss Expenses” below.

Investments.The Company currently classifies all of its fixed income investments, which consist of fixed maturity investments, short term investments and preferred equity securities, as “available for sale” and, accordingly, they are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive (loss) income. The Company determines the fair value of its fixed income investments in accordance with Statement of Financial Accounting Standards (“SFAS No. 157”), 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 use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. SFAS No. 157 establishes three levels as follows:

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 Quoted prices for similar assets in markets that are active, quoted prices for identical or similar assets in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. The adoption of SFAS No. 157 by the Company did not materially change the Company’s valuation of its available for sale investments. For further discussion of SFAS No. 157, see Note 4 of the notes to the audited consolidated financial statements contained herein.

The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed income investments. The Company obtains multiple prices for its securities where available. Pricing sources used by management in pricing the Company’s fixed income investments at December 31, 2008 were as follows:

Pricing services	19.6	%
Index providers	60.1	%
Broker/dealers	20.3	%

Pricing Services.Pricing services, including index providers, provide pricing for less-complex, liquid securities based on market quotations in active markets. For securities that do not trade on a listed exchange, these pricing services may use a matrix pricing consisting of observable market inputs to estimate the fair value of a security. These observable market inputs include: reported trades, benchmark yields, broker/dealer quotes, issuer spreads, tow-side markets, benchmark securities, bids, offers, reference data, and industry and economic factors. Additionally, pricing services may use a valuation model such as an option adjusted spread model commonly used for estimating fair values of mortgage-backed and asset-backed securities. At December 31, 2008, the Company has not adjusted any pricing provided by independent pricing services and index providers and have classified all such securities as Level 2.

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Broker/Dealers.Generally, the Company obtains quotes directly from broker/dealers who are active in the corresponding markets when prices are unavailable from independent pricing services or index providers. Broker/dealer quotes may also be used if the pricing from pricing services or index providers is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities. Quotes from broker/dealers are all non-binding. At December 31, 2008, the Company has not adjusted any pricing provided by broker/dealers and has classified all such securities as Level 2.

As described above, independent pricing services, index providers and broker/dealers have their own proprietary method for determining the fair value of securities. As such, prices provided by independent pricing services, index providers and independent broker quotes can vary widely, even for the same security, and have a material effect on the estimated fair values of the Company’s securities. To validate the techniques or models used by pricing sources, the Company’s review process includes, but is not limited to:

(i)	quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated);
(ii)	initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and
(iii)	comparing the fair value estimates to its knowledge of the current market.

Based on the above review, the Company will challenge any prices for a security or portfolio, which are considered not to be representative of fair value.

The Company’s available for sale investments are comprised of a variety of different securities, which are leveled based on the valuation technique and inputs used in their valuation. The valuation of current issue U.S. government securities are generally based on Level 1 inputs, which use the market approach valuation technique. The valuation of the Company’s other available for sale investments, including non-current U.S. government treasury securities, corporate debt, U.S. agency and non-agency mortgage-backed securities, asset-backed securities, short term investments and preferred equity securities generally incorporate significant Level 2 inputs using the market and income approach techniques.

For mortgage-backed and other asset-backed debt securities, fair value includes estimates regarding prepayment assumptions, which are based on current market conditions. Amortized cost in relation to these securities is calculated using a constant effective yield based on anticipated prepayments and the estimated economic life of the security. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date. Changes in estimated yield are recorded on a retrospective basis, resulting in future cash flows determining current book value.

In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and Financial Statement of Position 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” the Company periodically reviews its fixed income investments, to determine whether a decline in the fair value below the amortized cost basis is other-than-temporary. The Company considers a fixed income investment to be a candidate for further analysis if it meets any of the following thresholds or criteria:

• the fixed income investment trades at a 5% or greater discount to amortized cost for 12 consecutive months or longer;

• the fixed income investment trades at a 15% or greater discount to amortized cost for any length of time;

• the issuer of the fixed income investment defaults on a material outstanding obligation;

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• the issuer of the fixed income investment becomes subject to bankruptcy laws or any similar laws intended for court supervised reorganization of insolvent enterprises;

• the issuer of the fixed income investment proposes a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or

• in the judgment of management, the Company will not be able to realize a full recovery on the fixed income investment.

In the event one or more of the foregoing thresholds or criteria has been met, management conducts a further review of the fixed income investment to determine if it should be classified as other-than-temporarily impaired. This review is based upon the judgment of management, and involves the consideration of several factors including the following:

• the time period in which there has been a significant decline in value;

• the expected maturity of the investment;

• the significance of the decline;

• an analysis of the liquidity, business prospects and overall financial condition of the issuer/sector; and

• the Company’s intent and ability to hold the investment for a time period sufficient for the value to recover.

If such a decline in the fair value is judged to be other-than-temporary, the Company writes down the investment to fair value, thereby establishing a new cost basis. The amount of the write-down is charged to income as a realized loss. The new cost basis is not changed for subsequent recoveries in fair value. In light of the significant market volatility and lack of liquidity, the number of fixed income investments that have met the thresholds described above and become candidates for further other-than-temporary impairment analysis has increased. Although the Company has maintained its analysis thresholds, management has seen an increase in the number of instances in which subjective management judgment must be utilized in assessing other-than-temporary impairments.

Other investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. The carrying amounts of these investments are increased or decreased to reflect the Company’s share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by the managers of certain of our alternative funds, our investments in those alternative funds are estimated based on the most recently available information including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements. Prior to the second quarter of 2008, all of our investments in alternative funds were reported on a one-month lag.

Deferred Tax Assets.We provide for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” and Financial Interpretation No. 48, “Accounting for Uncertain Tax Positions” for Endurance Reinsurance, Endurance American, Endurance American Specialty, American Merchants, ARMtech and Endurance U.K., which are our subsidiaries operating in income tax paying jurisdictions. Our deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our Audited Consolidated Financial Statements and the tax basis of our assets and liabilities. We determine deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax asset will not be realized. The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction and available tax planning strategies. Estimates of future taxable income incorporate several assumptions that may differ from actual experience. Differences in our assumptions and resulting estimates could be material and have an adverse impact on our financial results of operations and liquidity. Any such differences are recorded in the period in which they become known.

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Reclassifications.Certain comparative information has been reclassified to conform to current year presentation.

Recent Accounting Pronouncements. See note 2(q), “Summary of Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes accompanying our audited consolidated financial statements.

Results of Operations

Years Ended December 31, 2008, 2007 and 2006

The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2008, 2007 and 2006.

	2008			2007			2006
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	2,246,420		$	1,781,115		$	1,789,642
Ceded premiums written		(462,130	)		(206,140	)		(204,078	)
Net premiums written		1,784,290			1,574,975			1,585,564
Net premiums earned		1,766,485			1,594,800			1,638,574
Net investment income		130,176			281,276			257,449
Net realized investment losses		(57,366	)		(18,302	)		(20,342	)
Other underwriting (loss) income		(3,973	)		1,602			1,390
Total revenues	$	1,835,322		$	1,859,376		$	1,877,071
Expenses
Net losses and loss expenses	$	1,135,431		$	749,081		$	827,630
Acquisition expenses		299,913			307,576			317,489
General and administrative expenses		216,365			217,269			190,373
Amortization of intangibles		10,675			5,286			4,600
Net foreign exchange losses (gains)		53,704			7,970			(21,021	)
Interest expense		30,171			30,125			30,041
Income tax (benefit) expense		(9,561	)		20,962			29,833
Total expenses	$	1,736,698		$	1,338,269		$	1,378,945
Net income	$	98,624		$	521,107		$	498,126
Ratios
Net loss ratio		64.3	%		47.0	%		50.5	%
Acquisition expense ratio		17.0	%		19.3	%		19.4	%
General and administrative expense ratio		12.2	%		13.6	%		11.6	%
Combined ratio		93.5	%		79.9	%		81.5	%

Premiums

Gross premiums written increased in 2008 compared to 2007 primarily due to growth in the Company’s Insurance segment driven by increases in the agriculture line from premiums written by ARMtech, which was acquired at the end of 2007. Partially offsetting this increase was a decline in gross premiums written in the Reinsurance segment due to a variety of factors, including the Company’s non-renewal of business which did not meet its underwriting requirements, rate reductions, increased client retentions and the absence of positive premium adjustments. Gross premiums written decreased slightly in 2007 compared to 2006 primarily due to declines in the Company’s Reinsurance segment partially offset by growth in the Company’s Insurance segment.

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Ceded premiums written increased in 2008 from 2007 and 2006 with the continued expansion of the Company’s Insurance segment. The increases in premiums ceded in 2008 primarily related to the Insurance segment’s agriculture line which cedes significant premiums to the U.S. government through a federally sponsored crop reinsurance program.

Net premiums earned increased in 2008 compared to 2007 due to growth in net premiums written by the Insurance segment. Net premiums earned declined in 2007 compared to 2006 consistent with declines in premiums written year over year.

The following table provides the distribution of gross premiums written by the geographic location in which the risk originated for the years ended December 31, 2008, 2007 and 2006:

	2008			2007			2006
	(U.S. dollars in thousands)
United States	$	1,769,437		$	1,273,432		$	1,217,321
Worldwide		276,957			301,650			462,731
Europe		142,061			160,786			186,704
Japan		17,839			18,110			19,505
Canada		15,555			14,152			15,087
Other		29,662			41,540			47,286
Deposit Accounting(1)		(5,091	)		(28,555	)		(158,992	)
Total gross premiums written	$	2,246,420		$	1,781,115		$	1,789,642

⁽¹⁾ Reconciles the Company’s gross premiums written to the Company’s financial statement presentation.

Net Investment Income

Net investment income decreased in 2008 compared to 2007 and 2006 principally due to net mark to market losses on alternative investments and high yield loan funds, included in other investments, of $111.6 million as compared to a gain of $21.3 million in 2007 and a gain of $29.1 million in 2006. Cash and cash equivalents and investments have decreased 4.1% from 2007 and 2.8% from 2006. The decrease in cash and cash equivalents and investments during 2008 resulted from declines in market valuations of investments and share repurchases, partially offset by positive net operating cash flows throughout 2008. Investment expenses, including investment management fees, for 2008 were $10.3 million compared to $9.5 million in 2007, and compared to $8.2 million in 2006. The increase in investment expenses was as a result of a shift in the composition of the investment portfolio during 2008 and increased monitoring activity conducted throughout the year.

The annualized net earned yield, total return of the investment portfolio for the years ended December 31, 2008, 2007 and 2006 and market yield and portfolio duration as of December 31, 2008 and 2007 were as follows:

	2008			2007			2006
Annualized net earned yield(1)		2.35	%		5.06	%		4.88	%
Total return on investment portfolio(2)		-3.40	%		6.57	%		5.58	%
Market yield(3)		5.14	%		5.03	%		5.33	%
Portfolio duration(4)		2.28			2.87			2.55

(1)	The actual net earned income from the investment portfolio after adjusting for expenses and accretion and amortization from the purchase price divided by the average book value of assets.
(2)	Includes realized and unrealized gains and losses.
(3)	The internal rate of return of the security based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) with its projected cash flows. Includes only cash and cash equivalents and fixed income securities held by the Company’s investment managers.
(4)	Includes only cash and cash equivalents and fixed income securities held by the Company’s investment managers.

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During 2008, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 250 basis points range, with a high of 3.76% and a low of 1.26%. Investment grade corporate and agency structured security spreads widened approximately 401 and 38 basis points, respectively, during the year ended December 31, 2008. Trading activity in the Company’s portfolio was aimed at reducing risk by increasing the allocation to cash and short term securities and government bonds, reducing exposure to mortgages and asset-backed securities and corporate bonds while emphasizing credit protection in structured securities. The duration of the fixed income portfolio at December 31, 2008 has decreased compared to December 31, 2007 primarily due to the sale of longer duration government bonds, asset-backed securities, mortgage-backed securities and corporates and subsequent reinvestment in short duration government securities and cash and cash equivalents.

Net Realized Investment Gains (Losses)

Our investment portfolio is managed to generate attractive economic returns and income while providing the Company with liquidity. Movements in financial markets and interest rates influence the timing and recognition of net realized investment gains or losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale for the year ended December 31, 2008 were $3,142.8 million compared to $3,112.8 million for the year ended December 31, 2007. Realized investment gains or losses for the years ended December 31, 2008, 2007 and 2006 were as follows:

	2008			2007			2006
	(U.S. dollars in thousands)
Gross realized gains	$	48,511		$	11,658		$	5,829
Gross realized losses excluding other-than-temporary impairments		(23,742	)		(12,630	)		(12,807	)
Other-than-temporary impairment losses		(82,135	)		(17,330	)		(13,364	)
Net realized investment losses	$	(57,366	)	$	(18,302	)	$	(20,342	)

During 2008, 2007 and 2006, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The Company considered how long the securities had been in a loss position, the expected maturity of the investments, the significance of the decline, the financial condition of the issuer, on the security’s structure and ability to continue to pay interest and return principal upon maturity or via prepayments and the Company’s intent and ability to hold such investments for a period of time sufficient for the recovery of value. For a more detailed description of the Company’s investment accounting policy, see “Application of Critical Accounting Estimates — Investments “ above. As a result of each review, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The unrealized loss position of these securities was principally a result of credit spread widening and deterioration of global economic conditions. Consequently, the book value of such securities was written down to fair value, and the Company recognized a realized loss on these securities.

As of December 31, 2008, the Company continued to maintain an investment portfolio with an average credit rating of AAA. The Company’s investment portfolio consists of both mortgage-backed and asset-backed securities, which comprised 43.7% of total invested assets, including pending securities transactions, fixed income investments, short term investments, preferred equity securities, cash and cash equivalents and other investments, at December 31, 2008. The Company, along with its investment managers, monitors the nature and type of assets underlying these types of securities. At December 31, 2008, the Company’s portfolio held no sub-prime mortgage exposure and the Company’s Alt-A exposure represented 2% of the Company’s fixed income investments. Of the Company’s Alt-A exposure, 84.7% are fixed rate securities. There were no significant changes to the credit ratings of the Company’s securities in 2008. However, the Company has experienced material downgrades of securities within its fixed income portfolio in early 2009 and may experience further write downs throughout 2009.

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Net Foreign Exchange Losses

During 2008, the Company revalued its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange losses of $53.7 million compared to $8.0 million for 2007 and gains of $21.0 million for 2006. The current year net foreign exchange losses resulted from the strengthening of the U.S. dollar and weakening of the U.K. Pound Sterling compared to other currencies during 2008. The Company had offsetting net unrealized foreign exchange gains of $54.8 million (2007 — $10.8 million, 2006 — losses of $12.2 million) from the revaluation of its foreign currency invested assets included in the change in net unrealized holding (losses) gains on investments within other comprehensive (loss) income.

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 2008, the Company’s net loss ratio was adversely impacted by losses from Hurricanes Gustav and Ike compared to 2007 and 2006, which benefited from the absence of major catastrophes. The Company recorded losses, net of reinstatement premiums, related to Hurricanes Gustav and Ike during 2008 of $148.0 million primarily in the Reinsurance segment. Losses from Hurricanes Gustav and Ike added 8.9 percentage points to the Company’s net loss ratio for 2008. In addition, decreased commodity prices for certain agriculture products, severe weather and worse than expected growing conditions for major crops in the U.S. adversely impacted the agriculture line of the Insurance segment.

Partially offsetting the adverse impact of the hurricanes in 2008 was loss emergence related to prior accident years that was lower than expected, resulting in the reserves held by the Company for those accident years being moderately redundant. During 2008, 2007 and 2006, the Company’s previously estimated ultimate losses for prior accident years were reduced by $156.5 million, $159.4 million and $57.7 million, respectively. The overall net reduction in the Company’s estimated losses for prior accident years experienced in 2008 was primarily in the Company’s short tail, long tail and other lines of both the Insurance and Reinsurance segments.

The Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are the only valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company’s consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. As a result of the incorporation of the Company’s own loss reporting patterns and loss history related to its short tail business, including catastrophe reinsurance and property insurance and reinsurance business lines, the Company would expect its prior year loss reserve development and adjustments for short tail business to be less than recorded in prior years. 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 decrease in the acquisition expense ratio for 2008 compared to 2007 and 2006 was due to the increase in Insurance segment agriculture premiums written, which typically have lower acquisition costs.

General and Administrative Expenses

The Company’s general and administrative expense ratio for 2008 decreased as compared to 2007 and increased from 2006. The decrease in the general and administrative expense ratio for 2008 as compared to 2007 principally resulted from more premiums earned in the Insurance segments’ agriculture line, which benefits from third party expense reimbursements. At December 31, 2008, the Company had a total of 781 employees as compared to 709 employees at December 31, 2007 and 481 employees at December 31, 2006.

Net Income

The Company produced net income of $98.6 million in 2008 compared to $521.1 million in 2007 and $498.1 million in 2006. The decrease in net income for 2008 compared to 2007 and 2006 was primarily due to losses and loss expenses recorded for Hurricanes Gustav and Ike, a decline in net investment income from mark to market reductions in the value of the Company’s alternative investments and high yield loan funds, increased realized losses from investments and higher foreign exchange losses.

Underwriting Results by Business Segment

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.

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

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

Insurance

The following table summarizes the underwriting results and associated ratios for the Company’s Insurance segment for the years ended December 31, 2008, 2007 and 2006.

	2008			2007			2006
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	1,426,366		$	741,556		$	576,745
Ceded premiums written		(445,768	)		(189,586	)		(160,108	)
Net premiums written		980,598			551,970			416,637
Net premiums earned		920,389			502,082			371,762
Expenses
Net losses and loss expenses		681,735			290,213			252,310
Acquisition expenses		103,783			72,044			32,528
General and administrative expenses		103,211			89,996			49,524
		888,729			452,253			334,362
Underwriting income	$	31,660		$	49,829		$	37,400
Ratios
Net loss ratio		74.1	%		57.8	%		67.9	%
Acquisition expense ratio		11.3	%		14.4	%		8.7	%
General and administrative expense ratio		11.2	%		17.9	%		13.3	%
Combined ratio		96.6	%		90.1	%		89.9	%

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Premiums.Net premiums written in the Insurance segment increased in 2008 by 77.7% over 2007 and 135.4% over 2006 net premiums written. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2008, 2007 and 2006 were as follows:

	2008				2007				2006
	Gross		Net		Gross		Net		Gross		Net
	Premiums		Premiums		Premiums		Premiums		Premiums		Premiums
	Written		Written		Written		Written		Written		Written
	(U.S. dollars in thousands)
Property	$	159,408	$	98,012	$	134,161	$	47,905	$	173,292	$	61,290
Casualty		120,867		86,610		125,124		77,188		128,933		89,817
Healthcare Liability		80,692		80,002		92,361		92,361		106,988		106,988
Workers’ Compensation		232,828		215,848		262,228		238,369		93,779		86,867
Agriculture		690,318		380,699		42,242		21,115		—		—
Professional Lines		142,253		119,427		85,440		75,032		73,753		71,675
Total	$	1,426,366	$	980,598	$	741,556	$	551,970	$	576,745	$	416,637

The increase in the Insurance segment net premiums written in 2008 compared to 2007, and 2007 compared to 2006 was largely driven by the addition of $359.6 million and $21.1 million, respectively of net agricultural premiums written by ARMtech, which was acquired in the fourth quarter of 2007. In addition, compared to 2007 and 2006, the Company wrote and retained more professional lines premiums from new business written by the Company’s U.S. insurance operations in 2008. The Company also experienced growth in the property line for 2008 compared to 2007. Growth in the Insurance segment net premiums written in 2008 was partially offset by declines in premiums of $22.5 million related the Company’s worker’s compensation line of business. Partially offsetting the growth in the Insurance segment net premiums written was a decline in the healthcare liability line of business for 2008 as compared to 2007 and 2006. Based on current pricing considerations and increased competition, the Company expects to cease underwriting new business in its workers compensation line as of February 2009. In addition, as of February 2009, the Company entered into a renewal rights transaction for the sale of the property insurance previously operated from Endurance U.K. For the full year of 2008, this line generated $38.7 million of net premiums written that will no longer be written by the Company.

Ceded premiums written by the Company in the Insurance segment increased in 2008 compared to 2007 and 2006 because of increased cessions to third party reinsurers associated with increased gross premiums written, principally in the agriculture line of business. The majority of premiums ceded by the agriculture line of business were to the U.S. government through a federally sponsored crop reinsurance program.

Net premiums earned by the Company in the Insurance segment in 2008 increased compared to 2007 and 2006 due to the increase in agriculture premiums written during 2008 as a result of the acquisition of ARMtech at the end of 2007.

Net Losses and Loss Expenses.The net loss ratio in the Company’s Insurance segment in 2008 compared to 2007 and 2006 reflected losses recorded in relation to the Company’s agriculture line. The Company’s agriculture line was adversely impacted by significant declines in commodity prices for certain agricultural products and severe weather that led to worse than expected growing conditions for major crops in the U.S. during 2008. In general, the Company expects higher levels of attritional losses in the agriculture line compared to other lines of business, resulting in higher initial expected loss ratios as the agriculture line contributes a greater amount of premiums to the Insurance segment.

Partially offsetting the impact of the losses in the agriculture line was favorable prior year loss reserve development recorded for 2008. Prior year loss reserves were reduced in 2008 by $71.0 million as compared to reductions of $80.4 million and $54.4 million for the years ended December 31, 2007 and 2006. Of the lines of business in the Company’s Insurance segment, both the short tail property, long tail healthcare liability and other agriculture lines experienced net reductions in the Company’s estimated losses for prior accident years in 2008 as claims have not materialized as originally estimated by the company. In addition, the Company recorded favorable loss emergence on its agriculture line.

Acquisition Expenses.The Company’s acquisition expense ratio in the Insurance segment decreased in 2008 as compared to 2007 primarily due to increases in agriculture premiums written and earned. Acquisition costs in the agriculture line were offset in 2008 by third party commissions received.

General and Administrative Expenses.The decrease in the general and administrative expense ratio in the Insurance segment in 2008 as compared to 2007 and 2006, resulted from increases in agriculture premiums written and earned for which general and administrative expenses were reduced by third party expense reimbursements.

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Reinsurance

The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance segment for the years ended December 31, 2008, 2007 and 2006.

	2008			2007			2006
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	825,145		$	1,068,114		$	1,371,889
Ceded premiums written		(16,362	)		(16,554	)		(43,970	)
Net premiums written		808,783			1,051,560			1,327,919
Net premiums earned		855,072			1,159,261			1,447,167
Expenses
Net losses and loss expenses		459,413			502,804			696,962
Acquisition expenses		204,912			255,091			341,194
General and administrative expenses		113,154			127,273			140,849
		777,479			885,168			1,179,005
Underwriting income (loss)	$	77,593		$	274,093		$	268,162
Ratios
Loss ratio		53.7	%		43.4	%		48.2	%
Acquisition expense ratio		24.0	%		22.0	%		23.6	%
General and administrative expense ratio		13.2	%		11.0	%		9.7	%
Combined ratio		90.9	%		76.4	%		81.5	%

Premiums.Gross premiums written in the Reinsurance segment decreased in 2008 by 22.7% over 2007 and 39.9% over 2006 gross premiums written. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2008, 2007 and 2006 were as follows:

Lines of Business

	2008				2007				2006
	Gross		Net		Gross		Net		Gross		Net
	Premiums		Premiums		Premiums		Premiums		Premiums		Premiums
	Written		Written		Written		Written		Written		Written
	(U.S. dollars in thousands)
Casualty	$	162,453	$	163,487	$	201,032	$	200,385	$	400,111	$	396,663
Property		195,849		195,822		228,796		230,211		318,883		310,795
Catastrophe		315,262		302,070		345,187		332,428		291,755		270,126
Agriculture		21,483		21,011		131,325		129,337		107,104		106,262
Aerospace and Marine		81,334		77,804		92,882		90,613		180,203		173,586
Surety and Other Specialty		48,764		48,589		68,892		68,586		73,833		70,487
Total	$	825,145	$	808,783	$	1,068,114	$	1,051,560	$	1,371,889	$	1,327,919

The decrease in 2008 gross premiums written as compared to 2007 and 2006 was primarily due to declines in agriculture premiums written. Agriculture premiums written declined in 2008 due to expected attrition stemming from the Company’s acquisition of ARMtech within the Insurance segment in December of 2007. Declines in the Company’s other reinsurance business lines resulted from non-renewal of contracts that no longer met the Company’s underwriting standards, changes in client retentions, rate reductions and reduced positive premium adjustments.

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Ceded premiums written by the Company in the Reinsurance segment during 2008 compared to 2007 was relatively consistent. In addition during 2008, the Company’s $235 million multi-year, collateralized catastrophe reinsurance protection purchased in 2006 expired. Ceded premiums written by the Company in the Reinsurance segment decreased in 2007 as compared to 2006 as the Company did not renew certain industry loss warranties purchased in 2006.

Net premiums earned by the Company in 2008 in the Reinsurance segment decreased compared to 2007 and 2006 due to the lower levels of total premiums written.

Net losses and Loss Expenses.The net loss ratio in the Company’s Reinsurance segment for 2008 increased as a result of losses recorded in relation to Hurricanes Gustav and Ike as compared to the low level of catastrophic loss activity, in particular outside of Europe, in 2007 and 2006. In 2008, the Company recorded combined losses, net of reinstatement premiums, of approximately $148 million due to Hurricanes Gustav and Ike, which added 18.9 percentage points to the net loss ratio as compared to 2007, which was impacted by $33.9 million of net losses or 3.2 net loss ratio points due to European Windstorm Kyrill.

In each year, the Company experienced favorable loss reserve development from prior years in its Reinsurance segment, with the majority of the current year favorable loss reserve development emanating from this segment’s short tail catastrophe, other tail agriculture and long tail casualty lines. During 2008, 2007 and 2006, the Company’s previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $88.6 million, $74.4 million and $5.0 million, respectively. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company.

Acquisition Expenses.The Company’s acquisition expense ratio in the Reinsurance segment increased for 2008 as compared to 2007 and 2006 due to decreases in premiums earned within the catastrophe and agriculture lines which typically have lower associated acquisition expenses as compared to other property and casualty lines, which are often written on a quota share basis.

General and Administrative Expenses.The general and administrative expense ratio experienced by the Reinsurance segment in 2008 as compared to 2007 and 2006 increased as a result of lower premiums earned.

Deposit Accounting

For internal management reporting purposes, underwriting results by business segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written. The following table presents the activity related to deposit accounted contracts included in the Company’s segment results above, which reconciles the Company’s underwriting results to the Company’s consolidated financial statement presentation for the years ended December 31, 2008, 2007 and 2006.

	2008			2007			2006
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	(5,091	)	$	(28,555	)	$	(158,992	)
Net premiums written		(5,091	)		(28,555	)		(158,992	)
Net premiums earned		(8,976	)		(66,543	)		(180,355	)
Other underwriting income (loss)		(3,973	)		1,602			1,390
Total revenues		(12,949	)		(64,941	)		(178,965	)
Expenses
Losses and loss expenses		(5,717	)		(43,936	)		(121,642	)
Acquisition expenses		(8,782	)		(19,559	)		(56,233	)
General and administrative expenses		—			—			—
		(14,499	)		(63,495	)		(177,875	)
Underwriting income (loss)	$	1,550		$	(1,446	)	$	(1,090	)

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During the years ended December 31, 2008, 2007 and 2006, the Company realized $5.1 million, $28.6 million and $159.0 million, respectively, of premiums that, in management’s judgment, were most appropriately accounted for as deposits under the deposit accounting provisions of SOP 98-7. While not underwritten as finite risk reinsurance, these contracts contain adjustable features, primarily sliding scale ceding commissions and profit share commissions that may cause the amount or variability of risk assumed by the Company to differ from that of its ceding company counterpart. These contracts often contain significant exposures, particularly catastrophic, start-up and other risks, that although they have a low probability of occurrence, could produce material losses. Consequently, these contracts were accounted for as contracts which either transfer only significant timing risk or transfer only significant underwriting risk. The determination of the appropriate method of accounting for these contracts requires significant judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses.

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

The following table reconciles total segment results including Insurance, Reinsurance and Deposit Accounting detailed above to income before income taxes for the years ended December 31, 2008, 2007 and 2006, respectively:

	2008			2007			2006
	(U.S. dollars in thousands)
Total underwriting income	$	110,803		$	322,476		$	304,472
Net investment income		130,176			281,276			257,449
Net foreign exchange (losses) gains		(53,704	)		(7,970	)		21,021
Net realized investment losses		(57,366	)		(18,302	)		(20,342	)
Amortization of intangibles		(10,675	)		(5,286	)		(4,600	)
Interest expense		(30,171	)		(30,125	)		(30,041	)
Income before income taxes	$	89,063		$	542,069		$	527,959

Significant Transaction

On December 7, 2007, Endurance Holdings’ U.S. based holding company acquired all outstanding stock of ARMtech and its affiliates. The base purchase price was $120 million, plus additional amounts as determined in accordance with the terms of the purchase agreement. During 2008, the Company paid an additional $3.2 million in settlement of its obligations under the purchase agreement with ARMtech. ARMtech underwrites crop insurance primarily through the U.S. federally sponsored Multiple Peril Crop Insurance Program. The Company recorded total goodwill and other intangible assets of $45.2 million and $96.7 million, respectively, related to certain licenses, internally developed software, non-compete agreements and customer relationships.

Liquidity and Capital Resources

Liquidity

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

The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, 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 December 31, 2008, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $339 million without prior regulatory approval based upon the Bermuda insurance and Companies Act regulations.

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Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and American Merchants are subject to regulation by the State of Delaware Department of Insurance. ARMtech 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, 2008, Endurance U.S. Reinsurance, Endurance American and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends during 2009 without the prior approval of the applicable insurance regulator. At December 31, 2008, American Merchants and ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $5.7 million and $3.5 million, respectively, without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and American Merchants 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 imposed 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 December 31, 2008, 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, preferred equity securities, other investments, cash and cash equivalents and pending securities transactions, as of December 31, 2008 totaled $5.4 billion compared to aggregate invested assets of $5.6 billion as of December 31, 2007. The decrease in invested assets since December 31, 2007 resulted from losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid, the repurchase of the Company’s ordinary shares and realized losses in the investment portfolio, offset in part by collections of premiums on insurance policies and reinsurance contracts and investment income.

As of December 31, 2008 and December 31, 2007, the Company had pledged cash and cash equivalents and fixed maturity investments of $147.9 million and $223.2 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2008 and December 31, 2007, the Company had also pledged $591.9 million and $594.7 million of its cash and fixed maturity investments as required to meet collateral obligations for $550.8 million and $532.3 million in letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2008 and December 31, 2007, cash and fixed maturity investments with fair values of $234.8 million and $120.3 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $14.2 million and $33.8 million were on deposit with Canadian regulators, respectively.

Cash flows from operating activities on a consolidated basis are provided by premiums collected and investment income, offset by loss and loss expense payments and other general and administrative expenses. Consolidated cash provided by operating activities for the years ended December 31, 2008, 2007 and 2006 was $479.4 million, $480.5 million, and $630.3 million, respectively.

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

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Endurance Holdings did not receive any proceeds from the sale of the ordinary shares by the forward counterparty, but Endurance Holdings will receive proceeds upon any prepayment, and may receive proceeds upon settlement of the forward sale agreement. Subject to Endurance Holdings’ right to elect cash or net share settlement of, or to terminate early, all or a portion of the forward sale agreement, the forward sale agreement will be physically settled by delivery of the requisite number of Endurance Holdings’ ordinary shares beginning July 20, 2010. The forward counterparty will pay Endurance Holdings approximately $150 million upon settlement of the forward sale agreement. The number of Endurance Holdings’ ordinary shares to be delivered to the forward counterparty varies depending upon the price of Endurance Holdings’ ordinary shares over a forty trading-day period beginning July 15, 2010 subject to an aggregate maximum of 4,786,827 and an aggregate minimum of 2,984,772 ordinary shares.

Endurance Holdings may accelerate settlement of or elect early termination with respect to, all or a portion of the forward sale agreement. The forward counterparty may elect early termination of the forward sale agreement upon the occurrence of certain events and the number of ordinary shares deliverable upon settlement of the forward sale agreement may be adjusted depending on the amount of dividends paid by Endurance Holdings or the occurrence of certain events.

Credit Facility.On May 8, 2007, Endurance Holdings amended its existing credit facility among Endurance Holdings, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, among other things, increase the size of the facility to $1,175 million from $925 million and to extend the maturity of the facility to May 8, 2012 (the “Credit Agreement”). On July 18, 2007, the Company entered into the First Amendment to the Credit Agreement, to, among other things, modify the restrictive covenants in the Credit Agreement to permit the Company to pay dividends on its preferred equity securities following the occurrence of certain defaults as defined pursuant to the terms of the Credit Agreement. As amended, the credit facility is referred to as the ''2007 Credit Facility.’’

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

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

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

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

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

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Commitments

At December 31, 2008, letters of credit totaling $635.5 million were outstanding, $200.0 million face value of 6.15% Senior Notes were outstanding and $250.0 million face value of 7% Senior Notes (the “7% Senior Notes”) were outstanding.

The Company’s contractual obligations as of December 31, 2008 are summarized as follows:

	Payments due by period
			Less than 1						More than 5
Contractual Obligations	Total		year		1-3 years		3-5 years		years
	(U.S. dollars in thousands)
Reserve for losses and loss expenses(1)	$	3,292,676	$	1,213,622	$	952,599	$	458,514		667,941
6.15% Senior Notes due 2015, including interest		286,100		12,300		24,600		24,600		224,600
7% Senior Notes due 2034, including interest		705,000		17,500		35,000		35,000		617,500
Investment commitments(2)		1,743		1,743		—		—		—
Operating lease obligations(3)		71,908		10,343		20,799		19,098		21,668
Total	$	4,357,427	$	1,255,508	$	1,032,998	$	537,212	$	1,531,709

(1)	The estimated expected contractual obligations related to our reserves for losses and loss expenses, including reserves related to deposit accounted contracts of $57.2 million, are presented on a gross basis. Due to the inherent complexity of the assumptions used in establishing the Company’s reserve for losses and loss expenses estimates, final claim settlements made by the Company may vary significantly from the present estimates in timing and amount. Approximately 64% of our net reserves were incurred but not reported at December 31, 2008. For a discussion of these uncertainties, see “Critical Accounting Estimates — Reserve for Losses and Loss Expenses.”
(2)	The Company entered into investment agreements to invest additional amounts in other investments.
(3)	The Company leases office space and office equipment under various operating leases.

These estimated obligations noted in the table above will be funded through operating cash flows and existing cash and investments.

Capital Resources

Variable Delivery Forward.On September 11, 2007, Endurance Holdings consummated a variable delivery equity forward sale arrangement as described above under the section entitled “Liquidity and Capital Resources.”

Credit Facility. On May 8, 2007, Endurance Holdings amended its existing credit facility among Endurance Holdings, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, as described above under the section entitled “Liquidity and Capital Resources.”

The Company had outstanding as of December 31, 2008 and 2007 $635.5 million and $574.4 million, respectively, of letters of credit under the 2007 Credit Facility. The Company did not have any revolving loans outstanding under the 2007 Credit Facility as of December 31, 2008. The Company was in compliance with all covenants contained in the 2007 Credit Facility as of December 31, 2008.

Senior Indebtedness.On October 17, 2005, Endurance Holdings issued $200 million principal amount of 6.15% Senior Notes. The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%, and, unless previously redeemed, will mature on October 15, 2015. Endurance Holdings used net proceeds from the offering to repay the $143.5 million revolving loan then outstanding under the credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes.

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On July 15, 2004, the Company issued $250 million principal amount of 7% Senior Notes. The 7% Senior Notes were offered by the underwriters at a price of 99.108% of their principal amount, providing an effective yield to investors of 7.072%, and, unless previously redeemed, will mature on July 15, 2034.

The 6.15% Senior Notes and the 7% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings’ existing and future unsecured and unsubordinated debt. The Senior Notes are also effectively junior to claims of creditors of Endurance Holdings’ subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.

The indentures governing the Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness.

At December 31, 2008, the carrying value of the Senior Notes stood at $447.3 million while the fair value as determined by quoted market valuation was $334.2 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2008.

Given that the Company’s Senior Notes and the 2007 Credit Facility contain cross default provisions, the risk exists that the holders of the Senior Notes and the lenders under the credit facility may declare such debt due and payable, which could result in an acceleration of all debt due under both the Senior Notes and the 2007 Credit Facility. If this were to occur, the Company may not have liquid funds sufficient to repay any or all of such indebtedness.

Preferred Shares. On October 10, 2005, Endurance Holdings issued 8,000,000 shares of its 7.75% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”). The Series A Preferred Shares sold in the offering were registered under the Securities Act of 1933, as amended, and are traded on the New York Stock Exchange. The Series A Preferred Shares were issued at a price to the public of $25.00 per share. Endurance Holdings received net proceeds from this offering of $193.5 million after expenses and underwriting discounts. The proceeds from this offering were used to provide additional capital to Endurance Holdings’ subsidiaries and for other general corporate purposes.

The Series A Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after December 15, 2015 at a redemption price of $25.00 per share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series A Preferred Shares before that date at a redemption price of $26.00 per share, plus any declared and unpaid dividends, to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series A Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction or change in Bermuda law.

Dividends on the Series A Preferred Shares, when, as and if declared by the Board of Directors of Endurance Holdings or a duly authorized committee of the board, accrue and are payable on the liquidation preference amount from the original issue date, quarterly in arrears on each dividend payment date, at an annual rate of 7.75%. Dividends on the Series A Preferred Shares are not cumulative.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of Endurance Holdings, holders of the Series A Preferred Shares and any parity shares are entitled to receive out of Endurance Holdings’ assets available for distribution to shareholders, before any distribution is made to holders of Endurance Holdings’ common equity securities, a liquidating distribution in the amount of $25 per Series A Preferred Share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Distributions will be made pro rata as to the Series A Preferred Shares and any parity shares and only to the extent of Endurance Holdings’ assets, if any, that are available after satisfaction of all liabilities to creditors.

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In conjunction with the issuance by the Company of the Series A Preferred Shares, the Company entered into a “Declaration of Covenant” for the benefit of the holders of the 7% Senior Notes. The Covenant states that the Company will redeem its Series A Preferred Shares only if the total redemption price is less than or equal to the proceeds Endurance Holdings or its subsidiaries have received during the six months prior to the date of such redemption from the sale of certain qualifying securities that, among other things, are, with limited exceptions,pari passuwith or junior to the Series A Preferred Shares upon the Company’s liquidation, dissolution or winding-up; perpetual, or have a mandatory redemption or maturity date that is not less than sixty years after the initial issuance of such securities; and provide for dividends or other income distributions that are non-cumulative.

Holders of the Series A Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings’ bye-laws.

On an ongoing basis, the Company expects its internally generated funds, together with borrowings available under the 2007 Credit Facility, capital generated from the exercise of the Company’s variable delivery forward, offering and sale of its Senior Notes, Series A Preferred Shares and ordinary shares, to be sufficient to operate its business. However, there can be no assurance that the Company will not incur additional indebtedness or issue additional equity or hybrid securities in order to implement its business strategy or pay claims.

Off-Balance Sheet Arrangements

Shackleton Re Limited (“Shackleton”), the entity from which Endurance Bermuda purchased $235 million of collateralized catastrophe reinsurance in 2006, is a variable interest entity under the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”. The final component of the Company’s coverage under Shackleton expired as of July 31, 2008. The Company had a variable interest in Shackleton but was not the primary beneficiary of Shackleton and therefore was not required to consolidate Shackleton in its consolidated financial statements. Please see “Ceded Reinsurance” section below for further details related to this transaction.

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

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

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

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Reserve for Losses and Loss Expenses

Reserving Process

The Company establishes loss and loss expense reserves to provide for the estimated costs of paying claims under insurance policies and reinsurance contracts underwritten by the Company. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported and include estimates of all expenses associated with processing and settling these claims. Estimating the ultimate cost of future claims and claim adjustment expenses is an uncertain and complex process. This estimation process is based largely on the assumption that past developments are an appropriate predictor of future events and involves a variety of actuarial techniques and judgments that analyze experience, trends and other relevant factors.

The Company’s reserving actuaries, who are independent of the Company’s business units, review the Company’s loss and loss expense reserves on a quarterly basis for both current and prior accident years using the most current claims data. These reserve reviews incorporate a variety of actuarial methods and judgments, including the three most common methods of actuarial evaluation used within the insurance industry, the Bornhuetter-Ferguson method, the expected loss ratio method and the loss development method. One actuarial method used by the Company to estimate reserves for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). The Bornhuetter-Ferguson method involves the application of selected loss ratios to the Company’s earned premiums to determine estimates of ultimate expected unpaid claims and claims expenses for each underwriting year. When the IBNR reserves are added to the losses and loss expenses amounts with respect to claims that have been reported to date, an estimated ultimate expected loss results. The Company believes that this method provides a more stable estimate of IBNR reserves that is insulated from wide variations in reported losses. In contrast, the loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. The Company uses these multiple methods, supplemented with its own actuarial and professional judgment, to establish its best estimate of loss and loss expense reserves.

The estimate of the reserve for losses and loss expenses is reviewed each quarter by the Company’s Loss Reserve Committee, consisting of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Actuary and representatives of various disciplines from within the Company, such as claims, underwriting and legal.

Current 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 short tail line of business in the Insurance segment includes property; long tail lines of business include casualty, healthcare liability, workers’ compensation and professional lines. The Company’s short tail lines of business in the Reinsurance segment include catastrophe, property, marine, aerospace and surety while the long tail line of business is casualty related business. Within the Company’s Reinsurance segment, the Company writes certain specialty lines of business for which the loss emergence is considered unique in nature and thus, has been included as “other” in the table below.

As more fully described under “Reserving Process” above, 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.

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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” beginning on page 91.

Losses and loss expenses for the year ended December 31, 2008 are summarized as follows:

	Incurred related to:
	Current						Total incurred
	year			Prior years			losses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	54,460		$	(12,077	)	$	42,383
Long tail		365,177			(54,101	)		311,076
Other		333,096			(4,820	)		328,276
Total Insurance		752,733			(70,998	)		681,735
Reinsurance segment:
Short tail		400,355			(38,218	)		362,137
Long tail		126,736			(17,384	)		109,352
Other		20,967			(33,043	)		(12,076	)
Total Reinsurance		548,058			(88,645	)		459,413
Deposit accounting(1)		(8,820	)		3,103			(5,717	)
Totals	$	1,291,971		$	(156,540	)	$	1,135,431

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

Losses and loss expenses for the year ended December 31, 2008 include $156.5 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2008 year benefited the Company’s 2008 reported loss ratio by approximately 8.9 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in the Company’s short tail, long tail and other lines within both the Insurance and Reinsurance segments.

For the year ended December 31, 2008, the Company did not materially alter the two key inputs it utilizes to establish its reserve for losses and loss expenses, initial expected loss ratios or loss reporting patterns, for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2008 for those reserve categories were within the range of possible results anticipated by the Company.

Short Tail Insurance. The lower than expected losses and loss expenses related to prior years in the short tail insurance category were primarily a result of favorable claims emergence in the Company’s property line of business. As a result, the Company reduced its estimated losses and loss expenses related to prior years in this reserve category during 2008.

Long Tail Insurance. Lower than expected claims activity within the healthcare liability line of business resulted in a reduction in estimated losses and loss expenses related to prior years for this reserve category. This favorable development was partially offset by unfavorable development in the Company’s professional line of business.

Other Insurance. Lower than anticipated agriculture claims settlements for the 2007 crop year resulted in a reduction in estimated losses and loss expenses for prior years within this reserve category.

Short Tail Reinsurance. Favorable loss emergence in the short tail reinsurance reserve category was due to lower than expected loss activity within the treaty catastrophe, treaty property, surety and aerospace lines of business partially offset by higher than expected loss activity within the Company’s marine line of business.

Long Tail Reinsurance. The lower than expected losses and loss expenses related to prior years in the long tail reinsurance reserve category were principally due to favorable development in the Company’s treaty casualty line of business.

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Other Reinsurance. Favorable loss emergence in the other reinsurance reserve category was due to lower than expected loss activity within the agriculture, personal accident, self-insured and special accounts lines of business.

Losses and loss expenses for the year ended December 31, 2007 are summarized as follows:

	Incurred related to:
	Current						Total incurred
	year			Prior years			losses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	47,895		$	(30,933	)	$	16,962
Long tail		317,205			(49,480	)		267,725
Other		5,526			—			5,526
Total Insurance		370,626			(80,413	)		290,213
Reinsurance segment:
Short tail		300,383			(69,227	)		231,156
Long tail		164,222			(6,450	)		157,772
Other		112,607			1,269			113,876
Total Reinsurance		577,212			(74,408	)		502,804
Deposit accounting(1)		(39,370	)		(4,566	)		(43,936	)
Totals	$	908,468		$	(159,387	)	$	749,081

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

Losses and loss expenses for the year ended December 31, 2007 include $159.4 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2007 year benefited the Company’s 2007 reported loss ratio by approximately 10.0 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected emergence of catastrophic and attritional losses. Favorable development of prior year reserves for 2007 relates primarily to the Company’s short and long tail lines included in its Insurance segment, as well as the short tail line of business in the Reinsurance segment. The favorable development of reserves related to prior years was primarily due to lower than expected claims across the Company’s reserve categories. For the year ended December 31, 2007, the Company did not materially alter the two key inputs it utilizes to establish its reserve for losses and loss expenses, initial expected loss ratios or loss reporting patterns, for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2007 for those reserve categories were within the range of possible results anticipated by the Company.

Short Tail Insurance. The lower than expected losses and loss expenses related to prior years in the short tail insurance line were principally a result of better than anticipated property claims settlements in 2007 related to the 2005 Hurricanes along with favorable claims emergence in the Company’s property line. As a result, the Company reduced its estimated losses and loss expenses related to prior years in this reserve category during 2007.

Long Tail Insurance. The absence of significant claims with respect to prior years resulted in a reduction in estimated losses and loss expenses related to prior years primarily in relation to the Company’s healthcare liability and professional lines offset modestly by unfavorable development in the Company’s workers’ compensation line.

Short Tail Reinsurance. The lower than expected losses and loss expenses related to prior years in the short tail reinsurance reserve category was due to lower than expected paid and reported losses.

Long Tail Reinsurance. The lower than expected losses and loss expenses related to prior years in the long tail reinsurance reserve category were principally due to favorable development in the Company’s casualty and surety and other specialty lines. Previously, the Company had been relying more on expected loss methods due to the relative immaturity of the loss activity along with the inherent uncertainty surrounding loss reporting for this line. As actual claims emergence was better than anticipated for these lines, the Company reduced its estimated losses and loss expenses related to prior years in 2007.

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Other Reinsurance. Loss settlement activity related to the 2006 year in the Company’s agriculture line was modestly higher than expected resulting in the Company increasing its estimated losses and loss expenses during 2007 in this reserve category for prior years.

Reserves for losses and loss expenses were comprised of the following at December 31, 2008:

							Reserve for
	Case			IBNR			losses and loss
	Reserves			Reserves			expenses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	59,346		$	37,429		$	96,775
Long tail		163,633			1,078,095			1,241,728
Other		250,278			70,076			320,354
Total Insurance		473,257			1,185,600			1,658,857
Reinsurance segment:
Short tail		463,494			277,319			740,813
Long tail		239,510			578,723			818,233
Other		6,535			68,238			74,773
Total Reinsurance		709,539			924,280			1,633,819
Deposit accounting(1)		(25,861	)		(31,359	)		(57,220	)
Totals	$	1,156,935		$	2,078,521		$	3,235,456

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

Reserves for losses and loss expenses were comprised of the following at December 31, 2007:

							Reserve for
	Case			IBNR			losses and loss
	Reserves			Reserves			expenses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	88,196		$	34,447		$	122,643
Long tail		57,283			911,608			968,891
Other		64,259			26,833			91,092
Total Insurance		209,738			972,888			1,182,626
Reinsurance segment:
Short tail		507,229			287,753			794,982
Long tail		244,276			595,468			839,744
Other		8,784			169,051			177,835
Total Reinsurance		760,289			1,052,272			1,812,561
Deposit accounting(1)		(52,131	)		(50,832	)		(102,963	)
Totals	$	917,896		$	1,974,328		$	2,892,224

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

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Selected quarterly activity in the reserve for losses and loss expenses for the year ended December 31, 2008 is summarized as follows:

	Quarter			Quarter			Quarter			Quarter			Year
	Ended			Ended			Ended			Ended			Ended
	March 31,			June 30,			September 30,			December 31,			December 31,
	2008			2008			2008			2008			2008
	(U.S. dollars in thousands)
Incurred related to:
Current year	$	230,456		$	331,507		$	463,945		$	266,063		$	1,291,971
Prior years		(40,954	)		(56,182	)		(18,444	)		(40,960	)		(156,540	)
Total incurred	$	189,502		$	275,325		$	445,501		$	225,103		$	1,135,431
Paid related to:
Current year	$	(237,835	)	$	(70,141	)	$	(142,311	)	$	(114,828	)	$	(565,115	)
Prior years		(163,827	)		(183,846	)		(134,695	)		(80,424	)		(562,792	)
Total paid	$	(401,662	)	$	(253,987	)	$	(277,006	)	$	(195,252	)	$	(1,127,907	)

The following table represents the development of GAAP balance sheet reserve for losses and loss expenses, net of losses and loss expenses recoverable, for 2002 through December 31, 2008. This table does not present accident or policy year development data. The top line of the table shows the gross and net reserve for losses and loss expenses at the balance sheet date for each of the indicated years. This represents the estimated amounts of gross and net losses and loss expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “cumulative redundancy” represents the aggregate change to date from the original estimate.

The table also shows the cumulative paid amounts as of successive years with respect to the reserve liability. All amounts reflect the conversion from the original currency of the underlying business if not denominated in U.S. dollars. The data in the table has been restated using the rate of exchange to U.S. dollars as of December 31, 2008. Information presented herein may differ materially from that reported in Endurance’s financial statements prepared in accordance with GAAP due to differences in foreign currency exchange rates.

Years ended Dec. 31,	2002		2003			2004			2005			2006			2007			2008
	(U.S. dollars in thousands)
Gross reserve for losses and loss expenses	$	200,840	$	833,158		$	1,549,661		$	2,603,590		$	2,701,686		$	2,892,224		$	3,235,456
Less: Loss recoverable		—		(1,442	)		(12,203	)		(17,248	)		(44,244	)		(187,354	)		(557,834	)
Net reserve for losses and loss expenses	$	200,840	$	831,716		$	1,537,458		$	2,586,342		$	2,657,442		$	2,704,870		$	2,677,622
Net reserve estimated as of:
1 year later		164,923		695,036			1,374,996			2,528,603			2,498,055			2,548,330			—
2 years later		143,295		629,925			1,305,424			2,467,734			2,356,210			—			—
3 years later		153,179		607,614			1,256,798			2,371,899			—			—			—
4 years later		147,977		589,425			1,199,472			—			—			—			—
5 years later		140,225		568,421			—			—			—			—			—
6 years later		136,086		—			—			—			—			—			—
Cumulative redundancy		64,754		263,295			337,986			214,443			301,232			156,540			—
Cumulative paid losses
1 year later		40,465		119,050			300,880			670,301			622,862			523,959			—
2 years later		58,239		185,171			446,060			1,093,556			913,307			—			—
3 years later		65,745		234,235			563,727			1,307,957			—			—			—
4 years later		68,502		277,722			639,645			—			—			—			—
5 years later		69,406		311,510			—			—			—			—			—
6 years later		77,662		—			—			—			—			—			—

The following table reconciles cumulative paid losses per the table above to the cumulative paid losses reported in the Company’s audited financial statements.

Years ended Dec. 31,	2002		2003			2004		2005		2006		2007
	(U.S. dollars in thousands)
Cumulative paid losses	$	40,465	$	119,050		$	300,800	$	670,301	$	622,862	$	523,959
Cumulative paid losses due to foreign exchange		67		(797	)		6,377		49,452		55,125		38,833
Cumulative paid losses excluding the impact of foreign exchange	$	40,532	$	118,253		$	307,257	$	719,753	$	677,987	$	562,792

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Potential Variability in Reserves for Losses and Loss Expenses

The Company’s estimated reserve for losses and loss expenses can change over time because of unexpected changes in the external business environment in which the Company operates or changes in internal Company operations. For a discussion of the factors which can contribute to uncertainty in the reserving process and volatility in the reserve for losses and loss expenses, see “Critical Accounting Estimates – Reserves for Losses and Loss Expenses” above.

Two key inputs utilized in determining loss and loss expense reserves for the Company’s two business segments are the initial expected loss ratio and the speed of the loss reporting pattern. The following tables illustrate the possible percentage effects on current estimates of the reserve for losses and loss expenses due to 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern as of December 31, 2008. The 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern in the tables below were chosen consistent with commonly accepted actuarial practice, due to the Company’s limited empirical data regarding loss and loss expense reserves variability. 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 lines of business within each business segment are aggregated based on their potential expected length of loss emergence or tail.

Insurance

Short Tail
Potential Percentage Change in Total Loss and Loss Expense Reserves

	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(9.3	%)		(7.5	%)		(5.6	%)
Unchanged		(2.6	%)		0.0	%		2.5	%
10% Slower		7.9	%		11.7	%		15.4	%

Long Tail
Potential Percentage Change in Total Loss and Loss Expense Reserves

	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(2.7	%)		(0.6	%)		1.5	%
Unchanged		(2.2	%)		0.0	%		2.1	%
10% Slower		(1.6	%)		0.6	%		2.8	%

Other
Potential Percentage Change in Total Loss and Loss Expense Reserves

	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(18.3	%)		(17.9	%)		(17.5	%)
Unchanged(1)		(2.2	%)		0.0	%		2.2	%
10% Slower		13.9	%		17.9	%		21.9	%

Reinsurance

Short Tail
Potential Percentage Change in Total Loss and Loss Expense Reserves

	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(7.2	%)		(6.1	%)		(4.9	%)
Unchanged		(1.8	%)		0.0	%		1.7	%
10% Slower		7.4	%		10.1	%		12.7	%

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Long Tail
Potential Percentage Change in Total Loss and Loss Expense Reserves

	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(6.8	%)		(3.8	%)		(0.6	%)
Unchanged		(3.5	%)		0.0	%		3.5	%
10% Slower		0.6	%		4.5	%		8.4	%

Other
Potential Percentage Change in Total Loss and Loss Expense Reserves

	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(6.4	%)		(3.4	%)		(0.3	%)
Unchanged		(3.3	%)		0.0	%		3.3	%
10% Slower		2.1	%		6.0	%		10.0	%

⁽¹⁾ The Other reserve category of the Insurance segment includes agricultural business written by the Company. Reporting pattern changes are not applicable to agricultural business as it is typically settled at an established time each year.

Each of the impacts set forth in the tables above is estimated individually, without consideration for any correlation among key assumptions or among lines of business. Therefore, it would be inappropriate to take each of the amounts set forth above and add them together in an attempt to estimate volatility for the Company’s loss and loss expense reserves in total. The Company believes the assumed variations in loss and loss expense reserves by individual development tail set forth in the tables above represents a reasonable estimate of the possible loss and loss expense reserve variations by individual development tail that may occur in the future. It is important to note that the variations set forth in the tables above are not meant to be a “best-case” or “worst-case” series of scenarios, and therefore, it is possible that future variations may be more or less than the amounts set forth above.

Ceded Reinsurance

Ceded premiums written were $462.1 million for the year ended December 31, 2008, $206.1 million for the year ended December 31, 2007 and $204.1 million for the year ended December 31, 2006. The increase in ceded premiums written was due to business written and ceded by our U.S. insurance operations, specifically related to the agriculture line, and strategic cessions of business in 2007 and 2006 for the purpose of managing the Company’s catastrophe risk profile. The Company’s U.S. insurance operating subsidiaries use proportional and excess reinsurance to protect larger limits on certain business written by this segment. Excess reinsurance coverage is often purchased in relation to the workers’ compensation line to protect against catastrophic events. ARMtech participates in a federally sponsored crop reinsurance program offered by the U.S. government.

In 2008, the Company purchased certain industry loss warranties to reduce its overall catastrophe exposure within the U.S. The industry loss warranties were allocated to the catastrophe and property reinsurance lines of business, and also the property insurance line of business.

In 2006, in order to protect the Company against the risk of a severe catastrophe event or the occurrence of multiple significant catastrophe events, Endurance Bermuda acquired $235 million of multi-year, collateralized catastrophe reinsurance from Shackleton. The reinsurance consisted of three separate coverages. The first coverage is $125 million of reinsurance for earthquake risk in California from August 1, 2006 through January 31, 2008. The second coverage consisted of $60 million of protection for hurricanes in the U.S. Northeast, Gulf Coast and certain inland states. The final coverage consisted of $50 million of reinsurance for losses resulting from hurricanes or California earthquakes following occurrence of a major hurricane or California earthquake. The second and third coverages provided protection from August 1, 2006 through July 31, 2008. All coverages under this agreement expired during 2008.

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At December 31, 2008 and 2007, the Company had reinsurance recoverables of $557.8 million and $187.4 million, respectively, related to its reinsurance agreements. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded related to the agriculture line of business. Accordingly, the Company has evaluated the reinsurers and retrocessionaires that are providing reinsurance and retrocessional protection and will continue to monitor the stability of its reinsurers and retrocessionaires. No allowance for uncollectible reinsurance was deemed necessary on the recoverable balances outstanding at December 31, 2008 and 2007.

Goodwill and Intangible Assets

Goodwill and other intangibles that arise from business combinations are accounted for by the Company in accordance with SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.” These standards require that identifiable intangible assets are amortized in accordance with their useful lives and goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually.

During 2007, we acquired ARMtech. As a part of that transaction we recorded total goodwill of $45.2 and intangible assets of $96.7 million, which included licenses, customer relationships, internally developed software and non-compete agreements. The finite lived intangibles are being amortized over terms ranging from five to fifteen years.

In addition, during 2007, we acquired American Merchants, and as a result of that transaction recorded an indefinite lived intangible of $2.2 million related to state insurance licenses acquired.

During 2006, we acquired Endurance American and as a result of that transaction recorded an indefinite lived intangible asset of $3.5 million related to state insurance licenses acquired.

In accordance with SFAS No. 142, the Company’s intangible assets and goodwill are tested at least annually for impairment and more often if a triggering event is deemed to have occurred. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The fair value of the reporting unit is impacted by the performance of the business. If it is determined that the goodwill has been impaired, the Company must write down the goodwill by the amount of the impairment, with a corresponding charge to net income.

During the fourth quarter of 2008, the Company performed its annual impairment testing of goodwill. The Company has two primary sources of goodwill – Goodwill obtain from a renewal rights transaction completed in 2003 with HartRe and goodwill obtain from the Company’s acquisition of ARMtech in 2007. The Company determined that the appropriate reporting units for evaluation were the Reinsurance segment in relation to HartRe goodwill and the agriculture line for ARMtech goodwill. The Company used a discounted cash flow approach to estimate the fair value of these reporting units. The fair value determined was in excess of the carrying value including goodwill for both reporting units noted. As a result of the impairment testing, no write downs were deemed necessary at December 31, 2008 and 2007.

Deferred Tax Assets and Liabilities

The Company’s balance sheet at December 31, 2008 contains a net deferred tax asset in the amount of $20.7 million (2007 — $0.9 million deferred tax liability). The current year net deferred tax asset consists of gross deferred tax assets of $106.9 million, gross deferred tax liabilities of $70.6 million and a valuation allowance of $15.7 million. Of the Company’s gross deferred tax assets, $23.0 million (2007 — $14.4 million) relates to net operating loss carryforwards that are available to offset future taxable income generated by the Company’s U.K. subsidiary. The Company’s net operating losses may be carried forward indefinitely. Based on its analysis of various potential tax planning strategies and projected taxable income for the Company’s U.K. subsidiary, management believes that it is more likely than not that the Company’s U.K. subsidiary will generate sufficient taxable income to realize the net operating loss carryforwards in the near term and prior to their expiration, except as provided for as follows.

93

The Company has established a valuation allowance of $15.7 million (2007 — $10.3 million) against realized capital losses, including securities write downs, and certain operating loss carryforwards at December 31, 2008. Of the $15.7 million valuation allowance, $7.8 million was established against realized investment losses as the Company cannot reasonably predict the occurrence of future realized investment gains and $7.9 million was established against net operating loss carryforwards in the United Kingdom as the Company does not expect to generate enough operating income in the short term to offset the full amount of the carryforwards. The increase in the valuation allowance was charged to the Company’s income tax expense during 2008. Management believes the net deferred tax assets, less the valuation allowance noted, are more likely than not to be fully realized in corresponding future periods, and the Company’s net deferred tax asset has been stated appropriately as at December 31, 2008. In the event that management determines in the future that it is more likely than not that the net deferred tax assets will not be fully realized in the near term and prior to their expiration, the Company will reassess the valuation allowance against the net deferred tax assets and record any changes to income tax expense in the period determined.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company believes that it is principally exposed to four types of market risk; interest rate risk, foreign currency risk, credit risk and equity risk.

Interest Rate Risk.The Company’s primary market risk exposure is to changes in interest rates. The Company’s fixed investment portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, the market value of our fixed maturity portfolio generally falls, and the converse is generally also true. The Company manages its interest rate risk through an asset liability strategy that involves the selection of investments with appropriate characteristics, such as duration, yield, currency and liquidity that are tailored to the anticipated cash outflow characteristics of our liabilities. The target duration of managed assets versus liabilities (including reserves for losses and loss expenses) is approximately three years. A significant portion of the investment portfolio matures each quarter, allowing for reinvestment at current market rates. As of December 31, 2008, assuming parallel shifts in interest rates, the impact of these interest rate shifts in basis points on the Company’s cash and fixed income portfolio of $5,073.8 million at December 31, 2008 would have been as follows:

	Interest Rate Shift in Basis Points
	-100			-50			0		50			100
	(U.S. dollars in millions)
December 31, 2008
Total market value	$	5,186.1		$	5,138.0		$	5,073.8	$	5,028.7		$	4,970.5
Market value change from base		2.21	%		1.27	%		—		(0.9	%)		(2.04	%)
Change in unrealized value	$	112.3		$	64.2			—	$	(45.1	)	$	(103.3	)

Another method used by the Company to evaluate portfolio risk is Value-at-Risk (“VaR”). VaR is a probabilistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. Portfolio risk, as measured by VaR, is affected by four primary risk factors: asset concentration, asset volatility, asset correlation and systematic risk. For a one year period over 95% of the time, assuming the risks taken into account in the VaR model perform per their historical tendencies, the portfolio loss for this year period is expected to be less than or equal to 10.6% at December 31, 2008.

The Company’s investments in alternative and high yield loan funds are exposed to interest rate risk. To the extent that the securities underlying these investments are fixed maturities, fluctuations in interest rates have a direct impact on the market valuation of these investments.

Foreign Currency Risk.The Company has made a significant investment in the capitalization of Endurance U.K., which is denominated in British Sterling. In addition, the Company enters into reinsurance and insurance contracts for which it is obligated to pay losses in currencies other than U.S. dollars. The majority of our operating foreign currency assets and liabilities are denominated in Euros, British Sterling, Canadian Dollars, Japanese Yen and Australian Dollars. The Company may, from time to time, experience losses from fluctuations in the values of these and other non-U.S. currencies, which could have a material adverse effect on its results of operations. The Company will attempt to manage its foreign currency risk by seeking to match its liabilities under insurance and reinsurance contracts that are payable in foreign currencies with investments that are denominated in such currencies. The Company purchases assets which are matched in currency to its case reserves for liabilities incurred in major currencies including U.S. dollars, Euros, British Sterling, Canadian Dollars, Japanese Yen and Australian dollars at the time such reserves are established. The Company has no currency hedges in place; however, as part of its matching strategy, the Company may consider the use of hedges when it becomes aware of probable significant losses that will be paid in non-U.S. dollar currencies. For liabilities incurred in currencies other than those listed above, U.S. dollars are converted to the currency of the loss at the time of claims payment. As a result, the Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies.

94

For the year ended December 31, 2008, approximately 11% of the Company’s gross premiums, prior to deposit accounting adjustments, were written in currencies other than the U.S. dollar. The portion of our cash and cash equivalents, investments and reserves for loss and loss expenses denominated in non-U.S. currencies at December 31, 2008 were approximately 9%, 5% and 7%, respectively. As of December 31, 2008, the Company’s principal foreign currency exposures are denominated in Euros and British Sterling. The Company measures and manages its exposure in these currencies, among others, by monitoring its estimated gross and net asset positions. In order to estimate such exposures, the Company considers currency specific investments, cash and cash equivalents, premiums receivable, reserve for losses and loss expenses, and unearned premiums. The total estimated gross and net asset balances denominated in Euros were $152.0 million and $59.8 million, respectively. The total estimated gross and net asset balances denominated in British Sterling were $163.8 million and $87.4 million, respectively. Assuming all other variables are held constant and disregarding any tax effects, a 10% change in the U.S. dollar relative to these currencies could result in a $14.7 million increase or decrease in the net assets held by the Company at December 31, 2008.

Credit Risk.The Company has exposure to credit risk primarily as a holder of fixed maturity securities, short-term investments, preferred equity securities and other investments. The Company’s risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. The Company attempts to limit our credit exposure by investing the fixed income portfolio primarily in investments rated A-/A3 or higher. In addition, the Company has limited its exposure to any single corporate issuer to 1.21% or less of its fixed income portfolio.

The following table summarizes the fair value composition of the fixed investment portfolio, which includes fixed maturity securities, short-term investments and preferred equity securities by investment ratings assigned by S&P, Moody’s or other rating agencies and by contractual maturity at December 31, 2008. In some cases, where bonds are unrated, the rating of the issuer has been applied. 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.

December 31, 2008

			Due after		Due after
	Due		one year		five years				Mortgage-		Asset-
	within		through		through		Due after		backed		backed
Ratings	one year		five years		ten years		ten years		securities(1)		securities(1)		Total
	(U.S. dollars in thousands)
U.S. government and agencies securities	$	21,520	$	345,043	$	236,589	$	54,596	$	—	$	—	$	657,748
AAA / Aaa		136,507		270,520		33,786		51,782		2,070,169		225,160		2,787,924
AA / Aa		22,473		88,328		32,088		15,359		1,452		4,018		163,718
A / A		34,757		200,680		49,386		24,126		11,001		7,879		327,829
BBB		1,620		604		2,143		9,807		4,610		11,118		29,902
Below BBB		164		11,662		21,832		2,020		8,098		—		43,776
Not rated		352		120		—		—		461		—		933
Total	$	217,393	$	916,957	$	375,824	$	157,690	$	2,095,791	$	248,175	$	4,011,830

⁽¹⁾ The effective durations of the Company’s mortgage-backed and asset-backed securities portfolios were 2.34 and 1.22, respectively, as of December 31, 2008. These securities are subject to prepayment risk and as such, actual maturity may differ significantly from contract maturity.

95

In addition, the Company has exposure to credit risk as it relates to losses recoverable on paid and unpaid losses where the Company has purchased reinsurance and retrocessional coverages. The Company relies on reinsurance within its insurance businesses in order to manage risk accumulations. The Company continues not to rely heavily on retrocessional reinsurance, but strategically purchases this coverage across the entire portfolio to reduce our exposure to the risk of a severe catastrophe event or occurrence of multiple significant catastrophe events. When reinsurance or retrocessional reinsurance is purchased, we require our reinsurers to have high financial strength ratings. The Company evaluates the financial condition of its reinsurers and monitors its concentration of credit risk on an ongoing basis. The balance of losses recoverable at December 31, 2008 was $557.8 million. At December 31, 2008, the Company had no allowance for estimated uncollectible losses recoverable. The balance of losses recoverable at December 31, 2008 was distributed as follows based on the ratings of the reinsurers:

Rating	December 31, 2008
	(U.S. dollars in
	thousands)
U.S. government sponsored program	$	369,470
A+ and above		116,804
A		36,201
A- and below		34,917
Not Rated		442
Total	$	557,834

Equity Price Risk.Certain of the Company’s other investments, comprised of alternative and high yield loan funds, are exposed to equity price risk. To the extent that the securities underlying these investments are equity securities, fluctuations in the equity markets may have a direct impact on the market valuation of these investments. The Company’s other investments at December 31, 2008 were $284.3 million which represents 5.3% of the Company’s invested assets including cash and cash equivalents, fixed maturity securities, short-term investments, preferred equity securities, other investments and net pending securities transactions. Of other investments, alternative investments represented $201.8 million or approximately 71.0% and high yield fixed maturity investments represented $82.5 million or approximately 29.0%. The Company estimates that its alternative investments have a combined historical beta versus the S&P 500 Index of approximately 0.56 at December 31, 2008. Beta measures the response of a portfolio’s performance relative to a market return, where a beta of 1 would be an equivalent return to the index. Given the historical beta for the Company’s other investments, a 10% movement in the S&P 500 Index would result in an approximately 5.6% (or approximately $15.9 million) increase or decrease in the market value of the Company’s alternative funds which are included in other investments at December 31, 2008.

96

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Endurance Specialty Holdings Ltd.

We have audited Endurance Specialty Holdings Ltd.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Endurance Specialty Holdings Ltd.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Cont’d .....

97

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Endurance Specialty Holdings Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 and our report dated February 27, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young Ltd.

Hamilton, Bermuda
February 27, 2009

98

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	100
Consolidated Balance Sheets at December 31, 2008 and 2007	101
Consolidated Statements of Income and Comprehensive (Loss) Income for the years ended December 31, 2008, 2007 and 2006	102
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006	103
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	104
Notes to the Consolidated Financial Statements for the years ended December 31, 2008, 2007 and 2006	105

99

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Endurance Specialty Holdings Ltd.

We have audited the accompanying consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive (loss) income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Endurance Specialty Holdings Ltd. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endurance Specialty Holdings Ltd.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young Ltd.

Hamilton, Bermuda
February 27, 2009

100

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007
(In thousands of United States dollars, except share amounts)

	2008			2007
ASSETS
Investments
Fixed maturity investments available for sale, at fair value (amortized cost: $4,047,368 and $4,556,061 at December 31, 2008 and 2007, respectively)	$	3,875,137		$	4,589,054
Short-term investments, available for sale at fair value (amortized cost: $111,322 and $12,646 at December 31, 2008 and 2007)		111,333			12,646
Preferred equity securities, available for sale at fair value		25,360			58,536
Other investments		284,263			358,128
Total investments		4,296,093			5,018,364
Cash and cash equivalents		1,061,994			567,825
Premiums receivable, net		609,387			723,832
Deferred acquisition costs		160,870			168,968
Securities lending collateral		112,940			173,041
Prepaid reinsurance premiums		149,591			122,594
Losses recoverable		557,834			187,354
Accrued investment income		30,872			38,543
Goodwill and intangible assets		200,791			206,632
Deferred tax asset		20,691			—
Other assets		71,407			64,000
Total assets	$	7,272,470		$	7,271,153
LIABILITIES
Reserve for losses and loss expenses	$	3,235,456		$	2,892,224
Reserve for unearned premiums		885,488			855,085
Deposit liabilities		58,622			108,943
Reinsurance balances payable		233,561			162,899
Securities lending payable		115,603			173,041
Debt		447,468			448,753
Deferred tax liability		—			922
Other liabilities		88,989			117,027
Total liabilities		5,065,187			4,758,894
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred shares
Series A, non-cumulative – Par value $1.00 – 8,000,000 issued and outstanding (2007 – 8,000,000); aggregate liquidation preference $200,000 (2007 – $200,000)		8,000			8,000
Common shares
Ordinary – 57,203,454 issued and outstanding (2007 – 60,364,488)		57,203			60,364
Additional paid-in capital		1,029,363			1,165,300
Accumulated other comprehensive (loss) income		(132,665	)		57,725
Retained earnings		1,245,382			1,220,870
Total shareholders’ equity		2,207,283			2,512,259
Total liabilities and shareholders’ equity	$	7,272,470		$	7,271,153

See accompanying notes to the consolidated financial statements.

101

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of United States dollars, except share and per share amounts)

	2008			2007			2006
Revenues
Gross premiums written	$	2,246,420		$	1,781,115		$	1,789,642
Ceded premiums written		(462,130	)		(206,140	)		(204,078	)
Net premiums written	$	1,784,290		$	1,574,975		$	1,585,564
Change in unearned premiums		(17,805	)		19,825			53,010
Net premiums earned (includes Nil, Nil, and $34,927 from related parties in 2008, 2007 and 2006, respectively)		1,766,485			1,594,800			1,638,574
Net investment income		130,176			281,276			257,449
Net realized investment losses		(57,366	)		(18,302	)		(20,342	)
Other underwriting (loss) income		(3,973	)		1,602			1,390
Total revenues		1,835,322			1,859,376			1,877,071
Expenses
Net losses and loss expenses (includes Nil, Nil, and $20,145, from related parties in 2008, 2007 and 2006, respectively)		1,135,431			749,081			827,630
Acquisition expenses (includes Nil, Nil, and $11,238, from related parties in 2008, 2007 and 2006, respectively)		299,913			307,576			317,489
General and administrative expenses		216,365			217,269			190,373
Amortization of intangibles		10,675			5,286			4,600
Net foreign exchange losses (gains)		53,704			7,970			(21,021	)
Interest expense		30,171			30,125			30,041
Total expenses		1,746,259			1,317,307			1,349,112
Income before income taxes		89,063			542,069			527,959
Income tax benefit (expense)		9,561			(20,962	)		(29,833	)
Net income		98,624			521,107			498,126
Preferred dividends		(15,500	)		(15,500	)		(15,500	)
Net income available to common shareholders		83,124		$	505,607		$	482,626
Other comprehensive (loss) income
Net income	$	98,624		$	521,107		$	498,126
Net unrealized holding (losses) gains on investments arising during the period (net of applicable deferred income taxes in 2008 — ($12,252); 2007— ($10,014); and 2006 — $3,620)		(218,816	)		49,257			(20,235	)
Reclassification adjustment for net realized losses included in net income		57,366			18,302			20,342
Foreign currency translation adjustments		(29,030	)		4,541			5,010
Reclassification adjustment for net loss on derivatives designated as cash flow hedge included in net income		90			90			90
Other comprehensive (loss) income		(190,390	)		72,190			5,207
Comprehensive (loss) income	$	(91,766	)	$	593,297		$	503,333
Per share data
Weighted average number of common and common equivalent shares outstanding:
Basic		57,755,959			64,696,669			66,435,712
Diluted		62,795,085			70,539,647			71,755,303
Basic earnings per common share	$	1.44		$	7.82		$	7.26
Diluted earnings per common share	$	1.32		$	7.17		$	6.73

See accompanying notes to the consolidated financial statements.

102

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of United States dollars)

	2008			2007			2006
Preferred shares
Balance, beginning and end of year	$	8,000		$	8,000		$	8,000
Common shares
Balance, beginning of year		60,364			66,480			66,139
Issuance of common shares		622			1,900			670
Repurchase of common shares		(3,783	)		(8,016	)		(329	)
Balance, end of year		57,203			60,364			66,480
Additional paid-in capital
Balance, beginning of year		1,165,300			1,458,063			1,453,722
Issuance of common shares		1,113			8,284			8,677
Issuance of restricted share units in lieu of dividends		(92	)		180			922
Public offering and registration costs		(141	)		(4,600	)		(134	)
Repurchase of common shares		(149,147	)		(304,020	)		(9,679	)
Settlement of equity awards		(5,065	)		(3,444	)		(3,498	)
Stock-based compensation expense		17,395			10,837			8,053
Balance, end of year		1,029,363			1,165,300			1,458,063
Accumulated other comprehensive (loss) income
Cumulative foreign currency translation adjustments:
Balance, beginning of year		33,393			28,852			23,842
Foreign currency translation adjustments		(29,030	)		4,541			5,010
Balance, end of year		4,363			33,393			28,852
Unrealized holding (losses) gains on investments:
Balance, beginning of year		26,718			(40,841	)		(40,948	)
Net unrealized holding (losses) gains arising during the period, net of reclassification adjustment		(161,450	)		67,559			107
Balance, end of year		(134,732	)		26,718			(40,841	)
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of year		(2,386	)		(2,476	)		(2,566	)
Net change from current period hedging transactions, net of reclassification adjustment		90			90			90
Balance, end of year		(2,296	)		(2,386	)		(2,476	)
Total accumulated other comprehensive (loss) income		(132,665	)		57,725			(14,465	)
Retained earnings
Balance, beginning of year		1,220,870			779,796			364,354
Net income		98,624			521,107			498,126
Issuance of restricted share units in lieu of dividends		92			(180	)		(922	)
Dividends on preferred shares		(15,500	)		(15,500	)		(15,500	)
Dividends on common shares		(58,704	)		(64,353	)		(66,262	)
Balance, end of year		1,245,382			1,220,870			779,796
Total shareholders’ equity	$	2,207,283		$	2,512,259		$	2,297,874

See accompanying notes to the consolidated financial statements.

103

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of United States dollars)

	2008			2007			2006
Cash flows provided by operating activities:
Net income	$	98,624		$	521,107		$	498,126
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net (discount) premium on investments		(306	)		3,731			12,485
Amortization of other intangibles and depreciation		22,594			17,045			15,809
Net realized investment losses		57,366			18,302			20,342
Deferred taxes		(35,439	)		8,727			18,968
Stock-based compensation expense		17,395			10,837			8,053
Equity in loss (earnings) of unconsolidated ventures		111,570			(21,286	)		(29,073	)
Premiums receivable, net		114,445			32,828			(85,461	)
Deferred acquisition costs		8,098			(6,263	)		(6,217	)
Prepaid reinsurance premiums		(26,997	)		16,197			(77,926	)
Losses recoverable		(370,480	)		(7,632	)		(26,996	)
Accrued investment income		7,671			2,214			(6,958	)
Other assets		(9,371	)		(7,105	)		2,549
Reserve for losses and loss expenses		343,232			48,122			98,096
Reserve for unearned premiums		30,403			(33,386	)		39,573
Deposit liabilities		(50,321	)		(52,081	)		68,501
Reinsurance balances payable		71,159			(62,909	)		93,756
Other liabilities		89,795			(7,932	)		(13,299	)
Net cash provided by operating activities		479,438			480,516			630,328
Cash flows provided by (used in) investing activities:
Proceeds from sales of fixed maturity investments		3,109,607			3,112,796			1,819,637
Proceeds from sales of short term investments		33,240			—			—
Proceeds from maturities and calls on fixed maturity investments		753,055			676,498			563,164
Proceeds from maturities and calls on short term investments		132,446			—			—
Proceeds from redemptions of other investments		15,345			5,126			—
Purchases of fixed maturity investments		(3,430,195	)		(3,652,611	)		(2,765,056	)
Purchases of short term investments		(264,320	)		(12,646	)		—
Purchase of other investments		(53,050	)		(88,900	)		(62,112	)
Purchases of fixed assets		(10,275	)		(17,734	)		(18,294	)
Change in securities lending collateral received		60,101			53,721			181,901
Net cash paid in acquisitions		(24,545	)		(109,813	)		(16,042	)
Net cash provided by (used in) investing activities		321,409			(33,563	)		(296,802	)
Cash flows used in financing activities:
Issuance of common shares		1,588			10,072			9,253
Repurchase of common shares		(155,463	)		(309,503	)		(10,008	)
Change in securities lending collateral		(57,438	)		(53,721	)		(181,901	)
Settlement of equity awards		(5,065	)		(3,444	)		(3,498	)
Offering and registration costs paid		(1,504	)		(715	)		(134	)
Proceeds from bank debt		784			—			—
Bank debt repaid		(2,159	)		—			—
Dividends on preferred shares		(15,500	)		(15,500	)		(15,500	)
Dividends on common shares		(58,708	)		(64,073	)		(66,262	)
Net cash used in financing activities		(293,465	)		(436,884	)		(268,050	)
Effect of exchange rate changes on cash and cash equivalents		(13,213	)		9,984			14,281
Net increase in cash and cash equivalents		494,169			20,053			79,757
Cash and cash equivalents, beginning of year		567,825			547,772			468,015
Cash and cash equivalents, end of year	$	1,061,994		$	567,825		$	547,772

See accompanying notes to the consolidated financial statements.

104

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

1. Organization

Endurance Specialty Holdings Ltd. (“Endurance Holdings”) was organized on June 27, 2002 under the laws of Bermuda to act as a holding company of providers of property and casualty insurance and reinsurance on a worldwide basis.

Endurance Holdings’ wholly-owned subsidiary, Endurance Specialty Insurance Ltd. (“Endurance Bermuda”), was organized in Bermuda on November 30, 2001. On December 14, 2001, Endurance Bermuda completed a private offering of 60 million common shares for gross cash proceeds of $1.2 billion. Under the terms of an Exchange Offer dated July 22, 2002, the shareholders of Endurance Bermuda transferred their interest in Endurance Bermuda to Endurance Holdings in exchange for an identical shareholding in Endurance Holdings. The Exchange Offer represented a business combination of companies under common control and was accounted for at historical cost. On March 5, 2003, Endurance Holdings consummated the initial public offering of its ordinary shares resulting in the issuance of an additional 9.6 million ordinary shares for net proceeds of $201.5 million.

Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its seven wholly-owned operating subsidiaries: Endurance Bermuda, domiciled in Bermuda including branches in Zurich and Singapore; Endurance Worldwide Insurance Limited (“Endurance U.K.”), domiciled in London, England; Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware; American Agri-Business Insurance Company, domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together, “ARMtech”); Endurance American Insurance Company (“Endurance American”), domiciled in Delaware; Endurance American Specialty Insurance Company (“Endurance American Specialty), domiciled in Delaware and American Merchants Casualty Company (“American Merchants”), domiciled in Delaware.

2. Summary of significant accounting policies

The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Endurance Holdings and its wholly-owned subsidiaries, which are collectively referred to herein as the “Company.” All intercompany transactions and balances have been eliminated in consolidation. The following are significant accounting and reporting policies adopted by the Company:

(a) Premiums and related expenses

The Company’s insurance premiums are earned pro rata over the terms of the applicable risk period specified in the insurance policy. The Company’s insurance policies cover losses occurring or claims made during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will only adjust if the underlying insured values adjust. Accordingly, the Company monitors the underlying insured values and records additional or return premiums in the period in which amounts are reasonably determinable.

The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the terms of the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24 month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period.

105

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(a) Premiums and related expenses, cont’d.

In addition to the applicable risk period, the Company’s estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract’s written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. For proportional reinsurance contracts, the Company estimates premium, commissions and related expenses based on ceding company estimates and also utilizes judgment in establishing proportional reinsurance contract estimates.

Premiums on the Company’s excess of loss and proportional reinsurance contracts are estimated by management at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the reinsurance contract is underwritten. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustments to these estimates are recorded in the period in which they become known.

Acquisition expenses are costs that vary with and are directly related to the production of new and renewal business, and consist principally of commissions and brokerage expenses. Acquisition and general and administrative expenses are shown net of commissions, other fees and expense allowances associated with and earned on ceded business. These costs are deferred and amortized over the periods in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums. Anticipated net investment income is considered in determining the recoverability of deferred acquisition costs.

(b) Reserve for losses and loss expenses

The Company’s reserve for losses and loss expenses includes case reserves and reserves for losses incurred but not reported (referred to as “IBNR reserves”). Case reserves are established for losses that have been reported, but not yet paid. IBNR reserves represent the estimated ultimate cost of events or conditions that have not been reported to or specifically identified by the Company, but have occurred. Case reserves and IBNR reserves are established by management based on reports from reinsurance intermediaries, ceding companies and insureds, and consultations with independent legal counsel. In addition, reserves for IBNR losses and loss expenses are established by management based on reported losses and loss expenses, and actuarially determined estimates of ultimate losses and loss expenses.

106

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(b) Reserve for losses and loss expenses, cont’d.

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

The Company’s loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company’s financial condition for any particular period. While management believes the Company’s estimate of loss and loss expense reserves is sufficient, the ultimate loss experience may not be as reliably predicted as may be the case with other insurance and reinsurance operations, and it is possible losses and loss expenses may be materially different than the total reserve for losses and loss expenses recorded by the Company.

(c) Deposit accounting

A portion of the Company’s assumed proportional reinsurance agreements contain occurrence limitations or loss sensitive provisions, such as adjustable or sliding scale commissions, that may impact the ultimate amounts paid to or received from ceding companies based on loss experience. In some loss scenarios, these features would result in the ceding company’s results not being proportional to the Company’s results from the proportional agreement, and such differences may be meaningful. The Company evaluates these contracts on an individual basis in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 113 — ‘‘Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts’’ (‘‘SFAS No. 113’’).

For the years ended December 31, 2008, 2007 and 2006, the Company entered into a small number of reinsurance contracts that did not fall within the criteria for reinsurance accounting under SFAS No. 113. The Company has accounted for these contracts by the deposit method of accounting specified by Statement of Position 98-7 — ‘‘Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.’’ Consequently, these contracts were accounted for as contracts which either transfer only significant timing risk or transfer only significant underwriting risk. The determination of the appropriate method of accounting for these contracts requires significant judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses. Under the deposit method of accounting, revenues and expenses from reinsurance contracts are not recognized as written premium and incurred losses. Instead, income or loss associated with contracts determined to transfer only significant timing risk is recognized as a component of net other underwriting (loss) income over the estimated claim settlement period while income or loss associated with contracts determined to transfer only significant underwriting risk is recognized as net other underwriting (loss) income over the contract risk period.

107

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(d) Reinsurance

Losses recoverable represent estimates of losses and loss expenses that will be recovered from reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreements and consistent with the establishment of the Company’s reserve for losses and loss expenses. Ceding commissions earned on ceded business are classified as an offset to acquisition and general and administrative expenses.

(e) Investments

The Company currently classifies all of its fixed income investments, which consist of fixed maturity investments, short-term investments and preferred equity securities, as “available for sale” and, accordingly, they are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive (loss) income. The Company determines the fair value of its fixed income securities in accordance with Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), 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 use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs.

For mortgage-backed and other asset-backed debt securities, fair value includes estimates regarding prepayment assumptions, which are based on current market conditions. Amortized cost in relation to these securities is calculated using a constant effective yield based on anticipated prepayments and estimated economic lives of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date. Changes in estimated yield are recorded on a retrospective basis, which results in future cash flows being used to determine current book value.

Realized investment gains and losses are recognized in earnings using the specific identification method. Interest on fixed maturity securities is recorded in net investment income when earned and adjusted for any amortization of premium or discount.

Investments are reviewed for declines in value that are considered to be other-than-temporary. This review involves consideration of several factors including (i) the time period in which there has been a significant decline in value, (ii) the expected maturity of the investment, (iii) the significance of the decline, (iv) an analysis of the liquidity, business prospects and overall financial condition of the issuer, and (v) the Company’s intent and ability to hold the investment for a period of time sufficient for the value to recover. If the decline in fair value is determined to be other-than-temporary, the cost of the security is written down to fair value and the amount is included in net realized investment losses in the Consolidated Statements of Income and Comprehensive (Loss) Income.

108

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(e) Investments, cont’d.

Other investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. The carrying amounts of these investments are increased or decreased to reflect the Company’s share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by the managers of certain of our alternative funds, our investments in those alternative funds are estimated based on the most recently available information including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.

The Company participates in a securities lending program whereby fixed income securities are loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The Company retains all economic interest in the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% – 105% of the market value of the loaned securities and is monitored and maintained by the lending agent. The securities lending collateral, excluding letters of credit, is reported as a separate line item with a corresponding liability related to the Company’s obligation to return the collateral. The Company had $112.6 million and $169.3 million in securities on loan at December 31, 2008 and 2007, respectively.

(f) Cash equivalents

Cash equivalents include highly liquid short-term deposits and securities with maturities of ninety days or less at the time of purchase. Cash equivalents are valued at amortized cost, which approximates fair value due to the short-term, liquid nature of these securities.

(g) Intangible assets

Identifiable intangible assets and goodwill that arise from business combinations are accounted for in accordance with SFAS No. 141R, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets.” Identifiable intangible assets are amortized in accordance with their useful lives. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually or more often if impairment indicators arise.

(h) Offering and registration costs

Offering and registration costs incurred in connection with equity offerings, including investment banking fees and legal fees, are deducted from the proceeds of the offerings. Offering and registration costs incurred in connection with the issuance of the Senior Notes are capitalized and amortized over the term of the Senior Notes.

(i) Foreign exchange

Assets and liabilities of foreign operations whose functional currency is not the United States dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at weighted average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income, net of applicable deferred income taxes. 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.

109

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(j) Derivatives

SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended on January 1, 2001, requires the recognition of all derivative financial instruments including embedded derivative instruments, as either assets or liabilities in the Consolidated Balance Sheets and measurement of those instruments at fair value. The accounting for gains and losses associated with changes in the fair value of a derivative and the effect on the financial statements depends on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value of the asset or liability hedged.

The Company’s investment strategy allows for the use of derivative instruments, subject to strict limitations. The Company’s investment managers currently utilize foreign currency forward contracts to minimize the effect of fluctuating foreign currencies and to gain exposure to interest rate differentials between differing market rates. These contracts do not qualify, and are not designated, as hedges and the realized and unrealized gains (losses) are recognized in net investment realized losses in the Consolidated Statements of Income and Comprehensive (Loss) Income.

(k) Income taxes

The Company accounts for income taxes in accordance with the Financial Accounting Standards Board’s (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB statement No. 109” (“FIN 48”) for its subsidiaries operating in taxable jurisdictions. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. FIN 48 allows for the recognition of tax benefits of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is established for any tax benefit claimed in a tax return in excess of this threshold. Income tax related interest and penalties are included as income tax expense.

(l) Stock compensation and other stock plans

The Company has a stock-based employee and non-employee Director incentive plan (“2007 Equity Incentive Plan”) and other stock plans which are described more fully in Note 16. The Company accounts for issuances under its stock plans in accordance with the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2002, as subsequently amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.” Awards under the 2007 Equity Incentive Plan vest over periods of up to four years. Effective January 1, 2006, the Company implemented SFAS No. 123(R) under the modified prospective method with no material impact on the Company’s financial position or results of operations.

110

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(m) Earnings per share

Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share are based on net income available to common shareholders divided by the weighted average number of common shares and dilutive potential common shares outstanding during the period of calculation using the treasury stock method.

(n) Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(o) Variable interest entity

The Company applies the guidance in FASB Interpretation No. 46 (Revised December 2004) “Consolidation of Variable Interest Entities” (“FIN 46(R)”), which defines a variable interest entity as a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. Based on the criteria included in FIN 46(R), the Company determined that it has a relationship with a variable interest entity. FIN 46(R) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company’s relationship with the variable interest entity, described in more detail in Note 6, does not meet the requirements for consolidation as established under FIN 46(R) nor does the Company have any exposure to or risk of loss from its involvement with the variable interest entity.

(p) Reclassifications

Certain comparative information has been reclassified to conform to current year presentation.

(q) Recent accounting pronouncements

In December 2007, the FASB issued FAS No. 141(R), Business Combinations (“FAS 141(R)”) and FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“FAS 160”). FAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to provide additional disclosures on the nature and financial effect of the business combination. FAS 141(R) applies to all transactions or other events in which the acquirer obtains control of one or more businesses, even if control is not obtained by purchasing equity interests or net assets. FAS 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. Both FAS 141(R) and FAS 160 apply prospectively to business combinations for which the acquisition date is on or after December 15, 2008, except for the presentation and disclosure requirements of FAS 160, which will be applied retrospectively for all periods presented. The Company does not expect the adoption of these statements to have a material impact on the Company’s financial condition or results of operations.

111

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(q) Recent accounting pronouncements, cont’d.

Statement of Financial Accounting Standards No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement of No. 115” was effective January 1, 2008. The Company did not elect the fair value option for any of its financial assets or financial liabilities under this statement.

In February 2008, the FASB issued Financial Staff Position SFAS 157-2 “Effective Date of FASB Statement No. 157,” which permits a one-year deferral of the application of SFAS 157 to non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company will adopt the provisions of SFAS 157 for non-financial assets and non-financial liabilities on January 1, 2009 and is currently evaluating the impact of these provisions on its results of operations and financial condition.

In April 2008, the FASB issued FASB Staff Position 142-3, “Determination of the Useful Lives of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset. Staff Position 142-3 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company is currently evaluating the impact of Staff Position 142-3 on its results of operations and financial condition.

In June 2008, the FASB issued Financial Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which clarifies which securities are to be considered participating securities prior to vesting and as such included in the calculation of earnings per share under the two-class method. FSP EITF 03-6-1 is effective for fiscal periods beginning after December 15, 2008 and requires retrospective adjustment of all prior period earnings per share data presented. The Company is currently evaluating the impact of FSP EITF 03-06-1 on its results of operations and financial condition.

In June 2008, the FASB issued EITF No. 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” which establishes criteria for evaluation of an instrument including assessing the instrument’s contingent exercise provisions, if any, and the instrument’s settlement provisions in order to conclude if such an instrument is indexed to an entity’s own stock. EITF No. 07-05 is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. The Company does not expect the adoption of EITF No. 07-05 to have a material impact on the Company’s financial condition or results of operations.

112

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

2. Summary of significant accounting policies, cont’d.

(q) Recent accounting pronouncements, cont’d.

In October 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 for inactive markets and provides an example to illustrate key considerations in determining the fair value of a financial asset in an inactive market. Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate. FSP SFAS 157-3 was effective on issuance, including prior periods for which financial statements have not been issued. The Company adopted FSP SFAS 157-3 in October and applied the guidance to the financial statements as of September 30, 2008. The adoption of FSP SFAS 157-3 did not impact the Company’s results of operations or financial position.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” which modifies the basis on which securities are deemed to be other-than-temporarily impaired under EITF Issue No. 99-20. Under FSP EITF 99-20-1, management may exercise judgment in its assessment of impairments regarding the probability of future cash flows and not rely exclusively on market participant assumptions regarding future cash flows. FAS EITF 99-20-1 is effective for interim and annual periods ending after December 15, 2008, and shall be applied prospectively. The Company adopted FSP EITF 99-20-1 and applied the guidance to the financial statements as at December 31, 2008. The adoption of FSP EITF 99-20-1 did not materially impact the Company’s results of operations or financial position.

113

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

3. Investments

The amortized cost, fair value and related gross unrealized gains and losses on the Company’s securities classified as available for sale at December 31, 2008 and 2007 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
DECEMBER 31, 2008	Cost		Gains		Losses			Fair Value
U.S. government and agencies securities	$	614,000	$	43,772	$	(24	)	$	657,748
Non-U.S. government securities		274,939		14,247		(21	)		289,165
Corporate securities		596,936		7,761		(20,439	)		584,258
Mortgage-backed securities
Agency mortgage-backed securities		1,145,281		35,137		(1,420	)		1,178,998
Non-agency mortgage-backed securities		1,144,872		233		(228,312	)		916,793
Asset-backed securities		271,340		11		(23,176	)		248,175
Total fixed maturity investments	$	4,047,368	$	101,161	$	(273,392	)	$	3,875,137
Short term investments		111,322		11		—			111,333
Preferred equity securities		26,003		—		(643	)		25,360
Total	$	4,184,693	$	101,172	$	(274,035	)	$	4,011,830

			Gross		Gross
	Amortized		Unrealized		Unrealized
DECEMBER 31, 2007	Cost		Gains		Losses			Fair Value
U.S. government and agencies securities	$	431,326	$	11,963	$	(11	)	$	443,278
Non-U.S. government securities		282,683		2,290		(647	)		284,326
Corporate securities		865,379		6,926		(6,139	)		866,166
Mortgage-backed securities
Agency mortgage-backed securities		1,292,098		14,194		(3,532	)		1,302,760
Non-agency mortgage-backed securities		1,226,337		12,446		(4,788	)		1,233,995
Asset-backed securities		458,238		1,961		(1,670	)		458,529
Total fixed maturity investments	$	4,556,061	$	49,780	$	(16,787	)	$	4,589,054
Short term investments		12,646		—		—			12,646
Preferred equity securities		60,406		7		(1,877	)		58,536
Total	$	4,629,113	$	49,787	$	(18,664	)	$	4,660,236

114

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
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 December 31, 2008 and 2007, 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
DECEMBER 31, 2008	Losses			Value		Losses			Value		Losses			Value
U.S. government and agencies securities	$	(24	)	$	2,256	$	—		$	—	$	(24	)	$	2,256
Non-U.S. government securities		(21	)		7,574		—			—		(21	)		7,574
Corporate securities		(16,563	)		268,544		(3,876	)		27,438		(20,439	)		295,982
Mortgage-backed securities
Agency mortgage-backed securities		(566	)		52,878		(854	)		38,353		(1,420	)		91,231
Non-agency mortgage-backed securities		(177,498	)		696,149		(50,814	)		172,466		(228,312	)		868,615
Asset-backed securities		(18,250	)		222,316		(4,926	)		20,848		(23,176	)		243,164
Total fixed maturity investments	$	(212,922	)	$	1,249,717	$	(60,470	)	$	259,105	$	(273,392	)	$	1,508,822
Short term investments		—			—		—			—		—			—
Preferred equity securities		(643	)		2,745		—			—		(643	)		2,745
Total	$	(213,565	)	$	1,252,462	$	(60,470	)	$	259,105	$	(274,035	)	$	1,511,567

At December 31, 2008, 672 available for sale securities were in an unrealized loss position. Of those, 174 securities had been in a continuous unrealized loss position for twelve months or greater. The unrealized loss position of these securities was principally a result of credit spread widening. During the year ended December 31, 2008, the Company identified securities which were considered to be other-than-temporarily impaired and wrote down the cost of such securities to fair value at the time of impairment, resulting in realized losses of $82.1 million during the period.

At December 31, 2008, the remaining unrealized losses on the Company’s available for sale securities investments were primarily due to widening of credit spreads relating to market illiquidity, rather than any significant credit downgrades on these securities. Because the Company has the ability and intent to hold these securities until recovery, the Company currently believes it is probable that it will collect all amounts due according to their respective contractual terms. Therefore, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2008.

115

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
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, 2007	Losses			Value		Losses			Value		Losses			Value
U.S. government and agencies securities	$	(11	)	$	8,598	$	—		$	—	$	(11	)	$	8,598
Non-U.S. government securities		(114	)		15,635		(533	)		55,467		(647	)		71,102
Corporate securities		(2,954	)		179,723		(3,185	)		216,781		(6,139	)		396,504
Mortgage-backed securities
Agency mortgage-backed securities		(92	)		31,560		(3,440	)		280,382		(3,532	)		311,942
Non-agency Mortgage-backed securities		(2,075	)		276,362		(2,713	)		220,484		(4,788	)		496,846
Asset-backed securities		(1,319	)		102,132		(351	)		59,396		(1,670	)		161,528
Total fixed maturity investments	$	(6,565	)	$	614,010	$	(10,222	)	$	832,510	$	(16,787	)	$	1,446,520
Short term investments		—			—		—			—		—			—
Preferred equity securities		(987	)		38,229		(890	)		19,192		(1,877	)		57,421
Total	$	(7,552	)	$	652,239	$	(11,112	)	$	851,702	$	(18,664	)	$	1,503,941

At December 31, 2007, 702 available for sale securities were in an unrealized loss position. Of those, 331 securities had been in a continuous unrealized loss position for twelve months or greater. The unrealized loss position of these securities was principally a result of changes in the interest rate environment. During the year ended December 31, 2007, the Company identified securities which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value at the time of impairment, and the Company realized losses of $17.3 million in relation to these securities for 2007.

At December 31, 2008, the Company held insurance enhanced bonds (asset-backed and municipal securities), in the amount of approximately $30.3 million, which represented approximately 0.8% of our available for sale fixed income portfolio. The overall credit quality of the insured bond portfolio was an average rating of “A” from Moody’s and “A” from Standard & Poor’s. The overall credit quality of the financial guarantors had an average rating of “Ba” by Moody’s and “BBB” by Standard & Poor’s. The financial guarantors of the Company’s insurance enhanced bonds include Financial Guarantee Insurance Company ($10.5 million), Ambac Financial Group, Inc. ($10.6 million), Financial Security Assurance Inc. ($4.9 million), MBIA Insurance Corporation ($4.0 million), and Syncora Holdings Ltd. ($0.3 million).

At December 31, 2008, the Company held $25.4 million of perpetual preferred equity securities. The Company evaluated these preferred equity securities for potential impairment in a manner similar to the evaluation procedures utilized for its debt securities. In addition, the Company examined each security held for deterioration in the credit quality of the issuer to determine if the preferred equity securities held should be deemed impaired. Included in the other-than-temporary impairments of $82.1 million above was $24.0 million of impairments related to the Company’s preferred equity securities.

116

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

3. Investments, cont’d.

The following table summarizes the composition of the available for sale portfolio by investment ratings assigned by rating agencies at December 31, 2008 and 2007. In some cases, where bonds are unrated, the rating of the issuer has been applied.

	2008					2007
Ratings	Fair Value		Percentage			Fair Value		Percentage
U.S. government and agencies securities	$	657,748		16.4	%	$	455,924		9.8	%
AAA / Aaa		2,787,924		69.5	%		3,415,821		73.3	%
AA / Aa		163,718		4.1	%		342,323		7.3	%
A / A		327,829		8.2	%		370,720		8.0	%
BBB		29,902		0.7	%		11,718		0.2	%
Below BBB		43,776		1.1	%		63,496		1.4	%
Not rated		933		0.0	%		234		0.0	%
Total	$	4,011,830		100.0	%	$	4,660,236		100.0	%

Contractual maturities of available for sale securities are shown below as of December 31, 2008 and 2007. 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.

	2008				2007
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due within one year	$	216,788	$	217,393	$	209,417	$	209,467
Due after one year through five years		890,635		916,957		982,002		991,128
Due after five years through ten years		365,577		375,824		335,432		339,317
Due after ten years		150,200		157,690		125,589		125,040
Mortgage-backed securities
Agency mortgage-backed securities		1,145,282		1,178,998		1,292,098		1,302,760
Non-agency mortgage-backed securities		1,144,871		916,793		1,226,337		1,233,995
Asset-backed securities		271,340		248,175		458,238		458,529
Total	$	4,184,693	$	4,011,830	$	4,629,113	$	4,660,236

The components of net investment income for the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007			2006
Available for sale investments	$	245,208		$	258,312		$	227,100
Other investments		(111,570	)		21,286			29,073
Cash and cash equivalents		6,789			11,145			9,466
	$	140,427		$	290,743		$	265,639
Investment expenses		(10,251	)		(9,467	)		(8,190	)
Net investment income	$	130,176		$	281,276		$	257,449

117

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

3. Investments, cont’d.

The analysis of realized investment losses for the years ended December 31, 2008, 2007 and 2006, respectively, is as follows:

	2008			2007			2006
Gross realized gains	$	48,511		$	11,658		$	5,829
Gross realized losses excluding other-than-temporary impairments		(23,742	)		(12,630	)		(12,807	)
Other-than-temporary impairment losses		(82,135	)		(17,330	)		(13,364	)
Net realized investment losses	$	(57,366	)	$	(18,302	)	$	(20,342	)

In addition to the Company’s available for sale investment portfolio, the Company invests in a portfolio of alternative investments and high yield loan funds (the “Funds”). The Funds invest largely in senior secured distressed debt, derivatives, equity long and short positions, senior secured bank debt and high yield securities and are included in the Company’s balance sheet under other investments. At December 31, 2008 and 2007, the Company had invested, net of capital returned, a total of $326.5 million and $285.6 million, respectively, in the Funds. At December 31, 2008 and 2007, the carrying value of the Funds was $284.3 million and $358.1 million, respectively. Certain of the Funds are subject to redemption restriction provisions (see Note 12).

The Company also participates in a securities lending program whereby fixed income securities are loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The borrowers of the Company’s securities provide the Company with collateral, typically in cash, which the Company separately maintains. The Company invests such cash collateral in other securities. In the first quarter of 2008, the Company restricted future investment of cash collateral in its securities lending program to overnight repurchase agreements. Previously, the Company allowed investments in U.S. Treasuries, U.S. government agencies securities, mortgage-backed securities, asset-backed securities and corporate fixed income securities. At December 31, 2008, the cash collateral was invested in senior credit card and auto asset-backed securities, bank notes, debentures and repurchase agreements. Securities with an estimated fair value of $112.6 million and $169.3 million were on loan under the program at December 31, 2008 and December 31, 2007, respectively. The Company was liable for cash collateral under the Company’s control of $115.6 million and $173.0 million at December 31, 2008 and December 31, 2007, respectively. As of December 31, 2008 and December 31, 2007, the fair value of the investments purchased with the cash collateral received from the borrower was $112.9 million and $173.0 million. The investments purchased with the cash collateral had an average credit quality rating of “Aa1” by Moody’s and “AA” by Standard & Poor’s. All securities on loan are issued on a term or overnight basis and are subject to daily recall at the Company’s discretion.

4. Fair value measurement

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement” (“SFAS No. 157”). SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

Under SFAS No. 157, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy in SFAS No. 157 prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels, which are described in detail below. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

118

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

4. Fair value measurement, cont’d.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the hierarchy are as follows:

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 Quoted prices for similar assets in markets that are active, quoted prices for identical or similar assets in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

In accordance with SFAS No. 157, the Company maximizes the use of observable inputs in its valuation techniques and applies unobservable inputs only to the extent that observable inputs are unavailable. The major classes of assets and liabilities carried at fair value by the Company at December 31, 2008 included fixed maturity investments, short term investments, preferred equity securities and securities lending collateral.

The determination of fair values in the absence of quoted market prices is based on: (i) valuation methodologies; (ii) securities we deem to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.

The Company’s available for sale investments are comprised of a variety of different securities, which are leveled based on the valuation technique and inputs used in their valuation. The valuation of current issue U.S. government securities are generally based on Level 1 inputs, which use the market approach valuation technique. The valuation of the Company’s other available for sale investments, including non-current U.S. government treasury securities, corporate debt and U.S. agency and non-agency mortgage, asset-backed securities, short term investments and preferred equity securities generally incorporate significant Level 2 inputs using the market and income approach techniques. The Company may assign a lower level to inputs typically considered to be Level 2 based on its assessment of liquidity and relative level of uncertainty surrounding the inputs. Prices provided by independent pricing services and independent broker quotes can vary widely, even for the same security.

119

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

4. Fair value measurement, cont’d.

There have been no material changes in the Company’s valuation techniques since the adoption of SFAS No. 157 effective January 1, 2008. On October 10, 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When Market for That Asset is Not Active,” which provided further clarification on fair value measurement for financial assets in inactive markets. The adoption of this statement did not impact the Company’s results of operations or financial position.

The following table sets forth the Company’s available for sale investments categorized by the level within the SFAS No. 157 hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2008:

			Fair Value Measurements at December 31, 2008
			Quoted Prices		Significant
			in Active		Other		Significant
	Total at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
U.S. government and agencies securities	$	657,748	$	48,464	$	609,284	$	—
Non-U.S. government securities		289,165		—		289,165		—
Corporate securities		584,258		—		582,628		1,630
Mortgage-backed securities
Agency mortgage-backed securities		1,178,998		—		1,178,998		—
Non-agency mortgage-backed securities		916,793		—		912,825		3,968
Asset-backed securities		248,175		—		248,175		—
Total fixed maturity securities	$	3,875,137	$	48,464	$	3,821,075	$	5,598
Short term investments		111,333		—		111,333		—
Preferred equity securities		25,360		—		25,360		—
Total	$	4,011,830	$	48,464	$	3,957,768	$	5,598

Level 3 assets represented less than 1% of the Company’s total assets at December 31, 2008.

120

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

4.    Fair value measurement, cont’d.

The following table presents the securities lending collateral reinvested by the Company in connection with its securities lending program, categorized by the level within the SFAS No. 157 hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2008:

			Fair Value Measurements at December 31, 2008
			Quoted Prices		Significant
			in Active		Other		Significant
	Total at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
Securities lending collateral	$	112,940		—	$	112,940		—

The following table presents 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 year ended December 31, 2008:

	Total
Level 3 as of January 1, 2008	$	23,795
Total net realized and unrealized losses:
Included in earnings		(1,034	)
Included in other comprehensive loss		(10,552	)
Purchases, issuances and settlements		(9,495	)
Net transfers in of Level 3		2,884
Level 3 as of December 31, 2008	$	5,598

Losses on Level 3 securities in the amount of ($0.8) million, representing realized losses due to other-than-temporary impairments, were included in earnings (net realized investment losses) for the year ended December 31, 2008 and were attributable to the change in unrealized gains or losses related to fixed maturity investments still held at December 31, 2008.

At December 31, 2008 and 2007, the fair value of the Company’s senior notes was $334.2 million and $431.7 million, respectively (See Note 8).

121

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

5. Reserve for losses and loss expenses

Activity in the reserve for losses and loss expenses for the years ended December 31, 2008, 2007 and 2006 is summarized as follows:

	2008			2007			2006
Net reserve for losses and loss expenses, January 1	$	2,704,870		$	2,657,442		$	2,586,342
Incurred related to:
Current year		1,291,971			908,468			885,369
Prior years		(156,540	)		(159,387	)		(57,739	)
Total incurred		1,135,431			749,081			827,630
Paid related to:
Current year		(565,115	)		(83,331	)		(63,103	)
Prior years		(562,792	)		(677,987	)		(719,753	)
Total paid		(1,127,907	)		(761,318	)		(782,856	)
Acquired reserves (Note 11)		—			23,879			—
Foreign currency translation		(34,772	)		35,786			26,326
Net reserve for losses and loss expenses, December 31		2,677,622			2,704,870			2,657,442
Losses and loss expenses recoverable		557,834			187,354			44,244
Reserve for losses and loss expenses, December 31	$	3,235,456		$	2,892,224		$	2,701,686

During 2008, the Company’s estimated ultimate losses for prior accident years were reduced by $156.5 million (2007 — $159.4 million; 2006 — $57.7 million) due to lower claims emergence than originally estimated by the Company. During 2008, the Company experienced favorable development in the Reinsurance segment of $85.5 million in the short tail, long tail and other lines of business. In the Insurance segment, the Company experienced $71.0 million of favorable development primarily in relation to the long tail healthcare line of business during 2008. During 2007, the Company experienced favorable development in the Insurance segment of $80.4 million in both the Company’s short and long tail lines of business and $79.0 million of favorable development in the Company’s Reinsurance segment primarily in relation to the short tail lines of business. The Insurance segment experienced favorable development in 2006 of $54.4 million across all accident years with the short tail property line and the long tail healthcare liability and professional lines of business representing the largest net reductions, and the Reinsurance segment experienced favorable development of $3.4 million.

Reserves for losses and loss expenses are based in part upon the estimation of losses resulting from catastrophic events. Estimation of these losses and loss expenses are based upon the Company’s historical claims experience and is inherently difficult because of the Company’s short operating history and the possible severity of catastrophe claims. Therefore, the Company uses both proprietary and commercially available models, as well as historical reinsurance industry catastrophe claims experience in addition to its own historical data for purposes of evaluating trends and providing an estimate of ultimate claims costs.

A significant portion of the Company’s contracts and policies cover excess layers for high severity exposures. Underwriting results and ultimate claims payments for this type of coverage are therefore not typically reported to the Company until later in the contract and policy lives. As a result, the level of losses paid to date is not necessarily indicative of expected future results.

122

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

6. Reinsurance

The effects of reinsurance on premiums earned and written during the years ended December 31, 2008, 2007 and 2006 are as follows:

	Year Ended						Year Ended						Year Ended
	December 31, 2008						December 31, 2007						December 31, 2006
	Earned			Written			Earned			Written			Earned			Written
Direct	$	1,331,635		$	1,426,366		$	696,038		$	741,556		$	472,929		$	576,745
Assumed		866,235			820,054			1,121,274			1,039,559			1,292,289			1,212,897
Ceded		(431,385	)		(462,130	)		(222,512	)		(206,140	)		(126,644	)		(204,078	)
	$	1,766,485		$	1,784,290		$	1,594,800		$	1,574,975		$	1,638,574		$	1,585,564

The Company purchases reinsurance to reduce its exposure to risk of loss in certain insurance and reinsurance lines of business. Loss recoverables are recorded as assets if the reinsurer is deemed able to meet its obligations. Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains primarily liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements.

During the year ended December 31, 2008, the Company recorded ceded losses of $574.4 million (2007 — $58.6 million; 2006 — $31.1 million). At December 31, 2008, the Company has an allowance for estimated uncollectible premiums receivable of $2.4 million (2007 — Nil) and no allowance for estimated uncollectible losses recoverable (2007 — Nil).

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

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

The reinsurance coverage provided by Shackleton to Endurance Bermuda was based on a modeled loss trigger designed to closely mimic the exposures in the Company’s portfolio of insurance and reinsurance business. Upon the occurrence of a hurricane or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios.

123

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

6. Reinsurance, cont’d.

If the modeled loss exceeded the designated attachment point for the peril at issue, then Endurance Bermuda could have made a recovery under the applicable reinsurance agreement. The amount recoverable was related to and limited by the Company’s ultimate net loss from the loss event. Endurance Bermuda was not entitled to any recovery from Shackleton.

Shackleton was a variable interest entity under the provisions of FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities.” The Company was not the primary beneficiary of Shackleton and was therefore not required to consolidate Shackleton in its consolidated financial statements. The Company had no exposure to loss as a result of its involvement with Shackleton.

7. Deposit accounting

For the years ended December 31, 2008, 2007 and 2006, the Company entered into contracts accounted for as deposits with gross premiums of $5.1 million, $28.6 million and $159.0 million, respectively, and recorded other underwriting (loss) income of ($4.0) million, $1.6 million and $1.4 million, respectively, related to such contracts. Gross premiums associated with treaties deemed to transfer only significant underwriting risk were $2.9 million, $17.5 million and $135.9 million during 2008, 2007 and 2006, respectively. Gross premiums associated with treaties deemed to transfer only significant timing risk were $2.2 million, $11.1 million and $23.1 million during 2008, 2007 and 2006, respectively.

8. Debt and financing arrangements

On May 8, 2007, Endurance Holdings amended its existing credit facility among Endurance Holdings, various designated subsidiary borrowers, fifteen lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, among other things, increase the size of the facility to $1,175 million from $925 million and to extend the maturity of the facility to May 8, 2012 (the “Credit Agreement”). On July 18, 2007, the Company entered into the First Amendment to the Credit Agreement, to, among other things, modify the restrictive covenants in the Credit Agreement to permit the Company to pay dividends on its preference shares following the occurrence of certain defaults as defined pursuant to the terms of the Credit Agreement. As amended, the credit facility is referred to as the ''2007 Credit Facility’’.

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

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

124

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

8. Debt and financing arrangements, cont’d.

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

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

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

On October 17, 2005, Endurance Holdings issued $200 million principal amount of 6.15% Senior Notes due 2015 (the “6.15% Senior Notes”). The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%, and, unless previously redeemed, will mature on October 15, 2015. Endurance Holdings used the net proceeds from the offering to repay the $143.5 million then outstanding under Endurance Holdings’ revolving credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes.

On July 15, 2004, the Company issued $250 million principal amount of 7% Senior Notes due 2034 (the “7% Senior Notes”). The 7% Senior Notes were offered by the underwriters at a price of 99.108% of their principal amount, providing an effective yield to investors of 7.072%, and, unless previously redeemed, will mature on July 15, 2034.

The 6.15% Senior Notes and the 7% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings’ existing and future unsecured and unsubordinated debt. The Senior Notes are also effectively junior to claims of creditors of Endurance Holdings’ subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.

The indentures governing each of the Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. At December 31, 2008, the carrying value of the Senior Notes stood at $447.3 million (2007 — $447.3 million) while the fair value as determined by quoted market valuation was $334.2 million (2007 — $431.7 million). The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2008.

125

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

8. Debt and financing arrangements, cont’d.

The Company made aggregate interest payments of $29.9 million during the year ended December 31, 2008 (2007 — $29.8 million, 2006 — $29.7 million).

9. Derivatives

In 2004, prior to the issuance of the 7% Senior Notes, the Company entered into an interest rate lock on a notional amount of $125 million to protect against interest rate increases before the anticipated issuance of the Senior Notes. The objective of the interest rate lock was to protect 50% of the forecasted receipt of proceeds from the issuance of the 7% Senior Notes offering, which was subject to change prior to issuance due to fluctuations in the benchmark 30 year U.S. Treasury rate. Upon issuance of the 7% Senior Notes, the interest rate lock was settled through payment by the Company of $2.7 million. The interest rate lock agreement was designated as a “cash flow hedge��� under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and accordingly, the fair value of the derivative was recorded in other comprehensive (loss) income and is being recognized as a component of interest expense in the statement of income as the interest expense related to the 7% Senior Notes affects earnings. The net income effect of the interest rate lock was not material.

The Company currently uses foreign currency forward contracts in its investment portfolios to minimize the effect of fluctuating foreign currencies and to gain exposure to interest rate differentials between differing market rates. For the years ended December 31, 2008, 2007 and 2006, the Company recognized a realized foreign exchange gain (loss) on forward contracts of approximately $544,000, ($527,100), and $17,900, respectively.

10. Segment reporting

The Company is currently organized into two business segments, Insurance and Reinsurance, which are based on how the Company monitors the performance of its underwriting operations.

• Insurance — This segment is comprised of six lines of business: property, casualty, healthcare liability, workers’ compensation, agriculture and professional lines. The property line of business is comprised of the insurance and facultative reinsurance of commercial properties. The types of risks insured are generally properties with sufficiently large values to require multiple insurers and reinsurers to accommodate their insurance capacity needs. The agriculture line of business is comprised of multiple peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products. The casualty lines of business are comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty, healthcare liability, workers’ compensation, and professional lines. The agriculture line of business is comprised of multiple peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products.

126

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

10. Segment reporting, cont’d.

• Reinsurance — This segment is comprised of six lines of business: casualty, property, catastrophe, agriculture, aerospace and marine and surety and other specialty. The casualty line of business is comprised of third party liability exposures and workers’ compensation coverages. The property line of business includes proportional and excess of loss reinsurance of personal and commercial exposures. Catastrophe coverages include reinsurance for catastrophic perils on a treaty basis. The agriculture line includes coverages for weather related perils as well as protection from yield and price risks. The marine line includes proportional and non-proportional reinsurance of hull and cargo insurance business. Aerospace coverages include the reinsurance of aviation and space business. Surety and other specialty coverages include proportional and excess of loss coverages of contract and commercial surety business as well as personal accident coverages.

Because the Company does not manage its assets by segment, investment income and total assets are not allocated to the individual segments. Management measures segment results on the basis of the combined ratio that is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. General and administrative expenses incurred by segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated 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 segment to which they apply. Group reinsurance protection purchased and any subsequent recoveries are allocated to segments based on the underlying exposures covered.

127

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

10. Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the year ended December 31, 2008, reserve for losses and loss expenses as of December 31, 2008 and the carrying value of goodwill as of December 31, 2008:

							Deposit
	Insurance			Reinsurance			Accounting(1)			Total
Revenues
Gross premiums written	$	1,426,366		$	825,145		$	(5,091	)	$	2,246,420
Ceded premiums written		(445,768	)		(16,362	)		—			(462,130	)
Net premiums written		980,598			808,783			(5,091	)		1,784,290
Net premiums earned		920,389			855,072			(8,976	)		1,766,485
Other underwriting loss		—			—			(3,973	)		(3,973	)
		920,389			855,072			(12,949	)		1,762,512
Expenses
Net losses and loss expenses		681,735			459,413			(5,717	)		1,135,431
Acquisition expenses		103,783			204,912			(8,782	)		299,913
General and administrative expenses		103,211			113,154			—			216,365
		888,729			777,479			(14,499	)		1,651,709
Underwriting income	$	31,660		$	77,593		$	1,550		$	110,803
Net loss ratio		74.1	%		53.7	%		63.7	%		64.3	%
Acquisition expense ratio		11.3	%		24.0	%		97.8	%		17.0	%
General and administrative expense ratio		11.2	%		13.2	%		—			12.2	%
Combined ratio		96.6	%		90.9	%		161.5	%		93.5	%
Reserve for losses and loss expenses	$	1,658,857		$	1,633,819		$	(57,220	)	$	3,235,456
Goodwill	$	45,217		$	39,961			—		$	85,178

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

128

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

10. Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the year ended December 31, 2007, reserve for losses and loss expenses as of December 31, 2007 and the carrying value of goodwill as of December 31, 2007:

							Deposit
	Insurance			Reinsurance			Accounting(1)			Total
Revenues
Gross premiums written	$	741,556		$	1,068,114		$	(28,555	)	$	1,781,115
Ceded premiums written		(189,586	)		(16,554	)		—			(206,140	)
Net premiums written		551,970			1,051,560			(28,555	)		1,574,975
Net premiums earned		502,082			1,159,261			(66,543	)		1,594,800
Other underwriting income		—			—			1,602			1,602
		502,082			1,159,261			(64,941	)		1,596,402
Expenses
Net losses and loss expenses		290,213			502,804			(43,936	)		749,081
Acquisition expenses		72,044			255,091			(19,559	)		307,576
General and administrative expenses		89,996			127,273			—			217,269
		452,253			885,168			(63,495	)		1,273,926
Underwriting income (loss)	$	49,829		$	274,093		$	(1,446	)	$	322,476
Net loss ratio		57.8	%		43.4	%		66.0	%		47.0	%
Acquisition expense ratio		14.4	%		22.0	%		29.4	%		19.3	%
General and administrative expense ratio		17.9	%		11.0	%		—			13.6	%
Combined ratio		90.1	%		76.4	%		95.4	%		79.9	%
Reserve for losses and loss expenses	$	1,182,626		$	1,812,561		$	(102,963	)	$	2,892,224
Goodwill	$	42,202		$	38,464			—		$	80,666

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

129

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

10. Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the year ended December 31, 2006, reserve for losses and loss expenses as of December 31, 2006 and the carrying value of goodwill as of December 31, 2006:

							Deposit
	Insurance			Reinsurance			Accounting(1)			Total
Revenues
Gross premiums written	$	576,745		$	1,371,889		$	(158,992	)	$	1,789,642
Ceded premiums written		(160,108	)		(43,970	)		—			(204,078	)
Net premiums written		416,637			1,327,919			(158,992	)		1,585,564
Net premiums earned		371,762			1,447,167			(180,355	)		1,638,574
Other underwriting income		—			—			1,390			1,390
		371,762			1,447,167			(178,965	)		1,639,964
Expenses
Net losses and loss expenses		252,310			696,962			(121,642	)		827,630
Acquisition expenses		32,528			341,194			(56,233	)		317,489
General and administrative expenses		49,524			140,849			—			190,373
		334,362			1,179,005			(177,875	)		1,335,492
Underwriting income (loss)	$	37,400		$	268,162		$	(1,090	)	$	304,472
Net loss ratio		67.9	%		48.2	%		67.4	%		50.5	%
Acquisition expense ratio		8.7	%		23.6	%		31.2	%		19.4	%
General and administrative expense ratio		13.3	%		9.7	%		—			11.6	%
Combined ratio		89.9	%		81.5	%		98.6	%		81.5	%
Reserve for losses and loss expenses	$	865,347		$	1,964,961		$	(128,622	)	$	2,701,686
Goodwill		—		$	38,464			—		$	38,464

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

130

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

10. Segment reporting, cont’d.

The following table reconciles total segment results to income before income tax (expense) benefit for the years ended December 31, 2008, 2007 and 2006, respectively:

	2008			2007			2006
Total underwriting income	$	110,803		$	322,476		$	304,472
Net investment income		130,176			281,276			257,449
Net foreign exchange (losses) gains		(53,704	)		(7,970	)		21,021
Net realized investment losses		(57,366	)		(18,302	)		(20,342	)
Amortization of intangibles		(10,675	)		(5,286	)		(4,600	)
Interest expense		(30,171	)		(30,125	)		(30,041	)
Income before income taxes	$	89,063		$	542,069		$	527,959

The following table provides gross premiums written, by line of business, for the year ended December 31, 2008, 2007 and 2006:

Business Segment	2008			2007			2006
Insurance
Property	$	159,408		$	134,161		$	173,292
Casualty		120,867			125,124			128,933
Healthcare liability		80,692			92,361			106,988
Workers’ compensation		232,828			262,228			93,779
Agriculture		690,318			42,242			—
Professional lines		142,253			85,440			73,753
Total Insurance		1,426,366			741,556			576,745
Reinsurance
Casualty		162,453			201,032			400,111
Property		195,849			228,796			318,883
Catastrophe		315,262			345,187			291,755
Agriculture		21,483			131,325			107,104
Aerospace and Marine		81,334			92,882			180,203
Surety and other specialty		48,764			68,892			73,833
Total Reinsurance		825,145			1,068,114			1,371,889
Subtotal business segments	$	2,251,511		$	1,809,670		$	1,948,634
Deposit accounting(1)		(5,091	)		(28,555	)		(158,992	)
Total	$	2,246,420		$	1,781,115		$	1,789,642

⁽¹⁾ Reconciles the Company’s gross premiums written to the Company’s financial statement presentation.

131

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

10. Segment reporting, cont’d.

The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2008, 2007 and 2006:

	2008			2007			2006
United States	$	1,769,437		$	1,273,432		$	1,217,321
Worldwide		276,957			301,650			462,731
Europe		142,061			160,786			186,704
Japan		17,839			18,110			19,505
Canada		15,555			14,152			15,087
Other		29,662			41,540			47,286
Deposit accounting(1)		(5,091	)		(28,555	)		(158,992	)
Total gross premiums written	$	2,246,420		$	1,781,115		$	1,789,642

⁽¹⁾ Reconciles the Company’s gross premiums written to the Company’s financial statement presentation.

The Company attributes gross premiums written to the geographic region in which the risks originate.

11. Goodwill and intangibles assets

The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2008, 2007 and 2006:

			Intangible		Intangible
			assets with		assets with
	Goodwill		indefinite lives		finite lives			Total
Net balance at December 31, 2006	$	38,464	$	11,530	$	20,372		$	70,366
Additions		42,202		5,699		93,651			141,552
Amortization		—		—		(5,286	)		(5,286	)
Net balance at December 31, 2007		80,666		17,229		108,737			206,632
Additions		4,512		—		322			4,834
Amortization		—		—		(10,675	)		(10,675	)
Net balance at December 31, 2008	$	85,178	$	17,229	$	98,384		$	200,791
Gross balance	$	85,178	$	17,229	$	130,059		$	232,466
Accumulated Amortization		—		—		(31,675	)		(31,675	)
Net balance	$	85,178	$	17,229	$	98,384		$	200,791

On December 7, 2007, Endurance U.S. Holdings, Inc., an indirect wholly-owned subsidiary of Endurance Holdings acquired all outstanding stock of ARMtech. ARMtech underwrites crop insurance primarily through the U.S. federally sponsored Multiple Peril Crop Insurance Program. The base purchase price was $120 million, which the Company paid in 2007. An additional $3.2 million was recorded in 2008 as determined in accordance with the terms of the purchase agreement. In connection with the acquisition of ARMtech, the Company recorded a total of $45.2 million of goodwill and $96.7 million of intangible assets. The intangible assets acquired consisted principally of internally developed software, non-compete agreements, state licenses and customer relationships with expected lives between five and fifteen years.

132

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

11. Goodwill and intangibles assets, cont’d.

On June 8, 2007, the Company completed the purchase of American Merchants Casualty Company, an admitted insurer in the United States and the District of Columbia. The fair value of the U.S. state licenses was $2.2 million at acquisition and was recorded as an intangible asset with an indefinite life.

On June 5, 2006, the Company completed the purchase of Endurance American, an admitted insurer in the United States and the District of Columbia. The fair value of the U.S. state licenses was $3.5 million at acquisition.

No impairment of the Company’s goodwill or intangible assets was noted following the annual impairment review for the years ended December 31, 2008 and 2007. The Company expects the amortization of the intangible assets with finite lives to approximate $10.4 million for years 2009 to 2011, $9.6 million for 2012, $6.3 million for 2013 and $51.5 million for all years thereafter.

12. Commitments and contingencies

Concentrations of credit risk.The areas where significant concentrations of credit risk may exist include loss recoverables, investments and cash and cash equivalents. The Company’s reinsurance recoverables at December 31, 2008 and 2007 amounted to $557.8 million and $187.4 million, respectively, and resulted from reinsurance arrangements entered into in the normal course of operations. A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of funds, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. As of December 31, 2008, $187.9 million of losses recoverable (2007-$117.1 million) was due from reinsurers rated A- or better by A.M. Best or Standard & Poor’s. An additional $369.5 million (2007-$67.6 million) of losses recoverable was due from a U.S. government sponsored reinsurance program as of December 31, 2008.

As of December 31, 2008, substantially all the Company’s cash and investments were held by four custodians. The Company’s investment guidelines limit the amount of credit exposure to any one issuer other than the U.S. Treasury and certain other foreign government obligations rated AAA.

133

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

12. Commitments and contingencies, cont’d.

Major production sources.The following table shows the percentage of gross premiums written before deposit accounting adjustments generated through the Company’s largest brokers for the years ended December 31, 2008, 2007 and 2006:

Broker	2008			2007			2006
Aon Benfield(1)		14.3	%		21.3	%		28.2	%
Marsh & McLennan Companies, Inc.		14.2	%		25.6	%		23.2	%
Willis Companies		10.9	%		14.0	%		17.8	%
Total of largest brokers		39.4	%		60.9	%		69.2	%

⁽¹⁾ On November 11, 2008, Aon Corporation completed its acquisition of Benfield Group Limited. The table above shows the gross premiums brokered by these entities on a consolidated basis for all years presented.

Letters of credit.As of December 31, 2008, the Company had issued letters of credit of $635.5 million (December 31, 2007 — $574.4 million) under its credit facility in favor of certain ceding companies.

Investment commitments. As of December 31, 2008 and 2007, the Company had pledged cash and cash equivalents and fixed maturity investments of $147.9 million and $223.2 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2008 and 2007, the Company had also pledged $591.9 million and $594.7 million of its cash and fixed maturity investments as required to meet collateral obligations for $550.8 million and $532.3 million in letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2008 and 2007, cash and fixed maturity investments with fair values of $234.8 million and $120.3 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $14.2 million and $33.8 million were on deposit with Canadian regulators, respectively.

The Company is subject to certain commitments with respect to other investments at December 31, 2008 and 2007. The Company is generally subject to redemption restriction provisions of between one to five years from the date of acquisition and rolling redemption restrictions on a one or two year basis thereafter. The Company requested redemptions of $15.2 million at December 31, 2008 to be received during 2009 subject to the funds discretion on the next available redemption date. No redemptions were requested at December 31, 2007. Due to redemption restrictions, the Company was prohibited from requesting redemptions during 2008 of $69.7 million (2007 — $157.9 million) of its other investments held at December 31, 2008. In addition, as of December 31, 2008, the Company was committed to investing a further $1.7 million (2007 — $29.4 million) in various investment funds classified as other investments.

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

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

134

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

12. Commitments and contingencies, cont’d.

Operating Leases.The Company leases office space and office equipment under operating leases.

Future minimum lease commitments at December 31, 2008 are as follows:

Year Ending December 31,	Amount
2009		10,343
2010		10,340
2011		10,459
2012		10,384
2013		8,714
2014 and thereafter		21,668
		71,908

Total rent expense under operating leases for the year ended December 31, 2008 was $10.1 million (2007 — $10.2 million; 2006 — $8.4 million).

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

13. Shareholders’ equity

The Company’s share capital at December 31, 2008 and 2007 is comprised as follows:

	2008		2007
Preferred shares
Authorized — $1.00 par value each		8,000,000		8,000,000
Issued, outstanding and fully paid:
Series A preferred shares — $1.00 par value each		8,000,000		8,000,000
Common shares
Authorized — $1.00 par value each		120,000,000		120,000,000
Issued, outstanding and fully paid:
Ordinary common shares — $1.00 par value each		57,203,454		60,364,488

During 2008, the Company issued restricted shares under its equity compensation plans (Note 16). The common shares, issued, outstanding and fully paid for 2008 includes 1,134,213 restricted shares.

135

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

13. Shareholders’ equity, cont’d.

During 2008, the Company repurchased its common shares through open market transactions authorized by the Company’s Board of Directors. The repurchases were accomplished in open market or privately negotiated transactions, from time to time, depending on market conditions. The Company’s initial share repurchase program was authorized in May 2004 and expired in February 2007, at which time the Company’s Board of Directors authorized the repurchase of up to 2,000,000 ordinary shares or share equivalents. In May 2007, the Company’s Board of Directors approved an increase in the number of ordinary shares authorized for repurchase to 18 million ordinary shares or share equivalents through May 2009. In February 2009, the Company’s Board of Directors approved an extension of the existing share repurchase authorization through May 13, 2011. During 2008 and 2007, the Company repurchased 4,600,279 and 8,081,199 of its ordinary shares and share equivalents under this program in open market and privately negotiated transactions at an average price of $33.20 and $38.61 per share, respectively. Total authorized repurchases remaining under the plan at December 31, 2008 was 5,565,322 shares (2007 — 10,165,601).

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

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

Endurance Holdings may accelerate settlement of or elect early termination with respect to, all or a portion of the forward sale agreement. The forward counterparty may elect early termination of the forward sale agreement upon the occurrence of certain events and the number of ordinary shares deliverable upon settlement of the forward sale agreement may be adjusted depending on the amount of our dividends or the occurrence of certain events.

136

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

13. Shareholders’ equity, cont’d.

At December 31, 2008 and 2007, 5,094,727 and 7,094,727 warrants were outstanding. Such warrants are exercisable for ordinary and class A shares as follows:

	2008		2007
Ordinary shares		4,547,682		6,547,682
Class A shares		547,045		547,045
		5,094,727		7,094,727

During 2008, the Company repurchased 1,500,000 (2007 — 107,620) of outstanding warrants at an average price of $34.14 (2007 — $25.42), net of the average warrant strike price of $15.45 (2007 — $16.10) per warrant. In addition during 2008, 500,000 warrants with an exercise price of $15.12 were exercised for the purchase of the Company’s ordinary shares at a price of $25.68. The warrant holders elected the net settlement option, and thus the Company delivered 205,607 ordinary shares in settlement. The outstanding warrants at December 31, 2008, which have an exercise price of $14.87 (2007 — $15.87) per share, expire on December 14, 2011.

14. Earnings per share

The Company follows SFAS No. 128, “Earnings per Share”, to account for its weighted average shares. Basic earnings per common share are calculated by dividing net income available to common shareholders of Endurance Holdings’ ordinary shares and class A shares (collectively referred to as “common shares”) by the weighted average number of common shares outstanding. The weighted average number of common shares includes the fully vested, unreleased or unsettled restricted shares and restricted share units discussed in Note 16.

Diluted earnings per common share are based on the weighted average number of common shares and dilutive potential common shares outstanding during the period of calculation using the treasury stock method.

137

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

14. Earnings per share, cont’d.

The following tables set forth the computation of basic and diluted earnings per share for the years ended December 31, 2008, 2007 and 2006.

	2008			2007			2006
Numerator:
Net income	$	98,624		$	521,107		$	498,126
Preferred dividends		(15,500	)		(15,500	)		(15,500	)
Net income available to common shareholders	$	83,124		$	505,607		$	482,626
Denominator:
Weighted average shares — basic Ordinary shares outstanding		57,682,546			64,541,472			66,208,752
Vested restricted shares and restricted share units outstanding		73,413			155,197			226,960
		57,755,959			64,696,669			66,435,712
Share equivalents:
Variable delivery forward		—			—			—
Unvested restricted share and restricted share units		662,382			428,848			483,767
Warrants		3,425,611			4,213,550			3,537,522
Options		951,133			1,200,580			1,298,302
Weighted average shares — diluted		62,795,085			70,539,647			71,755,303
Basic earnings per common share	$	1.44		$	7.82		$	7.26
Diluted earnings per common share	$	1.32		$	7.17		$	6.73

The following table sets forth dividends declared in the years ended December 31, 2008, 2007 and 2006 respectively.

	2008		2007		2006
Dividends declared per preferred share	$	1.94	$	1.94	$	1.94
Dividends declared per common share	$	1.00	$	1.00	$	1.00

15. Related party transactions

Certain founding shareholders, including Aon Corporation and its affiliates (“Aon”), received warrants in conjunction with the capitalization of the Company. During 2006, Aon transferred all of the warrants it had received from the Company to third parties and thus, was no longer an affiliate of the Company at December 31, 2006.

138

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

15. Related party transactions, cont’d.

During the year ended December 31, 2006, the Company was party to agreements with various affiliates of Aon as follows:

Underwriting activities. In the normal course of business, the Company entered into reinsurance contracts with various subsidiaries of Aon. Such contracts resulted in net premiums earned of $34.9 million, losses and loss expenses of $20.1 million and acquisition expenses of $11.2 million for the year ended December 31, 2006. During the year ended December 31, 2006, affiliates of Aon produced 19.3% of the Company’s gross premiums written before deposit accounting adjustments. There were no related reinsurance premiums receivable at December 31, 2006.

In addition, the Company paid brokerage fees and commissions to Aon and its affiliates, which varied based on the amount of business produced. During the year ended December 31, 2006, the Company incurred $23.0 million in brokerage fees and commissions in connection with these transactions.

16. Stock-based employee compensation plans

At its meeting on February 28, 2007, the Company’s Board of Directors adopted the 2007 Equity Incentive Plan (“2007 Plan”) to allow for the issuance of equity incentives to non-employee directors of the Company and eligible employees of the Company and its subsidiaries. The 2007 Plan was approved by the Company’s shareholders at the Annual General Meeting of Shareholders held on May 9, 2007. As such, the Company’s existing Amended and Restated 2002 Stock Option Plan and the Amended and Restated 2003 Non-Employee Director Incentive Plan were merged into the new 2007 Plan.

The 2007 Plan allows the Company to grant to employees and non-employee directors restricted shares, restricted share units, stock appreciation rights, share bonuses, options to purchase the Company’s ordinary shares and other forms of equity incentive awards, as determined by the Compensation Committee of the Company’s Board of Directors.

In September and November 2007, the Company offered to exchange the outstanding restricted share units held by current employees of the Company for new restricted shares. The new restricted shares have substantially the same terms and fair value as the restricted share units, except that dividends on the restricted shares are paid in cash rather than in the form of additional restricted share units and holders of restricted shares are entitled to vote such shares at the Company’s annual or special general meeting of shareholders.

At the Company’s exclusive option restricted share units may be settled in cash, ordinary shares or in a combination thereof. With respect to certain subsidiaries, the Company generally withholds an amount sufficient to satisfy any federal, state or local withholding tax requirements associated with awards under the 2007 Plan.

Under the terms of the 2007 Plan, and after the consolidation of the Company’s previous plans, a total of 2,100,000 ordinary shares have been reserved for issuance. The Company issues new ordinary shares upon the exercise of outstanding options or settlement of a vested restricted share unit. As of December 31, 2008, 1,136,109 ordinary shares remained available for issuance under the 2007 Plan.

139

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

16. Stock-based employee compensation plans, cont’d.

On January 1, 2006, the Company implemented Statement of Financial Accounting Standard 123(R) (“SFAS 123(R)”) under the modified-prospective method as it relates to its stock-based employee and non-employee compensation plan and other stock plans. As part of the adoption of SFAS 123(R), the Company has elected the alternative simplified approach to calculating the excess tax benefits as allowed by Financial Statement of Position 123(R)-3.

Stock Options

The Company issued stock options to employee and non-employee directors, with exercise prices equal to the fair market values of the Company’s ordinary shares on the grant dates. Options generally vest at a rate of 20% per year over a five year term. Option awards have a 10-year contractual life.

A summary of option activity, including options held by employees and non-employee directors, during the year ended December 31, 2008 is presented below:

	For the year ended December 31, 2008
						Weighted
						Average
				Weighted		Remaining		Aggregate
	Number of			Average		Contractual Life		Intrinsic
Options Outstanding	Options			Exercise Price		(years)		Value
Beginning of year		2,027,045		$	18.02
Granted		—			—
Exercised		(37,500	)		18.08
Forfeited		—			—
Outstanding, end of year		1,989,545		$	17.39		3.10	$	26,177
Exercisable and vested options, end of year		1,989,545		$	17.39		3.10	$	26,177

No options were granted during the years ended December 31, 2008, 2007 and 2006. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007, and 2006 was $0.6 million, $11.3 million, and $8.1 million, respectively. The Company received proceeds of $0.7 million from the exercise of options during the year ended December 31, 2008. The Company issued new ordinary shares in connection with the exercise of the above options.

No options expired during the year ended December 31, 2008. The total grant date fair value of options vested during the years ended December 31, 2008, 2007, and 2006 was Nil, $0.3 million, and $2.1 million, respectively. There were no unrecognized stock-based compensation expenses related to unvested stock options at December 31, 2008.

140

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

16. Stock-based employee compensation plans, cont’d.

Restricted Shares and Restricted Share Units

The Company also issues restricted share and restricted share unit awards to employees and non-employee directors for which the fair value is equal to the fair market value of the Company’s ordinary shares on the grant date. Compensation equal to the fair market value of the shares at the measurement date is amortized and charged to income over the vesting period. Restricted share and restricted share unit awards granted prior to September 1, 2007, generally vest over a four or five-year period as follows: 12.5% in years one and five and 25% in years two through four; 25% per year; or 20% per year. Certain restricted shares and restricted share units, which did not require future service, would be forfeited if the holder departed the Company and violated the terms of a non-compete provision. Restricted shares granted to employees and non-employee directors beginning in 2007 vest pro rata over a four-year period and are forfeited upon departure from the Company for any reason prior to the applicable vesting date. Restricted shares granted to non-employee directors vest twelve months following the date of grant and are forfeited upon departure from the Board of Directors for any reason prior to the applicable vesting date.

On July 1, 2006, the Company created a second option agreement for U.S. taxpayers in order to comply with Section 409A of the U.S. Internal Revenue Code and the regulations promulgated by the U.S. Internal Revenue Service under Section 409A. The new form of option agreement eliminates the reductions in strike price for dividends paid by the Company relating to unexercised options and instead grants restricted share units in an amount equal to the strike price adjustments for dividends paid by the Company. These units generally vest and settle on the first March 1^st following the six-month anniversary of the date of issuance of the unit.

A summary of the restricted share and restricted share unit activity during the year ended December 31, 2008 is presented below:

	Number of			Aggregate
	Shares/Units			Intrinsic Value
Unvested, beginning of year		1,040,562
Granted		539,137
Vested		(412,706	)
Forfeited		(47,157	)
Unvested, end of year		1,119,836
Outstanding, end of year		1,178,147		$	35,969

During the years ended December 31, 2008, 2007 and 2006, the Company granted an aggregate of 539,137, 565,321 and 397,763 restricted share and restricted share unit awards with weighted average grant date fair values of $20.9 million, $22.3 million and $12.7 million. During the years ended December 31, 2008, 2007 and 2006, the aggregate fair value of restricted shares and restricted share units that vested was $13.8 million, $7.8 million and $6.3 million, respectively.

For the years ended December 31, 2008, 2007 and 2006, compensation costs recognized in earnings for all restricted shares and restricted share units were $17.3 million, $10.9 million, and $6.2 million, respectively. At December 31, 2008, compensation costs not yet recognized related to non-vested awards was $15.6 million (2007 — $16.4 million). This expense is expected to be recognized between 2009 and 2012, with approximately 64% expected to be recognized during 2009.

141

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

16. Stock-based employee compensation plans, cont’d.

Employee Share Purchase Plans

On October 26, 2005, Endurance Holdings’ shareholders approved the Employee Share Purchase Plan (the “ESPP”) and the 2005 Sharesave Scheme. Neither the ESPP nor the 2005 Sharesave Scheme is subject to any provisions of the Employee Retirement Income Security Act of 1974 as amended, and neither plan is a qualified plan within the meaning of Section 402(a) of the Internal Revenue Code of 1986, as amended (the “Code”) the ESPP is a qualified plan under Section 423 of the Code. Total expenses related to these plans for the year ended December 31, 2008 were approximately $197,000 (2007 — $148,000, 2006 — $123,000).

Following approval by the Company’s shareholders, 200,000 of Endurance Holdings’ ordinary shares, par value $1.00 per share, were reserved for issuance under the ESPP. Under the terms of the ESPP, employees of Endurance Holdings and certain of its subsidiaries may purchase Endurance Holdings’ ordinary shares at a 15% discount to the closing market price on the purchase date. Participants are eligible to receive dividends on the shares purchased in the ESPP and are also entitled to vote such shares at any annual or special meeting of shareholders. These shares are restricted from sale, transfer or certification for one year from the purchase date.

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

17. Pension plan

The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company’s defined contribution plans, the Company makes contributions to its employees’ accounts in amounts ranging from 4% to 10% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Contributions for the year ended December 31, 2008 resulted in an expense of $6.4 million being recorded in earnings (2007 — $6.4 million; 2006 — $4.6 million).

18. Statutory requirements and dividend restrictions

Our insurance and reinsurance operations are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate, including Bermuda, United States and the United Kingdom. These regulations include certain restrictions on the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities.

142

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

18. Statutory requirements and dividend restrictions, cont’d.

The combined statutory capital and surplus and combined statutory net income (loss) for the Company’s principal operating subsidiaries in their respective jurisdictions were as follows:

	Bermuda		United States		Other(1)
Statutory capital and surplus
At December 31, 2008	$	2,114,519	$	608,957	NA		(2)
At December 31, 2007		2,817,154		605,601	$	239,722
Statutory net income (loss)
For the year ended December 31, 2008	$	202,816	$	5,647	NA		(2)
For the year ended December 31, 2007		537,733		21,126	$	17,297
For the year ended December 31, 2006		483,831		65,784		(697	)

(1)	Includes Endurance U.K. and the Company’s Singapore and Zurich branches.
(2)	Endurance U.K. and the Company’s Singapore branch are currently completing 2008 statutory profit and loss statements. The Company’s Zurich branch had no statutory filing requirement at or for the year ended December 31, 2008.

As a holding company, Endurance Holdings relies on dividends from Endurance Bermuda to provide cash flow required for debt service and dividends to shareholders. Endurance Bermuda’s ability to pay dividends and make capital distributions is subject to certain regulatory restrictions based on the enhanced capital requirement calculated using the Bermuda standard model in addition to limits on the amount of Endurance Bermuda’s premiums written and net reserves for losses and loss expenses, subject to an overall minimum capital and surplus requirement of $100 million. At December 31, 2008, Endurance Bermuda can pay approximately $339 million (2007 — $1,042 million) to Endurance Holdings without prior approval under Bermuda law. In addition, Endurance Bermuda is required to maintain a minimum statutory liquidity ratio and solvency margin.

Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and American Merchants are subject to regulation by the Delaware Department of Insurance. ARMtech 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, 2008, Endurance U.S. Reinsurance, Endurance American and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2009 without the prior approval of the applicable insurance regulator. If the parent company is also an insurer, as is the case with Endurance American, Endurance American Specialty and American Merchants, the parent company or companies must also meet their own dividend eligibility requirements in order to pass along any dividends received from subsidiary insurance companies. At December 31, 2008, American Merchants and ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $5.7 million and $3.5 million (2007 — $5.4 million and $6.3 million), respectively, without prior regulatory approval.

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 distribution. At December 31, 2008, Endurance U.K. did not have profits available for distribution.

143

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

19. Taxes

The Company is not required to pay any income or capital gains taxes in Bermuda. The Company has received an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966 of Bermuda, as amended, that in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not be applicable to the Company until March 28, 2016 provided that the assurance is subject to the condition that it will not prevent the application of any taxes payable by the Company in respect of real property or leasehold interests in Bermuda held by it. Endurance Bermuda intends to operate in a manner such that it will owe no United States tax other than premium excise tax and withholding taxes on certain investments.

The Company’s subsidiaries based in Canada, the United Kingdom and United States are subject to income taxes in their respective jurisdictions.

The income tax benefit (expense) was as follows for the years ended December 31, 2008, 2007 and 2006, respectively:

	2008			2007			2006
Current income tax expense	$	(12,545	)	$	(12,210	)	$	(7,822	)
Deferred income tax benefit (expense)		22,106			(8,752	)		(22,011	)
Income tax benefit (expense)	$	9,561		$	(20,962	)	$	(29,833	)

Of the 2008 current income tax expense, $22.8 million related to taxes incurred in the United States (2007 — $10.8 million; 2006 — $7.4 million) and $11.0 million related to current income tax benefits in the United Kingdom (2007 and 2006 — Nil). Of the deferred income tax benefit (expense), $22.0 million and $Nil related to deferred income tax benefits (expenses) in the United States and the United Kingdom, respectively (2007 — $3.0 million and ($11.8) million; 2006 — ($15.9) million and ($5.7) million).

The actual income tax benefit (expense) attributable to income for the years ended December 31, 2008, 2007 and 2006 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income before income tax benefit, as a result of the following:

	2008			2007			2006
Computed expected tax expense	$	—		$	—		$	—
Tax benefit (expense) effect of foreign taxes		14,971			(13,772	)		(26,959	)
Valuation allowance		(5,410	)		(7,190	)		(2,874	)
	$	9,561		$	(20,962	)	$	(29,833	)

144

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

19. Taxes, cont’d.

Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following as of December 31, 2008 and 2007:

	2008			2007
Deferred income tax assets:
Unearned premiums	$	13,310		$	13,904
Loss reserves		26,739			20,647
Net operating loss carry forward		22,960			14,398
Unrealized investment losses		6,659			—
Deferred compensation		3,641			3,657
Start-up costs		1,406			1,835
Deferred interest		18,392			10,535
Realized investment losses		7,736			3,443
Other		6,098			7,397
Total deferred tax assets		106,941			75,816
Deferred income tax liabilities:
Deferred acquisition costs		(14,361	)		(17,498	)
Unrealized investment gains		(6,314	)		(4,725	)
Unrealized foreign exchange gain		(13,659	)		(2,588	)
Temporary differences related to acquisition		(31,339	)		(34,087	)
Other		(4,902	)		(7,575	)
Total deferred tax liabilities		(70,575	)		(66,473	)
Valuation allowance		(15,675	)		(10,265	)
Net deferred income tax asset (liability)	$	20,691		$	(922	)

The Company paid income taxes totaling $29.6 million, $25.7 million and $7.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. Net operating loss carryforwards in the amount of $82.0 million are available for application against future taxable income in the United Kingdom. These net operating loss carry forwards have no expiration date. There were no income taxes payable at December 31, 2008 or 2007.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 2008, management has established a valuation allowance of $15.7 million (2007 — $10.3 million) against realized investment losses and other items for which the Company does not have current plans to produce future realized investment gains and other income.

145

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

20. Condensed unaudited quarterly financial data

The following is a summary of the unaudited quarterly data for the year ended December 31, 2008:

	Quarter			Quarter			Quarter			Quarter
	Ended			Ended			Ended			Ended
	March 31,			June 30,			September 30,			December 31,
	2008			2008			2008			2008
Net premiums earned	$	372,043		$	453,085		$	509,629		$	431,728
Net investment income (loss)		46,878			60,482			27,410			(4,594	)
Net realized investment losses		(11,484	)		(4,013	)		(30,069	)		(11,800	)
Subtotal	$	407,437		$	509,554		$	506,970		$	415,334
Net losses and loss expenses	$	189,502		$	275,325		$	445,501		$	225,103
Acquisition and general and administrative expenses	$	124,418		$	128,129		$	128,369		$	135,362
Net foreign exchange losses (gains)	$	3,107		$	(5,621	)	$	15,477		$	40,741
Net income (loss)	$	77,811		$	103,338		$	(99,392	)	$	16,867
Preferred dividends		(3,875	)		(3,875	)		(3,875	)		(3,875	)
Net income (loss) available (attributable) to common shareholders	$	73,936		$	99,463		$	(103,267	)	$	12,992
Basic earnings (loss) per share	$	1.26		$	1.70		$	(1.79	)	$	0.23
Diluted earnings (loss) per share	$	1.15		$	1.56		$	(1.79	)	$	0.22

146

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except
ratios, share and per share amounts)

20. Condensed unaudited quarterly financial data, cont’d.

The following is a summary of the unaudited quarterly data for the year ended December 31, 2007:

	Quarter			Quarter			Quarter			Quarter
	Ended			Ended			Ended			Ended
	March 31,			June 30,			September 30,			December 31,
	2007			2007			2007			2007
Net premiums earned	$	377,045		$	417,551		$	399,742		$	400,462
Net investment income		74,813			78,548			62,605			65,310
Net realized investment losses		(2,084	)		(9,038	)		(3,055	)		(4,125	)
Subtotal	$	449,774		$	487,061		$	459,292		$	461,647
Net losses and loss expenses	$	210,594		$	207,179		$	186,456		$	144,852
Acquisition and general and administrative expenses	$	116,359		$	122,605		$	131,725		$	154,156
Net foreign exchange losses (gains)	$	2,613		$	(2,072	)	$	700		$	6,729
Net income	$	101,835		$	135,341		$	131,401		$	152,530
Preferred dividends		(3,875	)		(3,875	)		(3,875	)		(3,875	)
Net income available to common shareholders	$	97,960		$	131,466		$	127,526		$	148,655
Basic earnings per share	$	1.47		$	2.01		$	1.98		$	2.39
Diluted earnings per share	$	1.36		$	1.85		$	1.81		$	2.18

Certain comparative information in the unaudited quarterly financial data for the years ended December 31, 2008 and 2007 have been reclassified to conform to current year presentation.

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PART III

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information called for by Item 12 relating to the security ownership of certain beneficial owners and management is incorporated herein by reference to the sections captioned “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Directors and Executive Officers” of our Proxy Statement for our 2009 Annual General Meeting of Shareholders.

Information required by this item relating to securities authorized for issuance under the equity compensation plans is included in the following table:

Equity Compensation Plan Information

					Number of securities remaining
	Number of securities to be		Weighted-average		available for future issuance
	issued upon exercise of		exercise price of		under equity compensation plans
	outstanding options,		outstanding options,		(excluding securities reflected in
Plan category		warrants and rights		warrants and rights (1)		the first column)
Equity compensation plans approved by security holders		2,054,983		$17.51		1,333,828
Equity compensation plans not approved by security holders		—		—		—
Total		2,054,983		$17.51		1,333,828

(1) Weighted average exercise price does not include $0 exercise price of 43,933 restricted share units included in the number of securities to be issued upon exercise.

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SIGNATURES

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

	ENDURANCE SPECIALTY HOLDINGS LTD.
Date: May 8, 2009	/s/ Michael J. McGuire
	Name:	Michael J. McGuire
	Title:	Chief Financial Officer (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number		Description of Document
	23.1	Consent of Independent Registered Public Accounting Firm
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
	32	Certifications Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

150