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.
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:
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’’).
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.
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.
Includes only cash and cash equivalents and fixed income securities held by the Company’s investment managers.
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.
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.
The Company’s contractual obligations as of December 31, 2008 are summarized as follows:
Reconciles the Company’s reserves by business segment to the Company’s financial statement presentation.
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.
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.
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.
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.
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.
The income tax benefit (expense) was as follows for the years ended December 31, 2008, 2007 and 2006, respectively: