We derived the following selected consolidated financial information for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 from our Audited Consolidated Financial Statements and related notes. These historical results are not necessarily indicative of results to be expected from any future period.
You should read the following selected consolidated financial information along with the information contained in this Annual Report on Form 10-K, including
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.
American Agri-Business Insurance Company, managed by ARMtech Insurance Services, Inc. (collectively “ARMtech”), both domiciled in Texas.
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 and Other Investments, comprised of alternative funds and high yield loan funds that are accounted for under the equity method of accounting. In accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), the available for sale 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 income as a separate component of shareholders’ equity. If unrealized losses are considered to be other-than-temporarily impaired due to credit related factors, such losses are included in earnings as net impairment losses recognized in earnings. For Other Investments, the Company increases or decreases the value of these investments for the Company’s share of income or loss, less dividends, which is included in net investment income.
Marketplace Conditions and Trends. In general, at the end of 2010, we believe operating conditions continued to be competitive. In most classes of property and casualty business, we experienced downward pricing driven largely by relatively high levels of underwriting capacity and competition. In our agriculture business, pricing was stable, although the underlying exposure base decreased with the decline in commodity prices. We continued to maintain our adherence to underwriting standards by declining business when pricing, terms and conditions did not meet our underwriting criteria.
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 54%, 57%, and 63% of the Company’s gross premiums written during the years ended December 31, 2010, 2009, and 2008, respectively.
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, 2010, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $1.8 million on the Company’s net income.
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. Management uses these multiple actuarial methods, supplemented with its own professional judgment, to establish its best estimate of reserves for losses and loss expenses.
Significant Assumptions Employed in the Estimation of Loss and Loss Expense Reserves. The most significant assumptions used as of December 31, 2010 to estimate the reserve for losses and loss expenses within the Company’s Insurance and Reinsurance segments are as follows:
the Company’s need to rely on its ceding companies for loss information.
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, 2010, 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.
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 portfolio. The Company obtains multiple prices for its securities where available. Pricing sources used in pricing the Company’s fixed income portfolio at December 31, 2010 were as follows:
Pricing Services and Index Providers. 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, two-sided 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, 2010, the Company has not adjusted any pricing provided by independent pricing services and index providers and have classified all such securities as Level 2.
comparing the fair value estimates to its knowledge of the current market.
review of information obtained from asset managers, credit agencies and industry reports or other publicly available information;
To the extent the Company determines that the amortized cost of the Company’s fixed income portfolio is likely to be recovered and related to non-credit factors (such as interest rates, market conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive income in the shareholders’ equity section of the Company’s balance sheet.
Other Investments. Other Investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. Other Investments consist largely of alternative funds that invest in senior secured bank debt, high yield securities, distressed debt, distressed real estate, derivatives and equity long/short strategies and high yield loan funds. The carrying value 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. Investments in high yield loan funds are reported as of the current date.
In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company’s stock price relative to both its book value and its net income. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead to an impairment of goodwill, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2010.
Deferred Tax Assets. We provide for income taxes in accordance with the provisions of the relevant accounting guidance on, “Accounting for Income Taxes” and “Accounting for Uncertain Tax Positions”, for Endurance Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions, ARMtech and Endurance U.K., which are our operating subsidiaries 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.
The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2010, 2009 and 2008.
Gross premiums written in 2010 were $2,053.2 million, an increase of $31.8 million, or 1.6%, compared to 2009 and a decrease of $193.2 million, or 8.6% compared to 2008. 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, 2010, 2009 and 2008:
Increased premium retentions in the agriculture and U.S. based property businesses within the Insurance segment for 2010 compared to 2009 and 2008;
Declines in the professional lines of the Insurance segment compared to 2009 as the Company nonrenewed a portion of the business due to increased competition and significant rate reductions.
Ceded premiums written by the Company decreased in 2010 compared to 2009 and 2008 because of decreased cessions to third party reinsurers, as the Company chose to retain a higher level of premiums in the agriculture and property lines of the Insurance segment. Net premiums earned increased in 2010 compared to 2009 due primarily to the growth in net premiums written in the Reinsurance segment’s casualty and property lines and the Insurance segment’s agriculture line. Net premiums earned decreased in 2010 compared to 2008 due to the Company exiting the workers’ compensation line of business in the Insurance segment in 2009, partially offset by growth across the agriculture and professional insurance lines and the casualty and property reinsurance lines.
The Company’s 2010 net investment income of $200.4 million represents a decrease of 29.5% or $83.8 million as compared to 2009 and an increase of 53.9% or $70.2 million as compared to 2008. Net investment income during 2010 included net mark to market gains of $40.3 million on Other Investments, comprised of alternative funds and high yield loan funds as compared to mark to market gains of $98.1 million in 2009 and mark to market losses of $111.6 million in 2008. Investment income generated by the Company’s fixed income securities decreased by $20.8 million in 2010 compared to 2009 and by $70.7 million compared to 2008 due to lower reinvestment rates. Cash and cash equivalents and investments (including pending investment settlements) increased 3.6% from 2009 and 15.4% from 2008. The increase in cash and cash equivalents and investments during 2010 and 2009 resulted from increases in market valuations of investments and positive net operating cash flows, partially offset by share repurchases. Investment expenses, including investment management fees, during 2010 were $14.9 million compared to $11.4 million in 2009 and $10.3 million in 2008. The increase in investment expenses over the two years was due to an overall increase in invested assets and changes in the Company’s external investment managers.
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.
The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes Other Investments and operating cash.
During 2010, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 171 basis point range, with a high of 2.74% and a low of 1.03%. Trading activity in the Company’s portfolio included reductions in short-term investments and government guaranteed corporate securities and increased allocations to corporate securities and U.S. government and agencies securities. The portfolio repositioning was aimed at selectively adding yield while continuing to keep the portfolio short in duration and conservatively positioned. The duration of the fixed income portfolio held at December 31, 2010 was largely consistent with the duration at the end of 2009.
The Company’s 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 and losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale for the year ended December 31, 2010 were $3,422.5 million compared to $2,587.5 million for the year ended December 31, 2009. Net realized investment gains on investment sales for the years ended December 31, 2010, 2009 and 2008 were as follows:
During 2010, 2009 and 2008, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. During the second quarter of 2009, the Company adopted new accounting guidance related to identifying whether an investment is considered to be other than temporarily impaired, which is described in Note 2(d), “Summary of Significant Accounting Policies-Investments,” of the notes accompanying our audited consolidated financial statements. As a result, the Company initially considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at December 31, 2010. The Company did not identify any such securities meeting these criteria. As such, the Company performed various analysis and reviews, to determine whether the investments in an unrealized loss position were other-than-temporarily impaired as a result of credit factors or non-credit related factors. Other-than-temporary impairment losses recognized in earnings for the years ended December 31, 2010, 2009 and 2008 were as follows:
During 2010, the Company revalued its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange gains of $3.0 million compared to gains of $29.7 million for 2009 and losses of ($53.7) million for 2008. The gains recorded in the current period were primarily due to the revaluation of foreign denominated cash, receivables and net insurance liabilities as the U.S. dollar fluctuated in mixed directions against other major currencies. The net foreign exchange gains recorded in 2009 resulted from the strengthening of the British Sterling and weakening of the U.S. Dollar over that period. The net foreign exchange losses recorded in 2008 resulted from the strengthening of the U.S. dollar and weakening of the British Sterling compared to other currencies over that period.
The Company’s acquisition expense ratio decreased in 2010 as compared to 2009 and 2008 primarily due to shifts in the earned premium mix, notably within the Insurance segment as earned premiums have increased in the agriculture line of business and decreased in the workers’ compensation line of business that had higher commission rates which the Company exited during 2009.
The Company incurred a tax expense for the year ended December 31, 2010 of $7.2 million compared to tax benefits of $11.4 million and $9.6 million for the years ended December 31, 2009 and 2008. The Company incurred additional taxes in 2010 due to the increase in income generated in its U.S. taxable jurisdictions compared to 2009 and 2008.
Increased premium retentions in the U.S. based property business resulting from changes in the Company’s third party reinsurance program implemented in 2009;
Growth in the casualty line of business as a result of modest levels of new premiums written combined with increased premium retentions;
The change in the Insurance business segment net premiums written in 2010 compared to 2008 was driven primarily by the Company’s exit from the California workers’ compensation market in the first quarter of 2009, which contributed $215.8 million of net premiums written in 2008. This was partially offset by modest growth in net premiums written in the professional, agriculture and casualty lines of business.
Ceded premiums written by the Company in the Insurance segment decreased in 2010 compared to 2009 as the Company retained a higher proportion of premiums in the agriculture and property lines of business.
Increased catastrophe premiums written generated by business acquired from Glacier Reinsurance AG in a quota share and renewal rights transaction in the third quarter of 2010. This was offset by reduced catastrophe premiums in the U.S. market as the Company reduced deployed limits and non-renewed business which did not meet return expectations. Net growth was offset by the absence of catastrophe reinstatement premiums recorded in 2008 as a result of Hurricanes Ike and Gustav;
An increase in premiums written in the surety and other specialty line compared to 2009 attributable to new business and increased participation on renewed contracts; and
Net losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for 2010 increased compared to 2009 and was comparable to 2008. The increase in loss ratio over 2009 was a result of an increase in losses incurred in the current period and from reduced pricing, partially offset by higher favorable prior year loss reserve development recognized in 2010. During 2010 the Company incurred losses from the Chilean earthquake, European windstorm Xynthia and the New Zealand earthquake. The Company’s Reinsurance segment was also impacted by losses related to European flooding and several small catastrophe events in the United States in 2010. These events contributed to the increase in current accident year ratios in 2010 compared to 2009. In 2008, the Company recorded combined losses, net of reinstatement premiums, of approximately $148 million due to Hurricanes Gustav and Ike, which added 19.2 percentage points to the net loss ratio.
General and Administrative Expenses. The general and administrative expense ratio experienced by the Reinsurance segment in 2010 as compared to 2009 and 2008 decreased as a result of the growth in overall premiums earned.
Foreign Government Securities. Non U.S. government securities represent the fixed income obligations of non-U.S. governmental entities, including securities issued by governments of countries other than the United States.
Commercial Mortgage-Backed Securities. Our commercial mortgage-backed securities (“CMBS”) portfolio is diversified both geographically and by the types of underlying properties. Our portfolio is primarily backed by office and retail buildings. We have limited exposure to lodging and industrial properties. The majority of commercial mortgage-backed securities in our portfolio are non-agency and in the super senior tranche with average credit support in excess of approximately 35%. The principal risks inherent in holding agency commercial mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash flows will be received. Non-agency CMBS also have credit risk should losses on the underlying collateral exceed the credit protection provided.
Short-term investments are investments which mature within no more than one year or no less than 90 days. The Company’s short-term investments generally consist of U.S. Government and Agencies securities.
Within the categories of securities noted above, the Company holds insurance enhanced bonds (residential mortgage-backed, asset-backed and municipal securities) of $27.6 million, which represent approximately 0.5% of our fixed income portfolio. The overall credit quality of the insured bond portfolio was an average rating of “A” from Moody’s and “BBB” from Standard & Poor’s. The overall credit quality of the financial guarantors was an average rating of “Caa” by Moody’s and “CC” by Standard & Poor’s. Our evaluation of risk for insurance enhanced securities assumes we will gain no benefit from the guarantees.
The contractual maturity distribution for our fixed income portfolio held as of December 31, 2010 and 2009 was as follows:
The Company participates in a securities lending program whereby fixed maturity investments 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 cash, which the Company separately maintains. The Company invests such cash collateral in other securities, typically overnight repurchase agreements. Securities with an estimated fair value of $58.7 million and $65.7 million were on loan under the program at December 31, 2010 and 2009, respectively. The Company was liable for cash collateral under the Company’s control of $59.9 million and $67.0 million at December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, the fair value of the investments purchased with the cash collateral received from the borrower was $59.9 million and $66.9 million. The investments purchased had an average credit quality rating of “Aaa” by Moody’s and “AAA” by Standard & Poor’s at December 31, 2010. All securities on loan are issued on a term or overnight basis and are subject to daily recall at the Company’s discretion.
During January 2011, major flooding occurred in and around Brisbane, Australia. On February 3, 2011, Tropical Cyclone Yasi made landfall in northern Queensland, Australia. In addition, on February 22, 2011, Christchurch, New Zealand experienced a severe earthquake causing substantial structural damage to the city. Preliminary information indicates that these events have the potential to cause significant losses within the insurance industry generally. To date, reported claims as a result of these events have been limited. Accordingly, while losses emanating from these events cannot be accurately estimated at this time, the Company may need to establish appropriate loss reserves related to these events in the first quarter of 2011, which may have a negative impact on its first quarter results of operations.
As of December 31, 2010 and 2009, the Company had pledged cash and cash equivalents and fixed maturity investments of $146.3 million and $158.5 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2010 and 2009, the Company had also pledged $500.9 million and $664.0 million of its cash and fixed maturity investments to meet collateral obligations for $439.3 million and $605.3 million in secured letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2010 and 2009, cash and fixed maturity investments with fair values of $369.1 million and $361.6 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $3.5 million and $12.4 million were on deposit with Canadian regulators, respectively.
Variable Delivery Forward. On September 11, 2007, Endurance Holdings entered into a variable delivery equity forward sale agreement under which Endurance Holdings was entitled to sell ordinary shares to an affiliate of Deutsche Bank Securities, Inc. for proceeds of approximately $150 million. The equity forward sale agreement was originally scheduled to be settled or terminate commencing on July 20, 2010. On June 18, 2010, Endurance Holdings, Deutsche Bank AG, London Branch and Deutsche Bank Securities Inc. entered into an agreement to terminate the equity forward sale agreement. The Company did not issue any of its ordinary shares in connection with transaction, nor has the Company incurred any early termination penalties in connection with the termination of the agreement.
The following table summarizes the components of our capital resources at December 31, 2010 and 2009:
The Company also has credit facility capacity of $735.7 million and $569.7 million as at December 31, 2010 and 2009, respectively.
Credit Facility. As of December 31, 2010 and 2009, the Company had $439.3 million and $605.3 million, respectively, of letters of credit outstanding under the 2007 Credit Facility and no revolving loans outstanding. The Company was in compliance with all covenants contained in the 2007 Credit Facility as of December 31, 2010.
On July 15, 2004, the Company issued $250 million principal amount of 7% Senior Notes. On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior Notes. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than the date of issue, the initial purchase price to the public and the first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with, the previously issued 7% Senior Notes. The 7% Senior Notes were offered by the underwriters at a price of 99.108% (original issuance) and 94.976% (additional issuance) of their principal amount, providing an effective yield to investors of 7.072% (original issuance) and 7.449% (additional issuance) and, unless previously redeemed, will mature on July 15, 2034.
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.
On an ongoing basis, the Company expects its internally generated funds, together with borrowings available under the 2007 Credit Facility, capital generated from the 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.
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.
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 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 loss reporting patterns, as well as changes in expected loss ratios, within the table under the heading “Potential Variability in Reserves for Losses and Loss Expenses” beginning on page 92.
For the year ended December 31, 2010, for the vast majority of our business, 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 2010 for those reserve categories were within the range of possible results anticipated by the Company. For the insurance workers’ compensation line of business we increased our prior initial expected loss ratios and for the Bermuda based Healthcare insurance line we decreased our prior initial expected loss ratios to recognize the emerging loss experience within those lines.
Short Tail Insurance. The prior year favorable loss development in the short tail insurance reserve category during 2010 was primarily as a result of lower than expected claims reported and favorable case reserve development 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 2010.
Long Tail Insurance. The favorable loss emergence within the long tail insurance reserve category during 2010 was primarily due to lower than expected claims activity and favorable case settlement within the Bermuda based healthcare liability, casualty and professional lines of business. This favorable loss emergence was partially offset by adverse loss development in U.S. based primary and excess casualty and the workers’ compensation line of business. The Company exited the workers’ compensation business in 2009.
Other Insurance. Lower than anticipated agriculture claims settlements for the 2009 crop year resulted in a reduction in prior years’ estimated loss and loss expenses within this reserve category during 2010.
Other Reinsurance. The Company recorded a modest amount of favorable prior period development in this reserve category due to lower than expected claims reported within the personal accident and agriculture lines of business.
For the year ended December 31, 2009, 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 2009 for those reserve categories were within the range of possible results anticipated by the Company.
Long Tail Insurance. The favorable loss emergence during 2009 within the long tail insurance reserve category was primarily due to lower than expected claims activity and favorable case settlement within the healthcare liability line of business. The favorable loss emergence in healthcare liability was partially offset by adverse loss development in the workers’ compensation line of business resulting from the Company’s review of industry trends and potential claim cost changes due to medical inflation. In addition, the Company also experienced adverse loss emergence related to credit crisis exposures within the professional lines of business.
Other Insurance. The Company recorded favorable loss emergence within this reserve category during 2009 due to lower than anticipated claims settlements for the 2008 crop year in the agriculture line of business.
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.
The Company is subject to income taxes in certain jurisdictions in which the Company operates; however, since the majority of the Company’s income is currently earned in Bermuda, a jurisdiction with no corporate income tax, the tax impact to the Company’s operations has historically been minimal. In 2010, the Company generated cumulative income before income taxes in its subsidiaries, which generated a consolidated 2% effective income tax rate. In 2009, certain subsidiaries of the Company in the U.S. generated taxable losses largely contributing to the Company’s income tax benefit. A larger proportion of the Company’s income before income taxes was generated in jurisdictions with a corporate income tax in 2010 versus 2009.
The Company’s balance sheet at December 31, 2010 contains a net deferred tax asset in the amount of $33.7 million (2009 - $17.3 million deferred tax asset). The current year net deferred tax asset consists of gross deferred tax assets of $124.1 million, gross deferred tax liabilities of $76.8 million and a valuation allowance of $13.6 million. Of the Company’s gross deferred tax assets, $24.1 million (2009 - $16.5 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.
In our opinion, Endurance Specialty Holdings Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, 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, 2010 and 2009, and the related consolidated statements of income and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated March 1, 2011 expressed an unqualified opinion thereon.
Consolidated Statements of Income and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008
We have audited the accompanying consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2010 and 2009, and the related consolidated statements of income and comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. 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 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, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2011 expressed an unqualified opinion thereon.
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. A third actuarial method used by the Company to estimate reserves for losses and loss expenses is known as the loss development method. 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. 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 reasonable, the ultimate loss experience may not be as reliably predicted as may be the case with other insurance and reinsurance companies, 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.
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. Current accounting guidance establishes three levels as follows:
For the remaining fixed income investments in an unrealized loss position for which a decision to sell has not been made and it is not more likely than not that the Company will be required to sell the security, the Company performs additional reviews to determine whether the investment will recover its amortized cost. Analysis and reviews performed to determine if the amortized cost of the Company’s fixed income portfolio is likely to be recovered include the following actions, among others, depending on the type of security being reviewed or tested:
Other Investments within the Company’s investment portfolio are comprised of (i) hedge funds and private equity funds that generally invest in senior secured bank debt, high yield securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan funds and are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. The carrying values 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. Investments in high yield loan funds are reported as of the current date.
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. In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company’s stock price relative to both its book value and its net income.
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.
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 realized gains on investment sales in the Consolidated Statements of Income and Comprehensive Income (loss).
Earnings per share is calculated using the two-class method, which is an earnings allocation formula that determines earnings per share for the holders of Endurance Holdings’ ordinary shares (also referred to as “common shares”) and participating common shares according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted shares, which receive cash dividends, are considered participating common shares. Net income available to common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company’s common and participating common shares. The remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security may share in earnings as if all of the earnings for the period had been distributed.
(Amounts in tables expressed in thousands of United States dollars, except
beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses it’s VIE determination with respect to an entity on an ongoing basis. See also Note 3 and Note 6.
In August 2006, Endurance Bermuda acquired $235 million of multi-year, collateralized catastrophe reinsurance from Shackleton Re Limited (“Shackleton”), a Cayman Island reinsurance company. Shackleton was a VIE under the accounting guidance. 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 or risk of loss from its involvement with Shackleton. This coverage expired July 31, 2008.
The reasons for transfers in or out of Level 3. If significant, the transfers into Level 3 are disclosed separately from transfers out of Level 3.
Reporting entities are required to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.
ASU 2010-6 was effective for the first quarter of 2010, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective beginning the first quarter of 2011. Since this standard impacts disclosure requirements only, its adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.
The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and
The following tables summarize the composition of the available for sale portfolio by investment ratings assigned by rating agencies at December 31, 2010 and 2009. In some cases, where investments are unrated, the rating of the issuer has been applied.
At December 31, 2010 and 2009, the Company held $27.6 million and $35.7 million of insurance enhanced bonds (residential mortgage-backed, asset-backed and municipal securities), respectively, representing 0.5% and 0.7% of the available for sale securities, respectively. At December 31, 2010, the overall credit quality of the insurance enhanced bond portfolio was an average rating of “A” from Moody’s and “BBB” from Standard & Poor’s. The overall credit quality of the financial guarantors had an average rating of “Caa” by Moody’s and “CC” by Standard & Poor’s.
Represents total OTTI recognized in accumulated other comprehensive income. It does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2010, the gross unrealized loss related to securities for which a non-credit OTTI was recognized in accumulated other comprehensive income was $6.2 million.
Represents total OTTI recognized in accumulated other comprehensive income. It does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2009, the gross unrealized loss related to securities for which a non-credit OTTI was recognized in accumulated other comprehensive income was $22.0 million.
Gross unrealized losses include unrealized losses on non-OTTI and OTTI securities recognized in accumulated other comprehensive income at December 31, 2009.
The Company determines the fair value of its fixed income portfolio in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Valuation inputs by security type may include the following:
Government guaranteed corporate securities - These securities are generally priced by pricing services or index providers. The pricing service or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical spread models which may incorporate inputs from the U.S treasury curve or LIBOR. The Company generally classifies the fair values of its government guaranteed corporate securities in Level 2.
Corporate securities - These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its corporate securities in Level 2.
Structured securities including agency and non-agency, residential and commercial, mortgage and asset-backed securities - These securities are generally priced by broker/dealers. Broker/dealers may use current market trades for securities with similar qualities. If no such trades are available, inputs such as bid and offer, prepayment speeds, the U.S. treasury curve, swap curve and cash settlement may be used in a discounted cash flow model to determine the fair value of a security. The Company generally classifies the fair values of its structured securities in Level 2.
The following tables set forth the Company’s available for sale investments categorized by the level within the hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2010 and 2009:
As of December 31, 2010, $38.3 million of fixed maturity and short-term investments were acquired and classified within Level 1 as they represented current issue or on the run U.S. treasury securities.
During the year ended December 31, 2010, $17.0 million of fixed maturity investments were transferred from Level 2 to Level 3. The reclassifications were largely related to high yield commercial mortgage-backed securities. At times during the year, the market activity for these securities decreased and therefore observable inputs were no longer available at December 31, 2010 and fair value of these securities was based on pricing models.
Level 3 assets represented less than 0.19% and 0.11% of the Company’s total available for sale assets at December 31, 2010 and 2009, respectively.
At December 31, 2010 and 2009, the carrying value of the Company’s other investments was $376.7 million and $351.4 million, respectively, which approximates fair value.
At December 31, 2010 and 2009, the carrying value of the Company’s senior notes was $528.3 million and $447.4 million and the fair value was $536.9 million and $439.1 million, respectively.
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.
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.
On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior Notes due July 15, 2034 (the “7% Senior Notes”), $250 million of which were initially issued on July 15, 2004 at a price of 94.976% of their principal amount, providing an effective yield to investors of 7.449%. On the closing of the additional issuance, the Company had a total par value of $335.0 million of the 7% Senior Notes outstanding. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than the date of issue, the initial purchase price to the public and the first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with the previously issued 7% Senior Notes. The Company used the proceeds from the additional 7% Senior Notes for general corporate purposes.
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. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2010.
The Company made aggregate interest payments of $32.8 million during the year ended December 31, 2010 (2009 - $29.8 million, 2008 - $29.9 million).
The following table provides gross premiums written, by line of business, for the years ended December 31, 2010, 2009 and 2008:
No impairment of the Company’s goodwill or intangible assets was noted following the annual impairment review for the years ended December 31, 2010 and 2009. The Company expects the amortization of the intangible assets with finite lives to approximate $10.4 million in 2011, $9.5 million in 2012, $6.2 million for 2013, $5.8 million in 2014 and 2015 and $40.0 million in all years thereafter.
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, 2010 and 2009 amounted to $319.3 million and $467.7 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 cash, 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, 2010, $206.6 million of losses recoverable (2009 - $211.3 million) was due from reinsurers rated A- or better by A.M. Best or Standard & Poor’s. An additional $111.7 million (2009 - $255.6 million) of losses recoverable was due from a U.S. government sponsored reinsurance program as of December 31, 2010.
As of December 31, 2010, substantially all the Company’s cash and investments were held by four custodians.
Letters of credit. As of December 31, 2010, the Company had issued letters of credit of $439.3 million (December 31, 2009 - $605.3 million) under its credit facility in favor of certain ceding companies.
The Company is subject to certain commitments with respect to Other Investments at December 31, 2010 and 2009. 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. Due to redemption restrictions, the Company is prohibited from requesting redemptions during 2011 of $118.9 million of its other investments held at December 31, 2010. In addition, as of December 31, 2010, the Company was committed to investing a further $11.7 million (2009 - $1.7 million) in various alternative funds classified as Other Investments.
In August 2010, the Company’s Board of Directors authorized for repurchase up to 7.0 million ordinary shares or share equivalents through November 9, 2011. This authorization superceded previous authorizations. During 2010 and 2009, under programs authorized by the Company’s Board of Directors, the Company repurchased 8,677,828 and 3,535,795 of its ordinary shares and share equivalents in open market and privately negotiated transactions at an average price of $38.96 and $32.87 per share, respectively. Common shares repurchased by the Company are not cancelled and are classified as treasury shares. The Company’s treasury shares are recorded at cost as a reduction in common shares and additional paid-in capital within shareholders’ equity. Total authorized repurchases remaining at December 31, 2010 was 2,808,354 shares (2009 - 6,413,635).
During 2010, the Company repurchased 10,000 (2009 - 1,599,200) outstanding warrants at an average price of $26.04 (2009 - $29.16), net of the average warrant strike price of $13.37 (2009 - $14.45) per warrant. During 2009, 500,000 warrants with an exercise price of $14.87 were exercised for the purchase of the Company’s ordinary shares at a price of $30.28. The warrant holders elected the net settlement option, and thus the Company delivered 254,458 ordinary shares in settlement. The outstanding warrants at December 31, 2010, which have an exercise price of $12.87 (2009 - $13.87) per share, expire on December 14, 2011.
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 two-class method.
Represents earnings available to holders of unvested restricted shares issued under the Company’s stock compensation plans that are considered participating.
Since 2002, subsidiaries of BlackRock Inc. (“BlackRock”) have provided the Company and its subsidiaries with various investment management, investment accounting and risk analysis services. BlackRock owned 3.9 million or 8.3% of Endurance Holdings’ ordinary shares outstanding at December 31, 2010 and were therefore considered a related party. The Company incurred expenses totaling $3.3 million (2009: $3.6 million; 2008: $3.5 million) of which $2.0 million was accrued in relation to investment services rendered by Blackrock at December 31, 2010 (2009: $1.6 million).
Richard C. Perry, a Director of the Company, is President of Perry Corp. Investment funds managed by Perry Corp. collectively owned 7,143,056 ordinary shares and options to purchase an additional 10,000 ordinary shares or approximately 15% of the Company’s common shares outstanding at December 31, 2010. As a non-employee director of the Company, Mr. Perry received from the Company the customary non-employee director compensation, consisting of $77,500 per annum and delivered $70,000 in restricted shares per annum, in each of 2010, 2009 and 2008. The investment funds managed by Perry Corp. sold all of their ordinary shares and options to the Company on January 28, 2011. For additional information regarding the transaction, see Note 20.
At the Company’s exclusive option, restricted share units may be settled in cash, ordinary shares or in a combination thereof. 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 as amended, and after the consolidation of the Company’s previous plans, a total of 2,100,000 ordinary shares were reserved for issuance. At a meeting on February 11, 2010, the Company’s Board of Directors adopted a resolution to add 1,795,000 ordinary shares to the 2007 Plan. The addition of 1,795,000 ordinary shares to the 2007 Plan was approved by the Company’s shareholders at the Annual General Meeting of Shareholders held on May 13, 2010. After the approval of the additional shares, a total of 3,895,000 ordinary shares were reserved for issuance. The Company issues new ordinary shares upon the issuance of share based equity incentives, such as restricted shares, or the exercise or settlement of outstanding derivative equity incentives, such as options or restricted share units. As of December 31, 2010, 2,254,016 (2009 - 854,346) ordinary shares remained available for issuance under the 2007 Plan.
The Company also issued 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
During the years ended December 31, 2010, 2009 and 2008, the Company granted an aggregate of 532,964, 326,671 and 539,137 restricted share and restricted share unit awards with weighted average grant date fair values of $20.4 million, $7.6 million and $20.9 million. During the years ended December 31, 2010, 2009 and 2008, the aggregate fair value of restricted shares and restricted share units that vested was $13.5 million, $15.1 million and $13.8 million, respectively.
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 entitled to vote such shares at any Annual General or Special Meeting of Shareholders. These shares are restricted from sale, transfer or certification for one year from the purchase date.
Following approval by the Company’s shareholders, 75,000 of Endurance Holdings’ ordinary shares, par value $1.00 per share, were reserved for issuance under the 2005 Sharesave Scheme. 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. The Company did not issue any options under the 2005 Sharesave Scheme in 2010 and there were no outstanding options under the 2005 Sharesave Scheme at December 31, 2010 and 2009.
American Specialty and Endurance Risk Solutions, 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, 2010, ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $2.8 million (2009 - $2.6 million) 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, 2010 Endurance U.K likely will not have profits available for distribution.
The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland, Singapore and Canada, which are subject to the relevant taxes in those jurisdictions. The Company’s various operating subsidiaries and branch operations are not under examination in any of these tax jurisdictions, but generally remain subject to examination for tax years 2006 - 2009.
The income tax (expense) benefit was as follows for the years ended December 31, 2010, 2009 and 2008, respectively:
Income tax paid in 2010 totaled $24.3 million. The Company received refunds and paid income taxes totaling $6.8 million and $29.6 million for the years ended December 31, 2009 and 2008, respectively. Net operating loss carryforwards in the amount of $66.2 million, $19.9 million and $17.1 million are available for application against future taxable income in the United Kingdom, Singapore and Switzerland respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland the net operating loss carry forwards expire after seven years. There were no income taxes payable in the United Kingdom as at December 31, 2010 or 2009.
On January 28, 2011, the Company repurchased 7,143,056 ordinary shares and options to purchase 10,000 ordinary shares from two affiliated funds of Perry Corp., a founding shareholder of Endurance Holdings. The aggregate repurchase price for the shares and the options was $321.5 million. The repurchase price per ordinary share was $44.99 per share. The ordinary shares acquired by the Company represented approximately 15% of its ordinary shares outstanding at December 31, 2010.
Following the closing of the transaction, Mr. Perry resigned from the Board of Directors of the Company.