The Company leases office space in Pembroke, Bermuda where the Company’s principal executive office is located. Additionally, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Switzerland and Singapore sufficient for the operation of its Insurance and Reinsurance segments. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2011, please see Note 11-“Commitments and Contingencies” to our Audited Consolidated Financial Statements.
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 equity securities that are held as available for sale and Other Investments, comprised of alternative and specialty 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 the Company’s intent to sell, requirement to sell such securities or credit related factors, such losses are included in earnings as net impairment losses recognized in (losses) 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.
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.
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, financial condition and liquidity.
The Company’s historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 8%, 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. An 8% variation in the Company’s proportional premiums receivable, net as of December 31, 2011, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $1.1 million on the Company’s net income.
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, 2011 and 2010:
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.
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 on 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.
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, 2011. 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, 2011 to estimate the reserve for losses and loss expenses within the Company’s Insurance and Reinsurance segments are as follows:
historic loss development and trend experience is assumed to be indicative of future loss development and trends; and
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, 2011, there were no significant backlogs related to the processing of policy or contract information in the Company’s Insurance or Reinsurance segments.
The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. 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 maturity, short-term and equity portfolios. The Company obtains multiple prices for its securities where available. Pricing sources used in pricing the Company’s fixed maturity, short-term and equity portfolios at December 31, 2011 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, 2011, the Company has not adjusted any pricing provided by independent pricing services and index providers and have classified all such securities as Level 2.
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, 2011, the Company has not adjusted any pricing provided by broker/dealers and has classified all such securities as Level 2.
Other than Temporary Impairment. Following a determination of fair value, the Company reviews its fixed maturity, short-term and equity portfolios to determine whether any declines in the fair value below the amortized cost basis of its fixed maturity, short-term and equity portfolios are other-than-temporary. If the Company determines that a decision to sell the security has been made or that it is more likely than not that the Company will be required to sell the security, the Company deems the security to be other-than-temporarily impaired and writes it down to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other-than-temporary impairment (“OTTI”) loss.
Other Investments. Other Investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. Other Investments consist of alternative funds and specialty funds. Alternative funds include investments in hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies. Specialty funds currently include high yield loan and convertible debt 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 certain of the fund managers, valuations of certain alternative funds and specialty funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.
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. As of December 31, 2011, the Company had a net deferred income tax asset of $33.4 million (2010-$33.7 million), which includes a valuation allowance of $31.4 million (2010-$13.6 million).
The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2011, 2010 and 2009:
Net premiums written in 2011 were $1,979.8 million, an increase of $216.1 million, or 12.3%, compared to 2010 and an increase of $373.8 million, or 23.3% compared to 2009. The change in net premiums written for 2011 compared to 2010 and 2009 was driven primarily by the following factors:
Increased net premiums written in the agriculture business within the Insurance segment resulting from increased commodity prices for corn, cotton, wheat and soybeans;
Declines in the property and professional lines of the Insurance segment and casualty and surety and other lines of the Reinsurance segment as a result of non-renewed business.
The components of net investment income for the years ended December 31, 2011, 2010 and 2009 are as follows:
The Company’s 2011 net investment income of $147.0 million represents a decrease of 26.6% or $53.3 million as compared to 2010 and a decrease of 48.3% or $137.2 million as compared to 2009. Net investment income during 2011 included net mark to market losses of $0.7 million on Other Investments, comprised of alternative and specialty funds, as compared to mark to market gains of $40.3 million in 2010 and mark to market gains of $98.1 million in 2009. Investment income generated by the Company’s available for sale investments decreased by $13.9 million in 2011 compared to 2010 and by $34.7 million compared to 2009 due to lower reinvestment rates. Cash and cash equivalents and investments (including pending investment settlements) increased 1.9% from
(3) The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes Other Investments and Operating Cash.
During 2011, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 162 basis point range, with a high of 2.40% and a low of 0.78%. Trading activity in the Company’s portfolio in 2011 included reductions in foreign governments, corporates, government guaranteed corporate securities and non-agency residential and commercial mortgage-backed securities and increased allocations to U.S. government and agency securities and equity securities. The duration of the fixed maturity portfolio held at December 31, 2011 did not change substantially compared to the end of 2010 and 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, 2011 were $3,034.9 million compared to $3,422.5 million for the year ended December 31, 2010. Net realized investment gains increased in the year ended December 31, 2011 compared to 2010 and 2009 as the Company realized gains as a result of managing the duration of the investment portfolio. Realized gains and losses on investment sales and the change in the fair value of derivative financial instruments for the years ended December 31, 2011, 2010 and 2009 were as follows:
For the years ended December 31, 2011, 2010 and 2009, the Company recorded $3.5 million, $3.9 million and $20.3 million of OTTI losses in earnings, respectively. The other-than-temporary impairment losses recognized by the Company in 2011 relating to specific credit events occurred primarily due to reductions in expected recovery values on residential and commercial mortgage-backed securities during the period, along with certain credit related downgrades in corporate securities.
The 2009 OTTI losses of $20.3 million included a portion related to credit losses and a portion related to non-credit factors. Non-credit related factors included market and sector related factors, including limited liquidity and credit spread widening.
During 2011, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange gains of $7.4 million compared to gains of $3.0 million for 2010 and gains of $29.7 million for 2009. The gains recorded in the current period resulted from net gains realized as the U.S. dollar fluctuated over the year. The net foreign exchange gains recorded in 2010 resulted from the weakening of the U.S. dollar compared to other currencies over that period. The net foreign exchange gains recorded in 2009 resulted from the weakening of the U.S. dollar and strengthening of British Sterling compared to other currencies over that period.
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. In 2011, multiple events adversely affected the Company’s net loss ratio in the Reinsurance segment. These included Thailand floods, Hurricane Irene, Danish floods, brushfires in Texas, the Tohuko, Japan earthquake and tsunami, the Christchurch, New Zealand earthquake, Queensland, Australia floods, Midwest United States tornadoes and multiple storms in the Midwest which when accumulated triggered certain aggregate catastrophe contracts. The Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals, of $466.7 million in relation to these events which added 24.8 percentage points to the Company’s net loss ratio for the year ended December 31, 2011. For the twelve months ended December 31, 2010, the Chilean earthquake, the New Zealand Earthquake and European Windstorm Xynthia adversely affected the Company’s net loss ratio in the Reinsurance segment. The Company recorded losses, net of reinstatement premiums and other loss sensitive accruals, of $81.1 million in relation to the three events, which added 4.8 percentage points to the Company’s net loss ratio for 2010. In 2009, the Company’s net loss ratio benefited from a relative absence of major catastrophes. Additionally, the Company recorded higher reserves for attritional losses in the Insurance segment’s agriculture and property lines in the year ended December 31, 2011 compared to 2010 which were partially offset by lower losses in the casualty line where a small number of individual risk events impacted results in 2010. The higher reserves in the agriculture line of business were due to drought conditions experienced in the Southwest United States and excess moisture in the Midwest United States in the spring, and the higher reserves in the property line of business was due to several small loss events related to storms and flooding. The Company recorded higher reserves for attritional losses in the Insurance segment’s property and healthcare lines in the year ended December 31, 2011 compared to 2009.
During 2011, 2010 and 2009, the Company’s previously estimated ultimate losses for prior accident years were reduced by $180.0 million, $126.8 million and $150.9 million, respectively, as the loss emergence related to prior accident years was lower than expected, resulting in the reserves held by the Company for those accident years being redundant. The overall net reduction in the Company’s estimated losses for prior accident years experienced in 2011 emerged 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
The Company’s acquisition expense ratio decreased in 2011 as compared to 2010 and 2009 primarily due to shifts in the earned premium mix, notably within the Insurance segment as earned premiums have increased in the agriculture line which has lower related acquisition costs than other lines. Additionally, the Company exited the workers’ compensation line of business within the Insurance segment during 2009 which had higher commission rates than other lines.
The Company incurred a tax benefit for the year ended December 31, 2011 of $23.0 million compared to tax expense of $7.2 million and benefit of $11.4 million for the years ended December 31, 2010 and 2009. The Company incurred a higher tax benefit in 2011 due to an increase in net losses experienced in its United States taxable jurisdictions compared to 2010 and 2009.
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.
Premiums. Net premiums written in the Insurance segment increased in 2011 by 21.2% compared to 2010 and increased 35.8% compared to 2009, respectively. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2011, 2010 and 2009 were as follows:
The change in the Insurance business segment net premiums written in 2011 compared to 2010 and 2009 was driven by the following factors:
An increase in the casualty line driven by new business emanating from our contract binding authority business which was launched at the end of 2010;
Acquisition Expenses. The Company’s acquisition expense ratio in the Insurance segment decreased in 2011 as compared to 2010 and 2009 as a result of a larger portion of the net premiums earned originating from the agriculture line, which has lower net acquisition costs than other lines of business in the Insurance segment.
General and Administrative Expenses. The Company’s general and administrative expense ratio in the Insurance segment for 2011 was comparable to that of both 2010 and 2009 as growth in net earned premiums offset increased expenditures. The increased expenditures in 2011 were due to higher personnel costs as the Company has been investing in several new insurance lines of business, which has resulted in increased headcount, and costs related to office closures and severance payments near the end of 2011.
The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance segment for the years ended December 31, 2011, 2010 and 2009:
Net losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for 2011 increased compared to 2010 and 2009 as a result of multiple catastrophe losses incurred in the period. These included Hurricane Irene, Thailand floods, Danish floods, brushfires in Texas, the Tohuko, Japan earthquake and tsunami, the Christchurch, New Zealand earthquake, Queensland, Australia floods, Midwest United States tornadoes and multiple storms in the Midwest which when accumulated triggered certain aggregate catastrophe contracts. The Company recorded Reinsurance segment losses, net of reinstatement premiums and other loss sensitive accruals, of $457.1 million in relation to these events for the year ended December 31, 2011. The net losses from the 2011 events added 49.9 percentage points to the Reinsurance segment’s net loss ratio for the year. The Company’s Reinsurance segment results for the year ended December 31, 2010 were impacted by net losses of $81.1 million in relation to the Chilean earthquake, New Zealand earthquake and Windstorm Xynthia. The net loss ratio incurred by the Reinsurance segment in 2009 was characterized by a relative absence of major catastrophe events.
The Company experienced higher favorable loss reserve development in its Reinsurance segment in 2011 compared to 2010 and 2009. The majority of the current year favorable loss reserve development emanated from the segment’s short tail catastrophe and the long tail casualty lines of business. During 2011, 2010 and 2009, the Company’s previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $109.2 million, $79.9 million and $58.8 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 for the year ended December 31, 2011 was comparable to 2010 and 2009.
The Company had an investment portfolio (including cash and cash equivalents) with a value of $6.3 billion as of December 31, 2011. The Company’s investment portfolio is comprised of cash, cash equivalents, fixed maturity investments, short-term investments, equity securities and investments in hedge funds, private equity funds, high yield loan funds and other specialty funds, which we categorize as “Other Investments.”
The following tables set forth the types of securities, amortized costs, fair values and related gross unrealized gains and losses of our investment portfolio held as of December 31, 2011 and 2010:
Equity securities in the Company’s investment portfolio consist of publically traded common and preferred stocks. Of the Company’s equity securities, 40.3% represent investments in an exchange traded fund that seeks to track the performance of a benchmark index of common stocks of companies that have a record of increasing dividends over time.
The investment ratings (provided by major rating agencies) for the fixed maturity portion of our investment portfolio held as of December 31, 2011 and 2010 and the percentage of our total fixed maturity portfolio they represented at such date were as follows:
specialty 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. Many of the Other Investments are subject to restrictions on redemptions and sale that limit our ability to liquidate these investments in the short-term. Interest income, income distributions and realized and unrealized gains and losses on our investments in the Other Investments are included in net investment income and totaled $0.7 million of losses for the year ended 2011.
During 2011, 2010 and 2009, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. In identifying such securities, 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 the end of the applicable period. To the extent that the Company did not identify securities meeting these criteria, the Company then performed various analyses 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. We identified certain securities that we believe will not recover their amortized costs. As such, the Company recorded total other than temporary impairments of $3.5 million (2010-$3.9 million; 2009-$20.3 million) related to credit factors and recognized in earnings.
On February 15, 2012, Moody’s placed a “negative outlook” on the “AAA” rating of the United Kingdom. The Company had sovereign and non-sovereign securities of the United Kingdom with a total fair value of $167.3 million as of December 31, 2011.
As of December 31, 2011 and 2010, the Company had pledged cash and cash equivalents and fixed maturity investments of $171.4 million and $143.6 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2011 and 2010, the Company had also pledged $517.2 million and $500.9 million of its cash and fixed maturity investments to meet collateral obligations for $447.3 million and $439.3 million in secured letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2011 and 2010, cash and fixed maturity investments with fair values of $370.4 million and $369.1 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $7.6 million and $10.7 million were on deposit with Canadian regulators, respectively.
Cash flows used in financing activities. Our cash flows used in financing activities for the twelve months ended December 31, 2011 were $234.1 million, compared to cash flows used in financing activities of $331.9 million and $233.9 million for 2010 and 2009, respectively. The 2011 cash flows used in financing activities decreased compared to 2010 principally due to the issuance of the Series B Preferred Shares by the Company in 2011.
The following table summarizes the components of our capital resources at December 31, 2011 and 2010:
Credit Facility. As of December 31, 2011 and 2010, the Company had $447.3 million and $439.3 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, 2011.
Senior Notes. 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. On December 16, 2011, the Company repurchased $0.5 million of its 6.15% Senior Notes due October 15, 2015.
At December 31, 2011, the carrying value of the Senior Notes stood at $528.0 million while the fair value as determined by quoted market valuation was $535.3 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2011.
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.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of Endurance Holdings, holders of the Series A Preferred Shares, Series B 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 and Series B 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, Series B 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.
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 which was valued at £93.5 million as of December 31, 2011. 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.
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 expected loss ratio method; the Bornhuetter-Ferguson method; and the loss development method. The expected loss ratio approach 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.
business. The Company’s short tail lines of business in the Reinsurance segment include catastrophe, property, aerospace and marine 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.
Losses and loss expenses for the year ended December 31, 2011 are summarized as follows:
Long Tail Insurance. The favorable loss emergence within the long tail insurance reserve category during 2011 was primarily due to lower than expected claims activity within the Bermuda based healthcare liability, casualty and professional lines of business. This favorable loss emergence was partially offset by adverse development within the U.S. based workers’ compensation line of business (which the Company exited in 2009) as well as other U.S. based casualty business.
Other Insurance. The favorable loss emergence within this reserve category resulted from lower than anticipated agriculture claims settlements for the 2010 crop year.
Short Tail Reinsurance. The Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity and favorable case reserve development within the catastrophe and surety and other specialty lines of business.
Short Tail Reinsurance. The Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity and favorable case reserve development within the catastrophe, property, and surety and other specialty lines of business.
Reserves for losses and loss expenses were comprised of the following at December 31, 2010:
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, 2011. 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.
At December 31, 2011 and 2010, the Company had reinsurance recoverables of $666.9 million and $319.3 million, respectively, related to its ceded 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. The Company has an allowance of $0.1 million for estimated uncollectible reinsurance recoverable balances at December 31, 2011 (2010-Nil).
Goodwill and other intangibles that arise from business combinations are accounted for by the Company in accordance with the applicable accounting guidance on “Business Combinations” and “Goodwill and Other Intangible Assets.” The accounting literature requires 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.
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 Company’s reporting units identified include the agriculture line of the Insurance segment, the remaining Insurance segment lines of business, and the Reinsurance segment. The fair value of the reporting unit is impacted by the performance of the business. The Company uses discounted cash flow analyses to estimate fair value. There have been no changes in the Company’s methodologies from the prior year. 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.
The Company is subject to income taxes on the operations of its subsidiaries and branch offices in the United States, United Kingdom, Switzerland, Singapore and Canada. The Company is not required to pay any income or capital gains taxes on its operations in Bermuda.
The Company’s income tax benefit (expense) was as follows for the years ended December 31, 2011, 2010 and 2009, respectively:
None of the Company’s other subsidiaries or branch operations are under an examination in any of the jurisdictions in which they operate, but they generally remain subject to examination for tax years 2007-2011. As of December 31, 2011 and 2010, the Company had no uncertain tax positions.
The Company has established a valuation allowance of $31.4 million (2010-$13.6 million) against certain operating loss carryforwards at December 31, 2011. The $31.4 million valuation allowance was established against net operating loss carryforwards in the Company’s United States subsidiaries, United Kingdom subsidiary and non-U.S. branches. The valuation allowance in 2010 was established against net operating loss carryforwards in the United Kingdom and non-U.S. branches. The increase in the valuation allowance was charged to the Company’s income tax expense during 2011. 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, 2011. 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.
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, 2011 and 2010, and the related consolidated statements of (loss) income and comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 and our report dated February 29, 2012 expressed an unqualified opinion thereon.
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Notes to the Consolidated Financial Statements for the years ended December 31, 2011, 2010 and 2009
Acquisition expenses are costs that vary with and are directly related to the successful 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.
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 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 expense 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.
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 views 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 judgment or estimation.
If the Company determines that a decision to sell an available for sale security has been made or that it is more likely than not that the Company will be required to sell the security, the Company deems the security to be other-than-temporarily impaired and writes down the value to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other-than-temporary impairment (“OTTI”) loss.
Basic (losses) earnings per common share are calculated by dividing net (loss) income (attributable) available to common shareholders by the weighted average number of common shares outstanding. The weighted average number of common shares excludes any dilutive effect of outstanding warrants, options and convertible securities such as unvested restricted shares.
In October 2010, the FASB issued ASU 2010-26, which modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new or renewal insurance contracts. The amended guidance specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts should be charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should also be charged to expense as incurred. ASU 2010-26 will be effective for fiscal periods beginning on or after December 15, 2011 with prospective or retrospective application permitted. The Company will adopt this standard prospectively on January 1, 2012. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends Accounting Standards Codification Topic 820, “Fair Value Measurement” (“ASC 820”) to change several requirements for measuring fair value and disclosing information about fair value measurements. Among the more significant changes, ASU 2011-04 amends ASC 820 to clarify certain existing fair value measurement and disclosure requirements as follows:
The “highest-and-best-use” and “valuation-premise” concepts only apply to measuring the fair value of nonfinancial assets. The previous guidance permitted the application of these concepts to financial assets and liabilities.
A reporting entity is required to measure the fair value of its own equity instruments from the perspective of a market participant that holds that instrument as an asset.
Reporting entities are required to disclose quantitative information about inputs used in estimating Level 3 fair value measurements.
ASU 2011-05 is effective for interim and annual reporting periods beginning after December 15, 2011. Early adoption is permitted and full retrospective application is required. The Company will adopt ASU 2011-05 on January 1, 2012. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.
(1) Includes net receivable on sales of investments and net payable on purchases of investments.
The following table summarizes the composition of the fixed maturity securities and short-term investments, by investment ratings assigned by rating agencies at December 31, 2011 and 2010. In some cases, where bonds are unrated, the rating of the issuer has been applied.
Contractual maturities of the fixed maturity and short-term investments portion of the investment portfolio are shown below as of December 31, 2011 and 2010. 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.
Realized and unrealized gains and losses are recognized in earnings using the first in and first out method. The analysis of net realized and unrealized gains for the years ended December 31, 2011, 2010 and 2009 are as follows:
(1) Balances include amounts related to collateralized debt obligations held with total fair values of $17.2 million.
The following tables summarize, for all available for sale securities in an unrealized loss position at December 31, 2011 and 2010, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.
(1) Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2010.
As of December 31, 2010, 376 available for sale securities were in an unrealized loss position aggregating $30.3 million. Of those, 112 securities with aggregated unrealized losses of $14.6 million at December 31, 2010 had been in a continuous unrealized loss position for twelve months or greater.
The following table provides a roll-forward of the amount related to credit losses for the Company’s fixed income investments recognized in (losses) earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income for the years ended December 31, 2011, 2010 and 2009:
For the year ended December 31, 2009, the Company recorded $20.3 million of OTTI losses in earnings. Such amounts included a portion related to credit losses and a portion related to non-credit factors.
The Company participated in a securities lending program until July 2011. Under this program fixed maturity investments were loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The borrowers of the Company’s securities provided the Company with collateral, typically cash, which the Company separately maintained. The Company typically invested such collateral in overnight repurchase agreements. Securities with an estimated fair value of $58.7 million were on loan under the program at December 31, 2010. The Company was liable for collateral under the Company’s control of $59.9 million at December 31, 2010. As of December 31, 2010, the fair value of the investments purchased with the cash collateral received from the borrower was $59.9 million. All securities on loan were issued on a term or overnight basis and were subject to daily recall at the Company’s discretion. Upon the termination of the securities lending program, the Company recalled all securities on loan and refunded all collateral previously held as part of the program.
Common equity securities - These securities primarily consist of exchange traded funds. These securities are generally priced by pricing services based on quoted market prices in active markets. The Company generally classifies the fair values of its common equity securities in Level 1.
The following tables set forth the Company’s available for sale investments and derivative instruments categorized by the level within the hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2011 and 2010:
During the year ended December 31, 2011, exchange traded equities were acquired and classified within Level 1.
Level 3 securities are primarily comprised of non-agency commercial mortgage-backed securities. Level 3 assets represented 0.21% and 0.19% of the Company’s total available for sale assets at December 31, 2011 and 2010, respectively. Net impairment losses recognized in earnings for the year ended December 31, 2011 included losses on Level 3 securities in the amount of $0.6 million (2010-$1.1 million), representing realized losses due to OTTI.
The following tables present a reconciliation of the beginning and ending balances for all available for sale securities measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2011 and 2010. Level three assets included below are related to our fixed maturity investments including corporate debt securities, non-agency residential and non-agency commercial mortgage-backed securities.
At December 31, 2011 and 2010, the carrying value of the Company’s other investments was $432.7 million and $376.7 million, respectively, which approximates fair value.
The effects of reinsurance on premiums earned and written during the years ended December 31, 2011, 2010 and 2009 are as follows:
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 $500.0 million, provided that no participating lender is obligated to increase its commitments under the facility.
Up to $675.0 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 $200.0 million in multicurrency letters of credit and up to $300.0 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 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 facility.
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 the current accounting guidance and accordingly, the fair value of the derivative was recorded in other comprehensive 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.
During 2011, the Company invested a portion of its fixed maturity assets with a third party investment manager with investment guidelines that permit the use of derivative instruments. The Company’s derivative instruments are recorded in the Consolidated Balance Sheets at fair value, with changes in fair value and gains and losses generally recognized in net realized and unrealized gains and net foreign exchange gains in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.
The Company may utilize foreign exchange forward contracts and options as part of its overall currency risk management and investment strategies.
The fair values and the related notional values of derivatives included in the Company’s Consolidated Balance Sheets at December 31, 2011 are noted below. The Company began entering into derivative transactions during the first quarter of 2011.
The fair values of all derivatives at December 31, 2011 were recorded in other assets or other liabilities in the Company’s Consolidated Balance Sheet. None of the above derivatives have been designated as hedges under current accounting guidance.
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: agriculture, professional lines, casualty, property, healthcare liability and surety and other specialty. The agriculture line of business is comprised of multi-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 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 surety and other specialty line includes coverages of workers’ compensation insurance which the Company exited in 2009 and contract and commercial surety business.
The following table provides gross premiums written by line of business for the years ended December 31, 2011, 2010 and 2009:
The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2011, 2010 and 2009:
The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2011 and 2010:
No impairment of the Company’s goodwill or intangible assets was noted following the annual impairment review for the years ended December 31, 2011 and 2010. No changes were made in the methodologies and assumptions used in the Company’s application of its impairment testing. The Company expects the amortization of the intangible assets with finite lives to approximate $10.3 million in 2012, $7.0 million in 2013, $6.5 million for 2014, $6.3 million in each of 2015 and 2016 and $37.8 million in all years thereafter.
As of December 31, 2011, substantially all the Company’s cash and investments were held by three custodians.
Employment agreements. The Company has entered into employment agreements with certain officers that provide for equity incentive awards, executive benefits and severance payments under certain circumstances.
Operating leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2011 are as follows:
The following table sets forth the computation of basic and diluted (losses) earnings per share for the years ended December 31, 2011, 2010 and 2009:
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 4.1 million or 9.5% of Endurance Holdings’ ordinary shares outstanding at December 31, 2011 and were therefore considered a related party. The Company incurred expenses totaling $3.2 million (2010-$3.3 million; 2009-$3.6 million) of which $2.1 million was accrued in relation to investment services rendered by Blackrock at December 31, 2011 (2010-$2.0 million). At December 31, 2011, the Company owned BlackRock common shares with a fair value of $0.5 million.
Pyramis Global Advisors, a subsidiary of FMR, LLC (“Fidelity”), provides investment management services to the Company. Fidelity and its affiliates owned 2.6 million or 6.1% of Endurance Holdings’ ordinary shares outstanding at December 31, 2011 and were therefore considered a related party. The Company incurred investment management fees totaling $1.5 million (2010-$2.0 million; 2009-$0.3 million) to this investment manager of which $0.4 million was accrued at December 31, 2011 (2010-$0.4 million).
Richard C. Perry, a former 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 $70,000 in restricted shares per annum, in each of 2010 and 2009. The investment funds managed by Perry Corp. sold all of their ordinary shares and options to the Company on January 28, 2011.
The Company issued stock options to employees 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, 2011 is presented below:
No options were granted, expired or vested during the years ended December 31, 2011, 2010 and 2009. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $32.5 million, $9.9 million, and $4.2 million, respectively. The Company received proceeds of $17.6 million from the exercise of options during the year ended December 31, 2011. The Company issued new ordinary shares in connection with the exercise of the above options.
There were no unrecognized stock-based compensation expenses related to unvested stock options at December 31, 2011.
The Company issued restricted shares and restricted share units to employees and non-employee directors. The fair value of the restricted shares and restricted share units granted 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 restricted shares and restricted share units at the measurement date is amortized and charged to income over the vesting period. Restricted shares granted to employees 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.
For the years ended December 31, 2011, 2010 and 2009, compensation costs recognized in earnings for all restricted shares and restricted share units were $14.8 million, $12.9 million, and $13.3 million, respectively. At December 31, 2011, compensation costs not yet recognized related to non-vested awards was $9.9 million (2010 - $11.6 million). This expense is expected to be recognized between 2012 and 2015, with approximately 63.9% expected to be recognized during 2012.
Total expenses related to this plan for the year ended December 31, 2011 was approximately $200,000 (2010 - $172,000; 2009- $100,000).
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. Company contributions for the year ended December 31, 2011 resulted in an expense of $7.5 million being recorded in earnings (2010 - $8.4 million; 2009 - $9.2 million).
Our insurance and reinsurance operations are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate, including Bermuda, the 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.
The combined statutory capital and surplus and combined statutory net (loss) income for our principal operating subsidiaries in their respective jurisdictions were as follows:
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions 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, 2011, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions, and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2012 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 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, 2011, ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $3.9 million (2010-$2.8 million) without prior regulatory approval.
The Company is not required to pay any income or capital gains taxes in Bermuda. The Company has received written assurance dated May 17, 2011 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 31, 2035 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’s Bermuda affiliates intend to operate in a manner such that they will owe no United States tax other than premium excise tax and withholding taxes on certain investments.
The income tax benefit (expense) was as follows for the years ended December 31, 2011, 2010 and 2009, respectively:
Of the 2011 current income tax benefit (expense), $12.7 million related to taxes incurred in the United States (2010 - $(27.7) million; 2009 - $6.5 million). Of the deferred income tax benefit, $9.6 million related to deferred income tax benefits in the United States (2010 - $21.4 million; 2009 - $5.3 million). A full valuation allowance has been recorded against the net asset position of Endurance Bermuda’s foreign branches and Endurance U.K.
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, 2011, and 2010:
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, 2011, management has established a valuation allowance of $31.4 million (2010 - $13.6 million) against net operating loss carryforwards in the Company’s United States subsidiaries, United Kingdom subsidiary and non-U.S. branches. The valuation allowance in 2010 was established against net operating loss carryforwards in the United Kingdom and non-U.S. branches.
The Company’s (loss) income before income taxes was distributed as follows for the years ended December 31, 2011, 2010 and 2009, respectively:
As of December 31, 2011 and 2010, the Company had no uncertain tax positions.
The following is a summary of the unaudited quarterly data for the year ended December 31, 2011:
The following is a summary of the unaudited quarterly data for the year ended December 31, 2010: