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, 2009, please see Note 11 - “Commitments and Contingencies” of our Audited Consolidated Financial Statements.
The following table sets forth our selected consolidated financial information for the years ended and as of the dates indicated. As described in Note 1 to our Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, our Audited Consolidated Financial Statements include the accounts of Endurance Holdings, Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions and ARMtech.
We derived the following selected consolidated financial information for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 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.
Endurance Specialty Holdings Ltd. (“Endurance Holdings”) was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings has seven wholly-owned operating subsidiaries:
In the Insurance segment, the Company writes agriculture, professional lines, casualty, property, healthcare liability and workers’ compensation insurance. In the Reinsurance segment, the Company writes catastrophe, casualty, property, aerospace and marine and surety and other specialty reinsurance.
Marketplace Conditions and Trends. In general, at the end of 2009, we believe operating conditions continued to be competitive. In certain catastrophe-exposed classes of property and some casualty business, we experienced a pricing environment that was flat to slightly up; however, for the remaining insurance and reinsurance lines of property and casualty business, we experienced downward pricing driven largely by relatively high levels of underwriting capacity and competition driven by several distressed or aggressive competitors. We continued to maintain our adherence to underwriting standards by declining business when pricing, terms and conditions did not meet our underwriting criteria.
In 2010, we believe the following three primary influences may affect the market for our insurance and reinsurance products - the continuation of the global recession, increased pricing competition in many of our markets, and a low interest rate environment. The United States and other markets around the world have continued to experience unsettled economic conditions, including increasing unemployment, increased governmental regulation and continued uncertainty in global financial markets. The reduction in economic activity is likely to lead to decreased demand for insurance and reinsurance. This, combined with the substantial recovery of most of the industry’s surplus position in 2009 and the impact of new market entrants, is likely to result in a more competitive global insurance and reinsurance market in 2010. Potentially offsetting these factors is the current low interest rate environment that will likely encourage more underwriting discipline as there will be reduced investment earnings from underwriting cash flows. We believe these three factors have and will continue to contribute to changes in market conditions within both the reinsurance and insurance marketplaces.
changes in the estimate or different estimates that could have been selected could have a material impact on the Company’s consolidated results of operations or financial condition.
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 approximately 57%, 63%, and 42% of the Company’s gross premiums written during the years ended December 31, 2009, 2008, and 2007, respectively.
In addition to determining the applicable risk period, the Company’s estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract’s written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Excess of loss reinsurance contracts accounted for approximately 23%, 23%, and 31% of the Company’s gross premiums written during the years ended December 31, 2009, 2008, and 2007, respectively. For proportional reinsurance contracts, the Company estimates premiums, commissions and related expenses based on broker and ceding company estimates. In addition to ceding company estimates, the Company also utilizes its judgment in establishing proportional reinsurance contract premium estimates after considering the following factors:
Actuarial Methods Used to Estimate Loss and Loss Expense Reserves. When the applicable information has been obtained, the Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company in connection with business it has underwritten and thus, the applicable reserve for losses and loss expenses. One actuarial method used by the Company to estimate its reserve for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). Another actuarial method used by the Company is known as the Bornhuetter-Ferguson method. The Bornhuetter-Ferguson method uses an initial loss estimate (expected loss technique) for each underwriting quarter by business line and type of contract. The portion of the initial loss estimate that is the IBNR reserve is then reduced in each subsequent quarter by the losses reported for that business segment during that quarter. Over time, the IBNR reserve will be reduced and will be replaced with the actual losses reported to the Company or, if losses do not develop as expected, reserves for those losses are reduced with the amounts by which reserves are reduced then reflected in net income (loss). Management uses these multiple actuarial methods, supplemented with its own professional judgment, to establish its best estimate of reserves for losses and loss expenses.
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, 2009. 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.
In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company’s underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews of the Company’s ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserve. On occasion, these reviews reveal that the ceding company’s reported losses and loss expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company’s policy is to vigorously defend its position in litigation or arbitration. As of December 31, 2009, the Company was not involved in any material claims litigation or arbitration proceedings.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and loss expense reserve estimates. As of December 31, 2009, there were no significant backlogs related to the processing of policy or contract information in the Company’s Insurance or Reinsurance segments.
changes in the judicial and/or arbitration environment regarding the interpretation of policy and contract provisions relating to the determination of coverage and/or the amount of damages awarded for certain types of claims;
The Company’s estimates of reserves for losses and loss expenses can also change over time because of changes in internal company operations, such as:
The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed income investments. The Company obtains multiple prices for its securities where available. Pricing sources used in pricing the Company’s fixed income investments at December 31, 2009 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, 2009, the Company has not adjusted any pricing provided by independent pricing services and index providers and have classified all such securities as Level 2.
The Company’s available for sale investments are comprised of a variety of different securities, which are grouped based on the valuation technique and inputs used in their valuation. The valuation of current issue U.S. government securities is generally based on Level 1 inputs, which use the market approach valuation technique. The valuation of the Company’s other available for sale investments, including non-current U.S. government and agency securities, U.S. state, municipal and foreign government securities, government guaranteed and other corporate debt, U.S. agency and non-agency residential and commercial mortgage-backed securities, asset-backed securities, short-term investments and preferred equity securities generally incorporate significant Level 2 inputs using the market and income approach techniques. Level 3 includes any available for sale investments that use unobservable inputs, which will vary from period to period.
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 and high yield loan funds that investment in senior secured bank debt and high yield securities, distressed debt, derivatives and equity long/short strategies 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.
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 subsidiaries operating in income tax paying jurisdictions. Our deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our Audited Consolidated Financial Statements and the tax basis of our assets and liabilities. We determine deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.
Recent Accounting Pronouncements. See note 2(p), “Summary of Significant Accounting Policies-Recent Accounting Pronouncements,” of the notes accompanying our audited consolidated financial statements.
The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2009, 2008 and 2007.
Gross premiums written in 2009 were $2,021.5 million, a decrease of $225.0 million, or 10.0%, compared to 2008 and an increase of $240.3 million, or 13.5% compared to 2007. Net premiums written in 2009 were $1,606.1 million, a decrease of $178.2 million, or 10.0%, compared to 2008 and an increase of $31.1 million, or 2.0% compared to 2007. The change in net premiums written for 2009 compared to 2008 was driven primarily by the following factors:
Declines in net premiums written in the workers’ compensation and property lines of the Insurance segment as a result of the Company’s exit from the California workers’ compensation and U.K. property insurance markets in the first quarter of 2009, which combined contributed $254.5 million of net premiums written in 2008;
Declines in net premiums written in the agriculture line of the Insurance segment due to lower commodity prices, partially offset by an increase in the policy count;
The change in net premiums written for 2009 compared to 2007 was driven primarily by the following:
Growth in the casualty line of the Reinsurance segment, primarily as a result of new business written; and
Declines in net premiums written in the workers’ compensation line of the Insurance segment as a result of the Company’s exit from the California workers’ compensation market in the first quarter of 2009, which contributed $237.8 million of net premiums written in 2007.
Ceded premiums written by the Company decreased in 2009 compared to 2008 because of decreased cessions to third party reinsurers associated with decreased gross premiums written, principally in the agriculture line of business of the Insurance segment. The majority of premiums ceded by the agriculture line of business were to the U.S. government through a federally sponsored crop reinsurance program. Ceded premiums written increased in 2009 compared to 2007 due to the full year impact of ARMtech on the agriculture line of the Insurance segment in 2009.
Net investment income increased in 2009 compared to 2008 and 2007 principally due to net mark to market gains on alternative investments and high yield loan funds, included in other investments, of $98.1 million as compared to a loss of $111.6 million in 2008 and a gain of $21.3 million in 2007. Cash and cash equivalents and investments (including pending investment settlements) have increased 11.5% from 2008 and 6.9% from 2007. The increase in cash and cash equivalents and investments during 2009 resulted from increases in market valuations of investments and positive net operating cash flows throughout 2009, partially offset by share repurchases. Investment expenses, including investment management fees, for 2009 were $11.4 million compared to $10.3 million in 2008, and compared to $9.5 million in 2007. The increase in investment expenses resulted from a larger investment portfolio year over year and from increased monitoring activity conducted throughout the year.
The annualized net earned yield, total return of the investment portfolio for the years ended December 31, 2009, 2008 and 2007 and market yield and portfolio duration as of December 31, 2009 and 2008 were as follows:
During 2009, 2008 and 2007, 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, 2009. 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, 2009, 2008 and 2007 were as follows:
As of December 31, 2009, the Company maintained an investment portfolio with an average credit rating of AA+. The Company’s investment portfolio consists of both mortgage-backed and asset-backed securities, which comprised 33.8% of total invested assets, including pending securities transactions, fixed maturity investments, short-term investments, preferred equity securities, cash and cash equivalents and other investments, at December 31, 2009. The Company, along with its investment managers, monitors the nature and type of assets underlying these types of securities. At December 31, 2009, the Company’s portfolio held no sub-prime mortgage exposure and the Company’s Alt-A exposure represented 1.2% of the Company’s fixed income investments. Of the Company’s Alt-A exposure, 81.0% are fixed rate securities.
During 2009, the Company revalued its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange gains of $29.7 million compared to losses of ($53.7) million for 2008 and losses of ($8.0) million for 2007. The current year net foreign exchange gains resulted from the strengthening of the U.K. pound sterling and weakening of the U.S. dollar compared to other currencies. The Company had offsetting net unrealized foreign exchange losses of $11.0 million (2008 - gains of $54.8 million, 2007 - gains of $10.8 million) from the revaluation of its foreign currency invested assets included in the change in net unrealized holding gains (losses) on investments within accumulated other comprehensive income (loss).
During 2009, 2008 and 2007, the Company’s previously estimated ultimate losses for prior accident years were reduced by $150.9 million, $156.5 million and $159.4 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 moderately redundant. The overall net reduction in the Company’s estimated losses for prior accident years experienced in 2009 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. Reserve adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss reserves were established by the Company’s actuaries and reflect management’s best estimate of ultimate losses. See “Reserve for Losses and Loss Expenses” below for further discussion.
The Company produced net income of $536.1 million in 2009 compared to $98.6 million in 2008 and $521.1 million in 2007. The increase in net income for 2009 compared to 2008 was primarily due to a decline in losses and loss expenses as a result of the absence of significant catastrophe events during 2009. In addition, the Company experienced growth in net investment income during 2009 specifically driven by increases in the value of the Company’s alternative investments and high yield loan funds as well as the recognition of foreign exchange gains which were absent in 2008 and 2007.
The following table summarizes the underwriting results and associated ratios for the Company’s Insurance segment for the years ended December 31, 2009, 2008 and 2007.
A reduction in the net premiums written in the agriculture line due to lower commodity prices; and
Ceded premiums written by the Company in the Insurance segment decreased in 2009 compared to 2008 because of decreased cessions to third party reinsurers associated with decreased gross premiums written, principally in the agriculture line of business. The majority of premiums ceded by the agriculture line of business were to the U.S. government through a federally sponsored crop reinsurance program. Net premiums earned by the Company in the Insurance segment in 2009 decreased compared to 2008 primarily due to declines in net premiums written during 2009. Net premiums earned by the Company in the Insurance segment in 2009 increased compared to 2007 due to the addition of ARMtech agriculture premiums written during 2009.
Net Losses and Loss Expenses. The net loss ratio in the Company’s Insurance segment in 2009 improved compared to 2008 primarily from improved loss experience in the agriculture line and increased prior year favorable loss reserve development. During 2008, the Company’s agriculture line was adversely impacted by significant declines in commodity prices for certain agricultural products and severe weather that led to worse than expected growing conditions for major crops in the U.S. The net loss ratio in the Company’s Insurance segment in 2009 was higher than the 2007 net loss ratio primarily due a shift in the mix of business toward the agriculture line of business which has generally higher loss ratios than the other insurance lines of business. The net loss ratio in the Company’s Insurance segment was adversely affected in 2009 due to higher current accident and prior year loss ratios in the recently exited California workers’ compensation line compared to 2008 and 2007 reflecting the Company’s cautious view of industry trends as a result of legal and regulatory changes and potential claim cost changes.
General and Administrative Expenses. The Company’s general and administrative expense ratio in the Insurance segment increased for 2009 compared to 2008 primarily due to reductions in third party commissions and expense reimbursements offsets, primarily in the agriculture line as well as higher incentive compensation expenses across the business compared to 2008. In addition, the Company continued to make strategic employee additions in its agriculture and other U.S. specialty insurance operations. The Company’s general and administrative expense ratio in the Insurance segment decreased for 2009 compared to 2007 from the increases in agriculture premiums written and earned for which general and administrative expenses were reduced by third party expense reimbursements.
The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance segment for the years ended December 31, 2009, 2008 and 2007.
Organic growth in the casualty line, mainly due to three large professional lines and small risk commercial casualty treaties that were newly written in the second and fourth quarters of 2009, offset in part by non-renewals of business not meeting our return requirements;
New business written, as well as increased pricing on renewal contracts, in the Company’s catastrophe and property lines, partially offset by the absence of catastrophe reinstatement premiums which were recorded in the third quarter of 2008 as a result of Hurricanes Ike and Gustav;
Ceded premiums written by the Company in the Reinsurance segment was lower in 2009 compared to 2008 and 2007. During 2008, the Company’s $235 million multi-year, collateralized catastrophe reinsurance protection purchased in 2006 expired.
Net Losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for 2009 decreased compared to 2008 and 2007 primarily as a result of the absence of significant catastrophe activity. 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. In 2007, the net loss ratio was impacted by approximately $40 million of net losses or 3.5 net loss ratio points due to European Windstorm Kyrill.
Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance segment in 2009 was relatively consistent with 2008 and 2007.
Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries, including Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions and ARMtech. Endurance Holdings relies primarily on dividends and other permitted distributions from its insurance subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its common shares and Series A Preferred Shares. There are restrictions on the payment of dividends by Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions and ARMtech to Endurance Holdings, which are described in more detail below.
The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. As of December 31, 2009, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $610 million without prior regulatory approval based upon the Bermuda insurance and Companies Act regulations. In addition, the Endurance Holdings has loaned Endurance Bermuda $300.0 million which is callable on demand.
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance. 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, 2009, Endurance U.S. Reinsurance, Endurance American and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends during 2009 without the prior approval of the applicable insurance regulator. At December 31, 2009, Endurance Risk Solutions and ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $3.8 million and $2.6 million, respectively, without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.
Cash and Invested Assets.The Company’s aggregate invested assets, including fixed maturity investments, short-term investments, preferred equity securities, other investments, cash and cash equivalents and pending securities transactions, as of December 31, 2009 totaled $6.0 billion compared to aggregate invested assets of $5.4 billion as of December 31, 2008. The increase in invested assets since December 31, 2008 resulted from collections of premiums on insurance policies and reinsurance contracts and investment income, offset in part by losses and loss expenses paid, interest and dividends paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid, interest and dividends paid, and the repurchase of the Company’s ordinary shares and realized losses in the investment portfolio.
As of December 31, 2009 and 2008, the Company had pledged cash and cash equivalents and fixed maturity investments of $158.5 million and $147.9 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2009 and 2008, the Company had also pledged $664.0 million and $591.9 million of its cash and fixed maturity investments as required to meet collateral obligations for $605.3 million and $550.8 million in letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2009 and 2008, cash and fixed maturity investments with fair values of $361.6 million and $234.8 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $12.4 million and $14.2 million were on deposit with Canadian regulators, respectively.
Cash flows from operating activities on a consolidated basis are provided by premiums collected and investment income, offset by loss and loss expense payments and other general and administrative expenses. Consolidated cash provided by operating activities for the years ended December 31, 2009, 2008 and 2007 was $471.9 million, $479.4 million, and $480.5 million, respectively.
The Company’s contractual obligations as of December 31, 2009 are summarized as follows:
Senior Indebtedness. On October 17, 2005, Endurance Holdings issued $200 million principal amount of 6.15% Senior Notes. The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%, and, unless previously redeemed, will mature on October 15, 2015. Endurance Holdings used net proceeds from the offering to repay the $143.5 million revolving loan then outstanding under the credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes.
The indentures governing the Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness.
At December 31, 2009, the carrying value of the Senior Notes stood at $447.4 million while the fair value as determined by quoted market valuation was $439.1 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2009.
The Series A Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after December 15, 2015 at a redemption price of $25.00 per share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series A Preferred Shares before that date at a redemption price of $26.00 per share, plus any declared and unpaid dividends, to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series A Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction or change in Bermuda law.
Holders of the Series A Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings’ bye-laws.
The Company’s functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all entities is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K. Endurance U.K. is subject to the United Kingdom’s Financial Services Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.’s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company’s results of operations.
The estimate of the reserve for losses and loss expenses is reviewed each quarter by the Company’s Loss Reserve Committee, consisting of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Actuary and representatives of various disciplines from within the Company, such as claims, underwriting and legal.
Differences between actual reported losses and expected losses are anticipated to occur in any individual period and such deviations may influence future initial expected loss ratios and/or expected loss reporting patterns as the recent actual experience becomes part of the historical data utilized as part of the ongoing reserve estimation process. The Company has demonstrated the impact of changes in the speed of the loss reporting patterns, as well as changes in the expected loss ratios, within the table under the heading “Potential Variability in Reserves for Losses and Loss Expenses” beginning on page 90.
Losses and loss expenses for the year ended December 31, 2009 are summarized as follows:
Other Insurance. The Company recorded favorable loss emergence within this reserve category due to lower than anticipated claims settlements for the 2008 crop year in the agriculture line of business recorded in the earlier part of 2009.
Losses and loss expenses for the year ended December 31, 2008 are summarized as follows:
Short Tail Insurance. The lower than expected losses and loss expenses related to prior years in the short tail insurance category were primarily a result of favorable claims emergence in the Company’s property line of business. As a result, the Company reduced its estimated losses and loss expenses related to prior years in this reserve category during 2008.
Long Tail Insurance. Lower than expected claims activity within the healthcare liability line of business resulted in a reduction in estimated losses and loss expenses related to prior years for this reserve category. This favorable development was partially offset by unfavorable development in the Company’s professional line of business.
Short Tail Reinsurance. Favorable loss emergence in the short tail reinsurance reserve category was due to lower than expected loss activity within the treaty catastrophe, treaty property, surety and aerospace lines of business partially offset by higher than expected loss activity within the Company’s marine line of business.
Reserves for losses and loss expenses were comprised of the following at December 31, 2009:
Reserves for losses and loss expenses were comprised of the following at December 31, 2008:
Selected quarterly activity in the reserve for losses and loss expenses for the year ended December 31, 2009 is summarized as follows:
The following table represents the development of GAAP balance sheet reserve for losses and loss expenses, net of losses and loss expenses recoverable, for 2002 through December 31, 2009. This table does not present accident or policy year development data. The top line of the table shows the gross and net reserve for losses and loss expenses at the balance sheet date for each of the indicated years. This represents the estimated amounts of gross and net losses and loss expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “cumulative redundancy” represents the aggregate change to date from the original estimate.
The table also shows the cumulative paid amounts as of successive years with respect to the reserve liability. All amounts reflect the conversion from the original currency of the underlying business if not denominated in U.S. dollars. The data in the table has been restated using the rate of exchange to U.S. dollars as of December 31, 2009. Information presented herein may differ materially from that reported in the Company’s financial statements due to differences in foreign currency exchange rates.
The following table reconciles cumulative paid losses - 1 year later per the table above to the cumulative paid losses - prior year reported in the Company’s audited financial statements.
The Other reserve category of the Insurance segment includes agricultural business written by the Company. Reporting pattern changes are not applicable to agricultural business as it is typically settled at an established time each year.
At December 31, 2009 and 2008, the Company had reinsurance recoverables of $467.7 million and $557.8 million, respectively, related to its reinsurance agreements. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded related to the agriculture line of business. Accordingly, the Company has evaluated the reinsurers and retrocessionaires that are providing reinsurance and retrocessional protection and will continue to monitor the stability of its reinsurers and retrocessionaires. No allowance for uncollectible reinsurance was deemed necessary on the recoverable balances outstanding at December 31, 2009 and 2008.
Goodwill and other intangibles that arise from business combinations are accounted for by the Company in accordance with the applicable accounting guidance. 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.
In addition, during 2007, we acquired Endurance Risk Solutions, and recorded an indefinite lived intangible of $2.2 million related to state insurance licenses acquired.
During the fourth quarter of 2009, the Company performed its annual impairment testing of goodwill. The Company has two primary sources of goodwill - goodwill obtained from a renewal rights transaction completed in 2003 with HartRe and goodwill obtained from the Company’s acquisition of ARMtech in 2007. The Company determined that the appropriate reporting units for evaluation were the Reinsurance segment in relation to HartRe goodwill and the agriculture business line of the Insurance segment for ARMtech goodwill. The Company used a discounted cash flow approach to estimate the fair value of these reporting units. The fair value determined was in excess of the carrying value including goodwill for both reporting units noted. As a result of the impairment testing, no write-downs were deemed necessary at December 31, 2009 and 2008.
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, 2009 and 2008, 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, 2009 and our report dated February 26, 2010 expressed an unqualified opinion thereon.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2009, 2008 and 2007
Notes to the Consolidated Financial Statements for the years ended December 31, 2009, 2008 and 2007
We have audited the accompanying consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2009 and 2008, 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, 2009. 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.
Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its seven wholly-owned operating subsidiaries: Endurance Bermuda, domiciled in Bermuda including branches in Zurich and Singapore; Endurance Worldwide Insurance Limited (“Endurance U.K.”), domiciled in London, England; Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware; American Agri-Business Insurance Company, domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together, “ARMtech”); Endurance American Insurance Company (“Endurance American”), domiciled in Delaware; Endurance American Specialty Insurance Company (“Endurance American Specialty”), domiciled in Delaware and Endurance Risk Solutions Assurance Co. (“Endurance Risk Solutions”) (formerly American Merchants Casualty Company), domiciled in Delaware.
The Company’s loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company’s financial condition for any particular period. While management believes the Company’s estimate of loss and loss expense reserves is sufficient, the ultimate loss experience may not be as reliably predicted as may be the case with other insurance and reinsurance operations, and it is possible losses and loss expenses may be materially different than the total reserve for losses and loss expenses recorded by the Company.
Following a determination of fair value, the Company reviews its fixed income investments to determine whether any declines in the fair value below the amortized cost basis of its fixed income investments are other-than-temporary. Since April 1, 2009, if the Company determines that a decision to sell the security has been made or that it is not 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.
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 investments is likely to be recovered include the following actions, among others, depending on the type of security being reviewed or tested:
If the amortized cost of the Company’s fixed income investments is, based upon the judgment of management, unlikely to be recovered, the Company writes down the investment by the amount representing the credit related portion of the decline in value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an OTTI loss. The new cost basis is not changed for subsequent recoveries in fair value.
Other investments within the Company’s investment portfolio 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.
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.
The accounting guidance requires the recognition of all derivative financial instruments including embedded derivative instruments, as either assets or liabilities in the Consolidated Balance Sheets and measurement of those instruments at fair value. The accounting for gains and losses associated with changes in the fair value of a derivative and the effect on the financial statements depends on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value of the asset or liability hedged.
The Company’s investment strategy allows for the use of derivative instruments, subject to strict limitations. The Company’s investment managers currently utilize foreign currency forward contracts to minimize the effect of fluctuating foreign currencies and to gain exposure to interest rate differentials between differing market rates. These contracts do not qualify, and are not designated, as hedges and the realized and unrealized gains (losses) are recognized in net realized gains (losses) on investment sales in the Consolidated Statements of Income and Comprehensive Income (Loss).
A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. As such, a variable interest entity requires consolidation by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company’s previous relationship with the variable interest entity, described in more detail in Note 6, did not meet the requirements for consolidation as established under the accounting guidance nor did the Company have any exposure to or risk of loss from its involvement with the variable interest entity.
In June 2008, the FASB issued new guidance related to the calculation of earnings per share clarifying which securities are to be considered participating securities prior to vesting and as such included in the calculation of earnings per share under the two-class method. The new guidance was effective for the Company as of January 1, 2009 and required retrospective adjustment of all prior period earnings per share data presented. The Company adopted this guidance for all periods beginning January 1, 2009, which resulted in a change to the Company’s calculation of earnings per share, which were previously calculated based on the treasury stock method and are now calculated using the two-class method. Amounts for the years ended December 31, 2008 and 2007 have been restated to reflect this change. See “Earnings per Share” in Note 13.
In April 2009, the FASB released the following investment related guidance relating to:
required disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements;
the use of alternative valuation methods for determining the fair value of financial instruments when (i) the volume and level of trading activity for the instrument significantly decreased from prior periods and (ii) transactions in the instrument are “not orderly.”
The April 2009 updates were effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the guidance during the second quarter of 2009. OTTI disclosures and their impact on the Company’s financial condition and results of operations are described in Note 3.
Contractual maturities of available for sale securities are shown below as of December 31, 2009 and 2008. 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.
At December 31, 2009 and 2008, the Company held $35.7 million and $30.3 million of insurance enhanced bonds (corporate, asset-backed and municipal securities), respectively, representing 0.7% and 0.8% of the available for sale securities, respectively. At December 31, 2009, the overall credit quality of the insurance enhanced bond portfolio was an average rating of “Baa” from Moody’s and “A” 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. The financial guarantors of the Company’s insurance enhanced bonds at December 31, 2009 include Financial Guarantee Insurance Company ($14.7 million), Ambac Financial Group, Inc. ($10.7 million), Assured Guaranty Municipal Corp. (formerly Financial Security Assurance Inc.) ($6.6 million), National Public Finance Guarantee Corp. (formely MBIA Insurance Corporation) ($3.4 million), and Syncora Holdings Ltd. ($0.3 million).
In addition to the Company’s fixed income investments, the Company invests in a portfolio of alternative investments and high yield loan funds (the “Funds”). The Funds invest largely in senior secured distressed debt, derivatives, equity long and short positions, senior secured bank debt and high yield securities and are included in the Company’s balance sheet under other investments. At December 31, 2009 and 2008, the Company had invested, net of capital returned, a total of $295.5 million and $326.5 million, respectively, in the Funds. At December 31, 2009 and 2008, the carrying value of the Funds was $351.4 million and $284.3 million, respectively. Certain of the Funds are subject to redemption restriction provisions (see Note 11).
Realized gains and losses on investment sales are recognized in earnings using the first in and first out method. The analysis of net realized gains (losses) on investment sales for the years ended December 31, 2009, 2008 and 2007, respectively, is as follows:
The analysis of OTTI for the years ended December 31, 2009, 2008 and 2007 is as follows:
In addition to the foregoing analysis, the adoption of the new accounting guidance regarding OTTI in the second quarter of 2009 resulted in a reclassification in the Company’s financial statements of the OTTI recorded by the Company for securities owned at April 1, 2009. Of the $93.4 million of OTTI recorded by the Company for securities owned at April 1, 2009, $60.1 million was determined to relate to specific credit events and $33.2 million was determined to relate to non-credit factors. The $60.1 million of OTTI determined to relate to specific credit events had previously been written down by the Company and had no effect on the Company’s income statement or balance sheet in 2009. The $33.2 million of OTTI related to non-credit factors had no effect on the Company’s income statement, but caused an increase in retained earnings and an offsetting decrease in accumulated other comprehensive income (loss) in 2009, with no effect on total shareholders’ equity.
For the three months ended March 31, 2009 and the years ended December 31, 2008 and 2007, the Company recorded $12.1 million, $82.1 million and $17.3 million of OTTI losses in earnings, respectively. Such amounts included a portion related to credit losses and a portion related to non-credit factors.
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, 2009 and 2008:
Level 3 assets represented less than 0.11% and 0.14% of the Company’s total available for sale assets at December 31, 2009 and 2008, respectively.
Losses on Level 3 securities in the amount of ($0.5) million, representing realized losses due to OTTI, were included in net impairment losses recognized in earnings for the year ended December 31, 2009 (2008 - ($0.8) million) and were attributable to fixed maturity investments held at December 31, 2009.
At December 31, 2009 and 2008, the carrying value of the Company’s senior notes was $447.4 million and $447.3 million and the fair value was $439.1 million and $334.2 million, respectively.
The effects of reinsurance on premiums earned and written during the years ended December 31, 2009, 2008 and 2007 are as follows:
The 2007 Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 2007 Credit Facility, the lenders can terminate their commitments under the revolving credit facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the 2007 Credit Facility. See Note 11 for details related to outstanding letters of credit.
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, “Accounting for Derivative Instruments and Hedging Activities” and accordingly, the fair value of the derivative was recorded in other comprehensive income (loss) 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.
Insurance - This segment is comprised of six lines of business: agriculture, professional lines, casualty, property, healthcare liability and workers’ compensation. The agriculture line of business is comprised of multiple peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products. The casualty lines of business are comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty, healthcare liability, workers’ compensation, and professional lines. The 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 following table provides a summary of the segment revenues and results for the year ended December 31, 2007, reserve for losses and loss expenses as of December 31, 2007 and the carrying value of goodwill as of December 31, 2007:
The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2009, 2008 and 2007:
On December 7, 2007, Endurance U.S. Holdings, Inc., an indirect wholly-owned subsidiary of Endurance Holdings, acquired all outstanding stock of ARMtech. ARMtech underwrites crop insurance primarily through the U.S. federally sponsored Multiple Peril Crop Insurance Program. The base purchase price was $120.0 million, plus additional amounts totaling $22.7 million as determined in accordance with the terms of the purchase agreement. In connection with the acquisition of ARMtech, the Company recorded a total of $45.2 million of goodwill and $96.7 million of intangible assets. The intangible assets acquired consisted principally of internally developed software, non-compete agreements, state licenses and customer relationships with expected lives between five and fifteen years.
On June 8, 2007, the Company completed the purchase of Endurance Risk Solutions Assurance Co. (formerly American Merchants Casualty Company), an admitted insurer in the United States and the District of Columbia. The fair value of the U.S. state licenses was $2.2 million at acquisition and was recorded as an intangible asset with an indefinite life.
Major production sources. The following table shows the percentage of gross premiums written generated through the Company’s largest brokers for the years ended December 31, 2009, 2008 and 2007:
Operating Leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2009 are as follows:
The Company’s share capital at December 31, 2009 and 2008 is comprised as follows:
During 2009, the Company issued restricted shares under its equity compensation plans (Note 15). The common shares, issued, outstanding and fully paid for 2009 includes 932,984 restricted shares.
During 2009, the Company repurchased its common shares and share equivalents through open market or privately negotiated transactions authorized by the Company’s Board of Directors. In November 2009, the Company’s Board of Directors authorized for repurchase up to 8 million ordinary shares or share equivalents through November 4, 2011. This authorization superceded previous authorizations. During 2009 and 2008, the Company repurchased 3,535,795 and 4,600,279 of its ordinary shares and share equivalents under this program in open market and privately negotiated transactions at an average price of $32.87 and $33.20 per share, respectively. Total authorized repurchases remaining under the plan at December 31, 2009 was 6,413,635 shares (2008 - 5,565,322).
On September 11, 2007, Endurance Holdings consummated a variable equity forward sale arrangement under which Endurance Holdings is entitled to sell ordinary shares to an affiliate of Deutsche Bank Securities, Inc. (the “forward counterparty”) for proceeds of approximately $150 million pursuant to a prospectus supplement to the Shelf Registration Statement on Form S-3ASR (Registration No. 333-130464) filed with the U.S. Securities and Exchange Commission on September 12, 2007. Under the terms of the forward sale agreement, Endurance Holdings may sell an aggregate of between 2,984,772 and 4,786,827 ordinary shares to the forward counterparty, subject to Endurance Holdings’ right to elect cash or net share settlement of, or to terminate early, all or a portion of such agreement.
Endurance Holdings did not receive any proceeds from the sale of the ordinary shares by the forward counterparty, but Endurance Holdings will receive proceeds upon any prepayment, and may receive proceeds upon settlement of the forward sale agreement. The forward sale agreement will be physically settled by delivery of the requisite number of Endurance Holdings’ ordinary shares beginning July 20, 2010 or earlier if elected. The forward counterparty will pay Endurance Holdings approximately $150 million upon settlement of the forward sale agreement. The number of Endurance Holdings’ ordinary shares to be delivered to the forward counterparty varies depending upon the price of Endurance Holdings’ ordinary shares over a forty trading-day period beginning July 15, 2010 subject to an aggregate maximum of 4,786,827 and an aggregate minimum of 2,984,772 ordinary shares. The costs associated with the variable delivery forward were charged to additional paid in capital and the underlying shares were considered in the calculation of diluted earnings per share using the treasury stock method.
Endurance Holdings may accelerate settlement of or elect early termination with respect to, all or a portion of the forward sale agreement. The forward counterparty may elect early termination of the forward sale agreement upon the occurrence of certain events and the number of ordinary shares deliverable upon settlement of the forward sale agreement may be adjusted depending on the amount of our dividends or the occurrence of certain events.
At December 31, 2009 and 2008, 2,995,527 and 5,094,727 warrants were outstanding. Such warrants are exercisable for ordinary and class A shares as follows:
During 2009, the Company repurchased 1,599,200 (2008 - 1,500,000) of outstanding warrants at an average price of $29.16 (2008 - $34.14), net of the average warrant strike price of $14.45 (2008 - $15.45) per warrant. In addition 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, 2009, which have an exercise price of $13.87 (2008 - $14.87) per share, expire on December 14, 2011.
Basic earnings per common share are calculated by dividing net income available to common shareholders of Endurance Holdings’ ordinary shares and class A shares (collectively referred to as “common shares”) by the weighted average number of common shares outstanding. The weighted average number of common shares includes the fully vested, unreleased or unsettled restricted shares and restricted share units.
The following table sets forth dividends declared in the years ended December 31, 2009, 2008 and 2007 respectively:
Pyramis Global Advisors, a subsidiary of FMR, LLC (“Fidelity”), provides investment management services to the Company. The Company incurred investment management fees totaling $0.3 million (2008: $0.2 million; 2007: $0.1 million) to this investment manager of which $0.1 million was accrued during the year ended December 31, 2009 (2008: $0.1 million). At December 31, 2009, Fidelity owned 5.5 million or 9.7% of Endurance Holdings’ ordinary shares outstanding.
In September and November 2007, the Company offered to exchange the outstanding restricted share units held by current employees of the Company for new restricted shares. The new restricted shares have substantially the same terms and fair value as the restricted share units, except that dividends on the restricted shares are paid in cash rather than in the form of additional restricted share units and holders of restricted shares are entitled to vote such shares at the Company’s annual or special general meeting of shareholders.
Under the terms of the 2007 Plan, and after the consolidation of the Company’s previous plans, a total of 2,100,000 ordinary shares were reserved for issuance. The Company issues new ordinary shares upon the exercise of outstanding options or settlement of a vested restricted share unit. As of December 31, 2009, 854,346 (2008 - 1,136,109) ordinary shares remained available for issuance under the 2007 Plan.
The Company issued stock options to employee and non-employee directors, with exercise prices equal to the fair market values of the Company’s ordinary shares on the grant dates. Options generally vest at a rate of 20% per year over a five-year term. Option awards have a 10-year contractual life.
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 as follows: 12.5% in years one and five and 25% in years two through four; 25% per year; or 20% per year. Certain restricted shares and restricted share units, which did not require future service, would be forfeited if the holder departed the Company and violated the terms of a non-compete provision. Restricted shares granted to employees and non-employee directors beginning in 2007 vest pro rata over a four-year period and are forfeited upon departure from the Company for any reason prior to the applicable vesting date. Restricted shares granted to non-employee directors vest twelve months following the date of grant and are forfeited upon departure from the Board of Directors for any reason prior to the applicable vesting date.
The Company grants restricted share units in an amount equal to the dividends paid by the Company. These units generally vest and settle on the first March 1st following the six-month anniversary of the date of issuance of the unit.
A summary of the restricted share and restricted share unit activity during the year ended December 31, 2009 is presented below:
During the years ended December 31, 2009, 2008 and 2007, the Company granted an aggregate of 326,671, 539,137 and 565,321 restricted share and restricted share unit awards with weighted average grant date fair values of $7.6 million, $20.9 million and $22.3 million. During the years ended December 31, 2009, 2008 and 2007, the aggregate fair value of restricted shares and restricted share units that vested was $15.1 million, $13.8 million and $7.8 million, respectively.
Total expenses related to these plans for the year ended December 31, 2009 was approximately $100,000 (2008 - $197,000, 2007 - $148,000).
Following approval by the Company’s shareholders, 200,000 of Endurance Holdings’ ordinary shares, par value $1.00 per share, were reserved for issuance under the ESPP. Under the terms of the ESPP, employees of Endurance Holdings and certain of its subsidiaries may purchase Endurance Holdings’ ordinary shares at a 15% discount to the closing market price on the purchase date. Participants are eligible to receive dividends on the shares purchased in the ESPP and are entitled to vote such shares at any annual or special meeting of shareholders. These shares are restricted from sale, transfer or certification for one year from the purchase date.
Under the terms of the 2005 Sharesave Scheme, all U.K. eligible employees may save between £5 and £250 per month for three, five or seven years, as determined by the Company. At the end of the savings period, participating employees’ savings may be used to purchase Endurance Holdings’ ordinary shares at an exercise price, which was established at a 15% discount to the closing market price on the date the options were granted. Participating employees may terminate their participation in the 2005 Sharesave Scheme and receive a refund of their contributed funds. The 2005 Sharesave Scheme was approved by Her Majesty’s Revenue on February 20, 2006.
Bermuda statutory capital and surplus includes an investment in affiliate assets, which represent interest in the insurance and reinsurance operations of the Company included in the United States and Other columns above.
Includes Endurance U.K. and the Endurance Bermuda’s Singapore and Zurich branches.
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, 2009, Endurance U.K did not have profits available for distribution.
Of the 2009 current income tax benefit (expense), $6.5 million related to taxes incurred in the United States (2008 - $22.8 million; 2007 - ($10.8) million) and Nil related to current income tax benefits in the United Kingdom (2008 - $11.0 million and 2007 - Nil). Of the deferred income tax benefit (expense), $5.3 million and Nil related to deferred income tax benefits (expenses) in the United States and the United Kingdom, respectively (2008 - $22.0 million and Nil; 2007 - $3.0 million and ($11.8) million).
Tax payments made during 2009 were not sufficient to offset a cash refund of U.S. federal income taxes received in 2009. Net taxes received totaled $6.8 million during 2009. The Company paid income taxes totaling $29.6 million and $25.7 million for the years ended December 31, 2008 and 2007, respectively. Net operating loss carryforwards in the amount of $58.9 million are available for application against future taxable income in the United Kingdom. These net operating loss carry forwards have no expiration date. There were no income taxes payable in the United Kingdom as at December 31, 2009 or 2008.