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 the Company’s 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, American Merchants (since June 8, 2007) and ARMtech (since December 7, 2007).
We derived the following selected consolidated financials for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 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.
Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements that involve risk and uncertainties. Please see the ‘‘Cautionary Statement Regarding Forward-Looking Statements’’ in this Annual Report on Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the ‘‘Risk Factors’’ set forth in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
• American Agri-Business Insurance Company, managed by ARMtech Insurance Services, Inc. (collectively ‘‘ARMtech’’), both domiciled in Texas.
Endurance Holdings and its wholly-owned subsidiaries are collectively referred to in this discussion and analysis as the ‘‘Company’’.
Revenues. The Company derives its revenues primarily from premiums from its insurance policies and reinsurance contracts. The premiums the Company charges for the risks assumed are priced based on many assumptions and are a function of the amount and type of policies and contracts the Company writes as well as prevailing market prices and in the case of agricultural insurance contracts, federally mandated pricing. The Company prices these risks before its ultimate costs are known, which may extend many years into the future.
The Company’s revenues also include income generated from its investment portfolio. The Company’s investment portfolio is comprised primarily of fixed maturity investments that are held as available for sale. In accordance with accounting principles generally accepted in the United States (‘‘U.S. GAAP’’), these investments are carried at fair market value and unrealized gains and losses on the Company’s investments are 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.
• changes in the estimate or different estimates that could have been selected could have a material impact on the Company’s consolidated results of operations or financial condition.
If factors such as those described in the ‘‘Risk Factors’’ section in this Annual Report on Form 10-K cause actual events or results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on the Company’s results of operations and financial condition and liquidity.
Management believes that the following critical accounting policies affect significant estimates used in the preparation of its consolidated financial statements.
Premiums. The Company’s insurance premiums are earned pro rata over the terms of the applicable risk period specified in the insurance policy. The Company’s insurance policies are written on a losses occurring or claims made basis during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will only adjust if the underlying insured basis adjusts. Accordingly, we monitor the underlying insured basis and record additional or return premiums in the period in which amounts are reasonably determinable. Insurance premiums written accounted for 42%, 32%, and 25% of the Company’s gross premiums written during the years ended December 31, 2007, 2006 and 2005, respectively.
The Company’s limited historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 10%, although larger variations, both positive and negative, are possible as a result of changes in one or more of the premium assumptions as noted above. A 10% variation in the Company’s proportional premiums receivable, net as of December 31, 2007, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $4.3 million on the Company’s net income (loss).
The following summarizes the Company’s net proportional premium estimates within premiums receivable, net on the Company’s Audited Consolidated Balance Sheet as of December 31, 2007:
The Company evaluates these contracts on an individual basis in accordance with the provisions of Statement of Financial Accounting Standards No. 113 - ‘‘Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts’’ (‘‘SFAS No. 113’’).
Under U.S. GAAP, the Company is not permitted to establish loss reserves until the occurrence of an actual loss event. Once such an event occurs, the Company establishes reserves based upon estimates of total losses incurred by the ceding companies or insureds as a result of the event, its estimate of the potential losses incurred, and its estimate of the portion of such loss the Company has insured or reinsured. As a result, only loss reserves applicable to losses incurred up to the reporting date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. Losses arising from future events will be estimated and recognized at the time the loss is incurred and could be substantial. See ‘‘Reserve for Losses and Loss Expenses’’ below for further discussion.
The Company’s loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company’s financial condition for any particular period. While we believe that we have made a reasonable estimate of loss and loss expense reserves, the ultimate loss experience may not be as reliably predicted as may be the case with other insurance and reinsurance operations, and it is possible that losses and loss expenses will be higher or lower than the total reserve for losses and loss expenses recorded by the Company.
provided to the Company by insureds and brokers at the time individual contracts and policies are bound. In addition, we use commercially available risk analysis models, contract by contract review by our underwriting teams and, to a limited extent, overall market share assumptions to estimate our loss and loss expense reserves related to specific loss events.
Significant Assumptions Employed in the Estimation of Loss and Loss Expense Reserves. The most significant assumptions used as of December 31, 2007 to estimate the reserve for losses and loss expenses within the Company’s Insurance and Reinsurance segments are as follows:
2. the loss and exposure information provided by ceding companies, insureds and brokers in support of their submissions can be used to derive meaningful estimates of the likely future performance of business bound with respect to each contract and policy;
Factors Creating Uncertainty in the Estimation of the Reserve for Losses and Loss Expenses. While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for losses and loss expenses, certain of the Company’s business lines are by their nature subject to additional uncertainties, including the Company’s casualty, property, catastrophe, aerospace and surety and other specialty lines in the Reinsurance segment and the Company’s casualty and professional lines in the Insurance segment, which are discussed in detail below. In addition, the Company’s Reinsurance segment is subject to additional factors which add to the uncertainty of estimating loss and loss expense reserves. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating loss and loss expense reserves.
• changes in the legislative environment regarding the definition of damages;
• growth in new lines of business where exposure and loss development patterns are not well established; or
• changes in the quality of risk selection or pricing in the underwriting process.
Due to the inherent complexity of the assumptions used in establishing the Company’s loss and loss expense reserve estimates, final claim settlements made by the Company may vary significantly from the present estimates, particularly when those settlements may not occur until well into the
Deferred Tax Assets. We provide for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, ‘‘Accounting for Income Taxes’’ and Financial Interpretation No. 48, ‘‘Accounting for Uncertain Tax Positions’’ for Endurance Reinsurance, Endurance American, Endurance American Specialty, American Merchants, ARMtech and Endurance U.K., which are our subsidiaries operating in income tax paying jurisdictions. Our deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our Audited Consolidated Financial Statements and the tax basis of our assets and liabilities. We determine deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.
Gross premiums written decreased slightly in 2007 compared to 2006 primarily due to declines in the Company’s Reinsurance segment partially offset by growth in the Company’s Insurance segment. Gross premiums written increased in 2006 compared to 2005 primarily from growth in the Company’s Insurance segment partially offset by a modest decline in gross premiums written in the Reinsurance segment.
The following table provides the distribution of gross premiums written by the geographic location in which the risk originated for the years ended December 31, 2007, 2006 and 2005:
Net investment income increased in 2007 compared to 2006 and 2005 principally due to a 1.3% increase in 2007 in cash and cash equivalents and investments over 2006 and a 12.8% increase in 2007 in cash and cash equivalents and investments over 2005. In addition, net investment income increased as a result of an increase in book yield resulting from higher reinvestment rates during 2007 than those available in 2006 and 2005. The increase in cash and cash equivalents and investments since 2005 resulted from positive net operating cash flows in 2007 and 2006, partially offset by cash used to purchase the Company’s own stock and other investing and financing activities undertaken during the periods. Investment expenses, including investment management fees, for 2007 were $9.5 million compared to $8.2 million in 2006 and $6.6 million in 2005. The increase in investment expenses was primarily a result of the increase in investment balances and a shift in the composition of the investment portfolio during 2007.
During 2007, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 200 basis points range, with a high of 5.21% and a low of 3.21%. The Company invested portions of its operating cash flows of $480.5 million in 2007 while decreasing U.S. government and agency exposures from prior years and increasing its allocations to non-government fixed income sectors and investments in other ventures. The duration of the fixed income portfolio increased in the second quarter of 2007 prior to rates beginning to decline as the economy in the U.S. showed signs of weakness.
timing and recognition of net realized investment gains or losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale for December 31, 2007 were $3,112.8 million compared to $1,819.6 million at December 31, 2006. Realized investment gains or losses for the years ended December 31, 2007, 2006 and 2005 were as follows:
During 2007 and 2006, the Company identified fixed maturity securities that were considered to be other-than-temporarily impaired. The unrealized loss position of these fixed maturities was principally a result of changes in the interest rate environment. Consequently, the cost of such securities was written down to fair value, and the Company recognized a realized loss on these securities in the current year.
The Company’s reported net losses and loss expenses are characterized by various factors and are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. For 2007 and 2006 compared to 2005, the Company’s net loss ratio was favorably impacted by both the absence of major catastrophes and lower than expected loss emergence related to prior periods. For 2005, the Company’s net loss ratio was adversely impacted by the damage caused by hurricanes striking the southeastern United States. Partially offsetting the adverse impact of the hurricanes in 2005 was loss emergence related to prior accident years that was lower than expected, resulting in the reserves held by the Company for those accident years being moderately redundant. During 2007, 2006 and 2005, the Company’s previously estimated ultimate losses for prior accident years were reduced by $159.4 million, $57.7 million, and $162.5, respectively. The overall net reduction in the Company’s estimated losses for prior accident years experienced in the current year was most significantly realized in the Company’s short and long tail lines of the Insurance segment and the short tail line of the Reinsurance segment.
employees, including 189 employees acquired through the acquisition of ARMtech, as compared to 481 employees at December 31, 2006.
Management measures the Company’s results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company’s historic combined ratios may not be indicative of future underwriting performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by business segments are allocated directly. Remaining expenses, including corporate expenses, are allocated based primarily on each business segment’s proportional share of premiums.
Ceded premiums written by the Company in the Insurance segment increased in 2007 compared to 2006 and 2005 because of increased cessions to third party reinsurers associated with increased gross premiums written, principally in the workers’ compensation and agriculture lines. The Company expects to continue to use such third party reinsurance in relation to its U.S. insurance operations as a means of managing its aggregate risk exposures. In 2006, the Company acquired $235 million of multi-year, collateralized catastrophe reinsurance from Shackleton Re Limited (‘‘Shackleton’’) in order to protect the Company against the risk of a severe catastrophe event or the occurrence of multiple significant catastrophe events. For more information on the Company’s cessions to Shackleton, see the ‘‘Ceded Reinsurance’’ section below.
Acquisition Expenses. The Company’s acquisition expenses in the Insurance segment increased in 2007 as compared to 2006 and 2005. The primary reason for the increase in 2007 as compared to 2006 and 2005 was higher commissions associated with the workers’ compensation business, for which gross
The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance segment for the years ended December 31, 2007, 2006 and 2005.
Premiums. Gross premiums written in the Reinsurance segment decreased in 2007 by 22.1% over 2006 and 23.2% over 2005 gross premiums written. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2007, 2006 and 2005 were as follows:
Ceded premiums written by the Company in the Reinsurance segment decreased in 2007 as compared to 2006 as the Company did not renew certain industry loss warranties purchased in 2006. Ceded premiums written increased in 2006 as compared to 2005 due to the Company purchasing certain industry loss warranties to reduce its overall catastrophe exposure within the U.S., and acquiring $235 million of multi-year, collateralized catastrophe reinsurance from Shackleton in order to protect the Company against the risk of a severe catastrophe event or the occurrence of multiple significant catastrophe events. For more information on the Company’s cessions to Shackleton, see the ‘‘Ceded Reinsurance’’ section below.
Net premiums earned by the Company in 2007 in the Reinsurance segment decreased compared to 2006 due to the lower levels of total premiums written. Net premiums earned increased in 2006 compared to 2005 due to the continued earning of gross premiums written by the Company in prior years as well as premium adjustments recorded in 2006.
General and Administrative Expenses. The general and administrative expense ratio experienced by the Reinsurance segment in 2007 as compared to 2006 increased as a result of overall higher allocated expenses, which were largely the result of increased incentive compensation expenses recorded in 2007 and 2006.
During the years ended December 31, 2007, 2006 and 2005, the Company realized $28.6 million, $159.0 million, and $143.3 million, respectively, of premiums that, in management’s judgment, were most appropriately accounted for as deposits under the deposit accounting provisions of SOP 98-7. While not underwritten as finite risk reinsurance, these contracts contain adjustable features, primarily sliding scale ceding commissions and profit share commissions, that may cause the amount or variability of risk assumed by the Company to differ from that of its ceding company counterpart. These contracts often contain significant exposures, particularly catastrophic, start-up and other risks, that although they have a low probability of occurrence, could produce material losses. Consequently, these contracts were accounted for as contracts which either transfer only significant timing risk or transfer only significant underwriting risk. The determination of the appropriate method of accounting for these contracts requires significant judgment and analysis, particularly with respect to assumptions about the variability and likelihood of potential future losses.
The following table reconciles total segment results including Insurance, Reinsurance and Deposit Accounting detailed above to income (loss) before income taxes for the years ended December 31, 2007, 2006 and 2005, respectively:
Acquisition. On December 7, 2007, Endurance Holdings’ U.S. based holding company acquired all outstanding stock of ARMtech and affiliates. The base purchase price was $120 million, plus
Endurance Holdings did not receive any proceeds from the sale of the ordinary shares by the forward counterparty, but Endurance Holdings will receive proceeds upon any prepayment, and may receive proceeds upon settlement of the forward sale agreement. The forward sale agreement will be physically settled by delivery of the requisite number of Endurance Holdings’ ordinary shares beginning July 20, 2010. The forward counterparty will pay Endurance Holdings approximately $150 million upon settlement of the forward sale agreement. The number of Endurance Holdings’ ordinary shares to be delivered to the forward counterparty varies depending upon the price of Endurance Holdings’ ordinary shares over a forty trading-day period beginning July 15, 2010 subject to an aggregate maximum of 4,786,827 and an aggregate minimum of 2,984,772 ordinary shares.
Credit Facility. On May 8, 2007, Endurance Holdings amended its existing credit facility among Endurance Holdings, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, among other changes, increase the size of the facility to $1,175 million from $925 million and to extend the maturity of the facility to May 8, 2012 (the ‘‘Credit Agreement’’). On July 18, 2007, the Company entered into the First Amendment to the Credit Agreement, to, among other things, modify the restrictive covenants in the Credit Agreement to permit the Company to pay dividends on its preference shares following the occurrence of certain defaults as defined pursuant to the terms of the Credit Agreement. As amended, the credit facility is referred to as the ‘‘2007 Credit Facility.’’
The 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, 2007, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $1,042 million without prior regulatory approval based upon the Bermuda insurance and Companies Act regulations.
On January 30, 2008, Endurance U.S. Reinsurance changed its state of domicile from New York to Delaware. As a result Endurance U.S. Reinsurance is subject to regulation by the State of Delaware Insurance Department. Endurance American and Endurance American Specialty are also subject to regulation by the State of Delaware Department of Insurance. American Merchants is
subject to regulation by the Ohio Department of Insurance, and 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, 2007, 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 2008 without the prior approval of the applicable insurance regulator. At December 31, 2007, American Merchants and ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $5.4 million and $6.3 million, respectively, without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and American Merchants would be subject to the dividend limitation of their respective parent insurance companies.
The Company’s aggregate invested assets, including fixed maturity investments, other investments, cash and cash equivalents and pending securities transactions, as of December 31, 2007 totaled $5.6 billion compared to aggregate invested assets of $5.5 billion as of December 31, 2006. The increase in invested assets since December 31, 2005 resulted from collections of premiums on insurance policies and reinsurance contracts and investment income, offset by losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid and the repurchase of the Company’s ordinary shares.
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, 2007, 2006 and 2005 was $480.5 million, $630.3 million, and $827.5 million, respectively. The decline in cash flows provided by operations for 2007 as compared to 2006 was primarily a result of less premiums collected in 2007 as compared to 2006, during which certain significant premium adjustments were recorded and the related premium collected.
These estimated obligations noted in the table above will be funded through operating cash flows and existing cash and investments.
The Company had outstanding as of December 31, 2007 and 2006 $574.4 million and $498.5 million, respectively, of letters of credit under the 2007 Credit Facility. The Company did not have any revolving loans outstanding under the 2007 Credit Facility as of December 31, 2007. The Company was in compliance with all covenants contained in the 2007 Credit Facility as of December 31, 2007.
existing and future unsecured and unsubordinated debt. The Senior Notes are also effectively junior to claims of creditors of Endurance Holdings’ subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.
Ordinary Shares. On October 6, 2005, Endurance Holdings issued 6,079,000 of its ordinary shares. Goldman, Sachs & Co. purchased the ordinary shares from Endurance Holdings and subsequently sold the ordinary shares to public investors. The ordinary shares issued in the offering were registered under the Securities Act of 1933, as amended, on a prospectus supplement to the Shelf Registration Statement at a price to the public of $33.15 per share, raising approximately $200 million in net proceeds. The proceeds from this offering were used by Endurance Holdings to provide additional capital to its subsidiaries and for other general corporate purposes.
On an ongoing basis, the Company expects its internally generated funds, together with borrowings available under the 2005 Credit Facility, capital generated from the offering and sale of its Senior Notes, Series A Preferred Shares and ordinary shares, to be sufficient to operate its business. However, there can be no assurance that the Company will not incur additional indebtedness or issue additional equity or hybrid securities in order to implement its business strategy or pay claims.
The effects of inflation could cause the severity of claims to rise in the future. The Company’s estimates for losses and loss expenses include assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent
In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the key lines of business within each business segment are aggregated based on their potential expected length of loss emergence. The period over which loss emergence occurs is typically referred to as the tail. The Company has classified its lines of business as either having a ‘‘short,’’ ‘‘long’’ or ‘‘other’’ tail pattern. The Company views short tail business as that for which development typically emerges within a period of several quarters while long tail business would emerge over many years. The Company’s short tail line of business in the Insurance segment includes property; long tail lines of business include casualty, healthcare liability, workers’ compensation and professional lines. The Company’s short tail lines of business in the Reinsurance segment include catastrophe, property, marine, aerospace and surety while the long tail line of business is casualty related business. Within the
Company’s Reinsurance segment, the Company writes certain specialty lines of business for which the loss emergence is considered unique in nature and thus, has been included as ‘‘other’’ in the table below.
(1) Reconciles the Company’s incurred losses by business segment to the Company’s financial statement presentation.
Short Tail Insurance. The lower than expected losses and loss expenses related to prior years in the short tail insurance line were principally a result of better than anticipated property claims settlements in 2006 related to Hurricanes Katrina, Rita, and Wilma (the ‘‘2005 Hurricanes’’). As a result of the lower 2006 reported claims activity, the Company adjusted downward its estimated losses and loss expenses related to prior years in this reserve category during 2006.
Long Tail Insurance. The absence of significant claims with respect to prior years, along with a better than expected significant loss settlement in this reserve category, resulted in a reduction in estimated losses and loss expenses related to prior years.
Short Tail Reinsurance. Higher than expected paid claims related to the 2005 Hurricanes, primarily in the Company’s catastrophe and marine (offshore energy) lines of business, caused the Company to increase the estimated losses and loss expenses related to prior years in this reserve category. The process of loss estimation for significant catastrophic events such as the 2005 Hurricanes is inherently uncertain and can result in greater variation in estimated losses and loss expenses.
Reserves for losses and loss expenses were comprised of the following at December 31, 2006:
(1) Reconciles the Company’s reserves by business segment to the Company’s financial statement presentation.
In 2006 and 2005, the Company purchased certain industry loss warranties to reduce its overall catastrophe exposure within the U.S. The industry loss warranties were allocated to the catastrophe and property reinsurance lines of business, and also the property insurance line of business.
In 2006, in order to protect the Company against the risk of a severe catastrophe event or the occurrence of multiple significant catastrophe events, Endurance Bermuda acquired $235 million of multi-year, collateralized catastrophe reinsurance from Shackleton. The reinsurance consists of three separate coverages. The first coverage is $125 million of reinsurance for earthquake risk in California from August 1, 2006 through January 31, 2008. The second coverage consists of $60 million of protection for hurricanes in the U.S. Northeast, Gulf Coast and certain inland states. The final coverage provides $50 million of reinsurance for losses resulting from hurricanes or California earthquakes following occurrence of a major hurricane or California earthquake. The second and third coverages provide protection from August 1, 2006 through July 31, 2008.
The reinsurance coverage provided by Shackleton to Endurance Bermuda is based on a modeled loss trigger designed to closely mimic the exposures in the Company’s portfolio of insurance and reinsurance business. Upon the occurrence of a hurricane or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss exceeds the designated attachment point for the peril at issue, then Endurance Bermuda may make a recovery under the applicable reinsurance agreement. The amount recoverable is related to and limited by the Company’s ultimate net loss from the loss event.
At December 31, 2007 and 2006, the Company had reinsurance recoverables of $187.4 million and $44.2 million, respectively, related to its reinsurance agreements. The Company remains obligated for
In accordance with SFAS No. 142, the Company’s intangible assets and goodwill were tested for impairment. As a result of the impairment testing, no write downs were deemed necessary at December 31, 2007 and 2006.
The Company has established a valuation allowance of $10.3 million (2006 - $2.9 million) against realized capital losses, including securities write downs, and certain operating loss carryforwards at December 31, 2007. This increase in the valuation allowance was charged to the Company’s income tax expense during 2007. 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, 2007. 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, 2007 and 2006, and the related consolidated statements of income (loss) and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 28, 2008 expressed an unqualified opinion thereon.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended December 31, 2007, 2006 and 2005
We have audited the accompanying consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2007 and 2006, and the related consolidated statements of income (loss) and comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endurance Specialty Holdings Ltd.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2008 expressed an unqualified opinion thereon.
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; 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 Service, Inc. (together, ‘‘ARMtech’’); Endurance American Insurance Company (‘‘Endurance American’’), domiciled in Delaware; Endurance American Specialty Insurance Company (‘‘Endurance American Specialty), domiciled in Delaware and American Merchants Casualty Company (‘‘American Merchants’’), domiciled in Ohio.
Acquisition expenses are costs that vary with and are directly related to the production of new and renewal business, and consist principally of commissions and brokerage expenses. Acquisition and general and administrative expenses are shown net of commissions and other 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’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
For the years ended December 31, 2007 and 2006, the Company entered into a small number of reinsurance contracts that did not fall within the criteria for reinsurance accounting under
Investments in fixed maturity securities are designated as available for sale and are carried at fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive income. Fair value is generally based on listed market prices. If listed market prices are not available, fair value is determined based on other relevant factors, including broker or dealer price quotations and valuation pricing models that take into account time value and volatility factors underlying the financial instruments. For mortgage-backed and other asset-backed debt securities, fair value includes estimates regarding prepayment assumptions, which are based on current market conditions. Amortized cost in relation to these securities is calculated using a constant effective yield based on anticipated prepayments and estimated economic lives of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date. Changes in estimated yield are recorded on a retrospective basis, which results in future cash flows being used to determine current book value. Realized investment gains and losses are recognized in earnings using the specific identification method. Interest on fixed maturity securities is recorded in net investment income when earned and adjusted for any amortization of premium or discount.
Investments are reviewed for declines in value that are considered to be other-than-temporary. This review involves consideration of several factors including (i) the time period in which there has been a significant decline in value, (ii) the expected maturity of the investment, (iii) the significance of the decline, (iv) an analysis of the liquidity, business prospects and overall financial condition of the issuer, and (v) the Company’s intent and
ability to hold the investment for a period of time sufficient for the value to recover. If the decline in fair value is determined to be other-than-temporary, the cost of the security is written down to fair value and the amount is included in net realized investment losses in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity investments available for sale, are loaned to third parties, primarily major brokerage firms. The Company retains all economic interest in the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% - 105% of the market value of the loaned securities and is monitored and maintained by the lending agent. The securities lending collateral, excluding letters of credit, is reported as a separate line item with a corresponding liability related to the Company’s obligation to return the collateral. The Company had $169.3 million and $220.5 million in securities on loan at December 31, 2007 and 2006, respectively.
Cash equivalents include highly liquid short-term deposits and securities with maturities of ninety days or less at the time of purchase. Cash equivalents are valued at amortized cost which approximates fair value due to the short-term, liquid nature of these securities.
Identifiable intangible assets and goodwill that arise from business combinations are accounted for in accordance with SFAS No. 141, ‘‘Business Combinations’’, and SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’ Identifiable intangible assets are amortized in accordance with their useful lives. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually or more often if impairment indicators arise.
expenses of such foreign operations are translated at weighted average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income, net of applicable deferred income taxes. Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses
included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.
The Company’s investment strategy allows for the use of derivative instruments, subject to strict limitations. The Company is currently utilizing 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 realized gains (losses) in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
The Company has a stock-based employee and non-employee Director incentive plan (‘‘2007 Equity Incentive Plan’’) and other stock plans which are described more fully in Note 15. The Company accounts for issuances under its stock plans in accordance with the fair value recognition provisions of SFAS No. 123, ‘‘Accounting for Stock-Based Compensation,’’ prospectively to all employee awards granted, modified, or settled after January 1, 2002, as
Basic earnings (loss) per common share are calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share are based on net income (loss) available to common shareholders divided by the weighted average number of common shares and dilutive potential common shares outstanding during the period of calculation using the treasury stock method.
Effective January 1, 2008, the Company adopted SFAS No. 157 and 159. The Company does not expect the adoption of these statements to have a material impact on the Company’s financial condition.
The amortized cost, fair value and related gross unrealized gains and losses on fixed maturity securities at December 31, 2007 and 2006 are as follows:
At December 31, 2006, 1,357 fixed maturity securities were in an unrealized loss position. Of those, 763 securities had been in a continuous unrealized loss position for twelve months or greater. The unrealized loss position of these fixed maturity securities was principally a result of changes in the interest rate environment. During the year ended December 31, 2006, the Company identified securities which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value at the time of impairment, and the Company realized losses of $13.4 million in relation to these securities for 2006.
Contractual maturities of fixed maturity securities are shown below as of December 31, 2007 and 2006. 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.
The analysis of realized investment losses for the years ended December 31, 2007, 2006 and 2005, respectively, is as follows:
A portfolio of alternative investment and high yield fixed maturity funds (the ‘‘Funds’’) that invest largely in senior secured distressed debt, derivatives, equity long and short positions, senior secured bank debt and high yield securities is included in other investments. At December 31, 2007, the Company had invested a total of $285.6 million (2006 - $204.6 million) in these Funds. At December 31, 2007, the carrying value of the Funds is $358.1 million (2006 - $253.1 million), which approximates fair value, as the underlying securities held by the Funds are valued at fair value. Certain of the Funds are subject to redemption restriction provisions (see Note 11).
At December 31, 2007, the carrying value and fair value of the Company’s senior notes was $447.3 million and $431.7 million, respectively (See Note 7).
Activity in the reserve for losses and loss expenses for the years ended December 31, 2007, 2006 and 2005 is summarized as follows:
The reinsurance consists of three separate coverages. The first coverage is $125 million of reinsurance for earthquake risk in California from August 1, 2006 through January 31, 2008. The second coverage consists of $60 million of protection for hurricanes in the U.S. Northeast, Gulf Coast and certain inland states. The final coverage provides $50 million of reinsurance for losses resulting from hurricanes or California earthquakes following occurrence of a major hurricane or California earthquake. The second and third coverages provide protection from August 1, 2006 through July 31, 2008.
If the modeled loss exceeds the designated attachment point for the peril at issue, then Endurance Bermuda may make a recovery under the applicable reinsurance agreement. The amount recoverable is related to and limited by the Company’s ultimate net loss from the loss event.
On May 8, 2007, Endurance Holdings amended its existing credit facility among Endurance Holdings, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, among other changes, increase the size of the facility to $1,175 million from $925 million and to extend the maturity of the facility to May 8, 2012 (the ‘‘Credit Agreement’’). On July 18, 2007, the Company entered into the First Amendment to the Credit Agreement, to, among other things, modify the restrictive covenants in the Credit Agreement to permit the Company to pay dividends on its preference shares following the occurrence of certain defaults as defined pursuant to the terms of the Credit Agreement. As amended, the credit facility is referred to as the ‘‘2007 Credit Facility’’.
Up to $675 million of borrowings or letter of credit issuances under the 2007 Credit Facility may be collateralized by a portion of the investment portfolio of such subsidiary borrowing under the facility to the extent of such subsidiary’s borrowing. The facility allows for the issuance of up to $200 million in multicurrency letters of credit and up to $300 million of fronted letters of credit that may also be multicurrency letters of credit. Endurance Holdings guarantees the obligations of its subsidiaries that are parties to the 2007 Credit Facility.
The interest rate for revolving loans under the 2007 Credit Facility is either (i) the higher of (a) the Federal Funds Effective Rate plus 0.5% and (b) the prime commercial lending rate of JPMorgan Chase Bank or (ii) LIBOR plus a fee ranging from 0.165% to 0.375% depending on the Company’s leverage ratio and if the loan is collateralized or uncollateralized. For letters of credit issued on a collateralized basis, the Company is required to pay a fee ranging from 0.165% to 0.29% on the daily stated amount of such letters of credit. For letters of credit issued
The 2007 Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 2007 Credit Facility, the lenders can terminate their commitments under the revolving credit facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the 2007 Credit Facility.
On October 17, 2005, Endurance Holdings issued $200 million principal amount of 6.15% Senior Notes due 2015 (the ‘‘6.15% Senior Notes’’). The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%, and, unless previously redeemed, will mature on October 15, 2015. Endurance Holdings used the net proceeds from the offering to repay the $143.5 million then outstanding under Endurance Holdings’ revolving credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes.
The 6.15% Senior Notes and the 7% Senior Notes (collectively, the ‘‘Senior Notes’’) are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings’ existing and future unsecured and unsubordinated debt. The Senior Notes are also effectively junior to claims of creditors of Endurance Holdings’ subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.
The indentures governing each of the Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. At December 31, 2007, the carrying value of the Senior Notes stood at $447.3 million (2006 - $447.2 million) while the fair value as determined by quoted market valuation was $431.7 million (2006 - $457.5 million). The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2007.
The Company made aggregate interest payments of $29.8 million during the year ended December 31, 2007 (2006 - $29.7 million, 2005 - $21.6 million).
In 2004, prior to the issuance of the 7% Senior Notes, the Company entered into an interest rate lock on a notional amount of $125 million to protect against interest rate increases before the anticipated issuance of the Senior Notes. The objective of the interest rate lock was to protect 50% of the forecasted receipt of proceeds from the issuance of the 7% Senior Notes offering, which was subject to change prior to issuance due to fluctuations in the benchmark 30 year U.S. Treasury rate. Upon issuance of the 7% Senior Notes, the interest rate lock was settled through payment by the Company of $2.7 million. The interest rate lock agreement was designated as a ‘‘cash flow hedge’’ under SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’ and accordingly, the fair value of the derivative was recorded in other comprehensive income (loss) and is being recognized as a component of interest expense in the statement of income (loss) as the interest expense related to the 7% Senior Notes affects earnings. The net income (loss) effect of the interest rate lock was not material.
The Company currently uses foreign currency forward contracts in its investment portfolios to minimize the effect of fluctuating foreign currencies and to gain exposure to interest rate differentials between differing market rates. For the years ended December 31, 2007, 2006 and 2005, the Company recognized a realized foreign exchange (loss) gain on forward contracts of approximately ($527,100), $17,900, and Nil, respectively.
• Insurance - The property line of business is comprised of the insurance and facultative reinsurance of commercial properties. The types of risks insured are generally properties with sufficiently large values to require multiple insurers and reinsurers to accommodate their insurance capacity needs. The agriculture line of business is comprised of multiple peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products. The casualty lines of business are comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty, healthcare liability, workers’ compensation, and professional lines.
Because the Company does not manage its assets by segment, investment income and total assets are not allocated to the individual segments. Management measures segment results on the basis
The following table provides a summary of the segment revenues and results for the year ended December 31, 2005, reserve for losses and loss expenses as of December 31, 2005 and the carrying value of goodwill as of December 31, 2005:
The following table provides gross premiums written, by line of business, for the year ended December 31, 2007, 2006 and 2005:
The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2007, 2006 and 2005:
The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2007, 2006 and 2005:
On August 1, 2005, the Company completed the purchase of Endurance American Specialty, a non-admitted insurer of the United States and the District of Columbia. The fair value of the U.S. state licenses was $8.0 million at acquisition.
No impairment of the Company’s goodwill or intangible assets was noted following the annual impairment review for the years ended December 31, 2007 and 2006. The Company expects the amortization of the intangible assets with finite lives to approximate $10.4 million for years 2008 to 2011, $9.6 million for 2012 and $57.8 million for all years thereafter.
Concentrations of credit risk. The areas where significant concentrations of credit risk may exist include loss recoverables, investments and cash and cash equivalents. The Company’s reinsurance recoverables at December 31, 2007 and 2006 amounted to $187.4 million and $44.2 million,
As of December 31, 2007, substantially all the Company’s cash and investments were held by three custodians. The Company’s investment guidelines limit the amount of credit exposure to any one issuer other than the U.S. Treasury and certain other foreign government obligations rated AAA.
Major production sources. During the years ended December 31, 2007, 2006, and 2005, the Company obtained 60.9%, 69.2%, and 74.2% of its gross premiums written before deposit accounting adjustments through four brokers, respectively: Marsh & McLennan Companies, Inc. (including Guy Carpenter) - 25.6% (2006 - 23.2%; 2005 - 26.9%); Aon Corporation - 15.0% (2006 - 19.3%; 2005 - 24.3%); Willis Companies - 14.0% (2006 - 17.8%; 2005 - 13.7%); and Benfield Group - 6.3% (2006 - 8.9%; 2005 - 9.3%).
Letters of credit. As of December 31, 2007, the Company had issued letters of credit of $574.4 million (December 31, 2006 - $498.5 million) under its credit facility in favor of certain ceding companies.
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.
The Company’s share capital at December 31, 2007 and 2006 is comprised as follows:
During 2007, the Company issued restricted shares under its equity compensation plans (Note 15). The common shares, issued, outstanding and fully paid for 2007 includes 1,119,489 restricted shares.
During 2007, the Company repurchased 107,620 of outstanding warrants at an average price of $25.42, net of the average warrant strike price of $16.10 per warrant. The outstanding warrants at December 31, 2007, which have an exercise price of $15.87 (2006 - $16.87) per share, expire on December 14, 2011.
The following tables set forth the computation of basic and diluted earnings (loss) per share for the years ended December 31, 2007, 2006 and 2005.
The following table sets forth dividends declared in the years ended December 31, 2007, 2006, and 2005 respectively.
During the years ended December 31, 2006 and 2005, the Company was party to agreements with various affiliates of Aon as follows:
Underwriting activities. In the normal course of business, the Company entered into reinsurance contracts with various subsidiaries of Aon. Such contracts resulted in net premiums earned of $34.9 million (2005 - $19.0 million), losses and loss expenses of $20.1 million (2005 - $10.4 million) and acquisition expenses of $11.2 million (2005 - $5.7 million) for the year ended December 31, 2006. During the year ended December 31, 2006, affiliates of Aon produced 19.3% (2005 - 24.3%) of the Company’s gross premiums written before deposit accounting adjustments. Related reinsurance premiums receivable totaled Nil and $39.7 million at December 31, 2006 and 2005, respectively.
In addition, the Company paid brokerage fees and commissions to Aon and its affiliates, which varied based on the amount of business produced. During the years ended December 31, 2006 and 2005, the Company incurred $23.0 million and $25.6 million, respectively, in brokerage fees and commissions in connection with these transactions.
At its meeting on February 28, 2007, the Company’s Board of Directors adopted the 2007 Equity Incentive Plan (‘‘2007 Plan’’) to allow for the issuance of equity incentives to non-employee directors of the Company and eligible employees of the Company and its subsidiaries. The 2007 Plan was approved by the Company’s shareholders at the Annual General Meeting of Shareholders held on May 9, 2007. As such, the Company’s existing Amended and Restated 2002 Stock Option Plan and the Amended and Restated 2003 Non-Employee Director Incentive Plan were merged into the new 2007 Plan.
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
Under the terms of the 2007 Plan, and after the consolidation of the Company’s previous plans, a total of 2,100,000 ordinary shares have been reserved for issuance. The Company issues new ordinary shares upon the exercise of outstanding options or settlement of a vested restricted share unit. As of December 31, 2007, 1,622,951 ordinary shares remained available for issuance under the 2007 Plan.
No options were granted during the years ended December 31, 2007, 2006, and 2005. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006, and 2005 was $11.3 million, $8.1 million, and $2.4 million, respectively. The Company received proceeds of $9.4 million from the exercise of options during the year ended December 31, 2007. The Company issued new ordinary shares in connection with the exercise of the above options.
No options expired during the year ended December 31, 2007. The total grant date fair value of options vested during the years ended December 31, 2007, 2006 and 2005 was $0.3 million,
$2.1 million, and $3.7 million, respectively. There were no unrecognized stock-based compensation expenses related to unvested stock options at December 31, 2007.
A summary of the restricted share and restricted share unit activity during the year ended December 31, 2007 is presented below:
non-vested awards was $16.4 million (2006 - $9.2 million). This expense is expected to be recognized between 2008 and 2011, with approximately 59% expected to be recognized during 2008.
The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company’s defined contribution plans, the Company makes contributions to its employees’ accounts in amounts ranging from 4% to 10% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Contributions for the year ended December 31, 2007 resulted in an expense of $6.4 million being recorded in earnings (2006 - $4.6 million; 2005 - $4.5 million).
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. At December 31, 2007, 2006 and 2005, these requirements had been met. Endurance U.K. is currently completing 2007 statutory profit (loss) accounts. Endurance U.K. recorded statutory net losses of ($0.8) million and ($40.3) million for the years ended December 31, 2006 and 2005.
The Company is not required to pay any income or capital gains taxes in Bermuda. The Company has received an assurance from the Minister of Finance of Bermuda under the
Exempted Undertakings Tax Protection Act of 1966 of Bermuda, as amended, that in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not be applicable to the Company until March 28, 2016 provided that the assurance is subject to the condition that it will not prevent the application of any taxes payable by the Company in respect of real property or leasehold interests in Bermuda held by it. Endurance Bermuda intends to operate in a manner such that it will owe no United States tax other than premium excise tax and withholding taxes on certain investments.
The income tax (expense) benefit was as follows for the years ended December 31, 2007, 2006 and 2005, respectively:
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, 2007 and 2006:
The following is a summary of the unaudited quarterly data for the year ended December 31, 2007:
The following is a summary of the unaudited quarterly data for the year ended December 31, 2006: