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, 2008, please see Note 12 - “Commitments and Contingencies” of our Audited Consolidated Financial Statements.
Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware;
Endurance American Specialty Insurance Company (“Endurance American Specialty”), domiciled in Delaware;
The Company’s revenues also include income generated from its investment portfolio. The Company’s investment portfolio is comprised of fixed maturity investments, short term investments and preferred equity securities that are held as available for sale. 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 generally excluded from earnings. These unrealized gains and losses are included on the Company’s balance sheet in accumulated other comprehensive (loss) income as a separate component of shareholders’ equity. If unrealized losses are considered to be other-than-temporarily impaired, such losses are included in earnings as a realized loss.
it requires assumptions to be made that were uncertain at the time the estimate was made; and
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 information gathered by the Company and the actuarial analyses performed on the gathered information is used to develop individual point estimates of carried loss and loss expense reserves for each of the Company’s business segments and underlying lines of business. These individual point estimates are then aggregated along with actual losses reported to reach the total reserve for losses and loss expenses carried in the Company’s consolidated financial statements. All of the Company’s loss reserving is currently performed on a point estimate basis. The Company does not utilize range estimation in its loss reserving process.
Since inception, the Company has used reserving methods that are commonly applied when limited loss development experience exists. In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the key lines of business within each business segment are aggregated based on their potential expected length of loss emergence. The period over which loss emergence occurs is typically referred to as the tail. The Company has classified its lines of business as either having a “short,” “long” or “other” tail pattern. As the Company has accumulated its own loss reserve history, it has determined it is more appropriate to incorporate the Company’s actual loss experience. As of 2006, the Company determined that its own loss development history in relation to its short tail and other lines of business had reached a level of maturity sufficient to provide a credible basis on which to estimate its reserve for losses and loss expenses related to these lines of buinsess. As such, the Company’s actual reporting patterns were considered when determining the reserve for losses and loss expenses in the short tail and other lines of business in its Reinsurance and Insurance segments for the year ended December 31, 2008. 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.
4. no significant emergence of losses or types of losses that are not represented in the information supplied to the Company by its brokers, ceding companies and insureds will occur.
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, 2008, the Company was not involved in any material claims litigation or arbitration proceedings.
Broker/Dealers. Generally, the Company obtains quotes directly from broker/dealers who are active in the corresponding markets when prices are unavailable from independent pricing services or index providers. Broker/dealer quotes may also be used if the pricing from pricing services or index providers is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities. Quotes from broker/dealers are all non-binding. At December 31, 2008, the Company has not adjusted any pricing provided by broker/dealers and has classified all such securities as Level 2.
As described above, independent pricing services, index providers and broker/dealers have their own proprietary method for determining the fair value of securities. As such, prices provided by independent pricing services, index providers and independent broker quotes can vary widely, even for the same security, and have a material effect on the estimated fair values of the Company’s securities. To validate the techniques or models used by pricing sources, the Company’s review process includes, but is not limited to:
Based on the above review, the Company will challenge any prices for a security or portfolio, which are considered not to be representative of fair value.
The Company’s available for sale investments are comprised of a variety of different securities, which are leveled based on the valuation technique and inputs used in their valuation. The valuation of current issue U.S. government securities are 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 treasury securities, corporate debt, U.S. agency and non-agency 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.
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 the estimated economic life of the security. 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, resulting in future cash flows determining current book value.
the Company’s intent and ability to hold the investment for a time period sufficient for the value to recover.
If such a decline in the fair value is judged to be other-than-temporary, the Company writes down the investment to fair value, thereby establishing a new cost basis. The amount of the write-down is charged to income as a realized loss. The new cost basis is not changed for subsequent recoveries in fair value. In light of the significant market volatility and lack of liquidity, the number of fixed income investments that have met the thresholds described above and become candidates for further other-than-temporary impairment analysis has increased. Although the Company has maintained its analysis thresholds, management has seen an increase in the number of instances in which subjective management judgment must be utilized in assessing other-than-temporary impairments.
Other investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. The carrying amounts 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. Prior to the second quarter of 2008, all of our investments in alternative funds were reported on a one-month lag.
Gross premiums written increased in 2008 compared to 2007 primarily due to growth in the Company’s Insurance segment driven by increases in the agriculture line from premiums written by ARMtech, which was acquired at the end of 2007. Partially offsetting this increase was a decline in gross premiums written in the Reinsurance segment due to a variety of factors, including the Company’s non-renewal of business which did not meet its underwriting requirements, rate reductions, increased client retentions and the absence of positive premium adjustments. 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.
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, 2008, 2007 and 2006:
The internal rate of return of the security based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) with its projected cash flows. Includes only cash and cash equivalents and fixed income securities held by the Company’s investment managers.
During 2008, the yield on the benchmark five year U.S. Treasury bond fluctuated within a 250 basis points range, with a high of 3.76% and a low of 1.26%. Investment grade corporate and agency structured security spreads widened approximately 401 and 38 basis points, respectively, during the year ended December 31, 2008. Trading activity in the Company’s portfolio was aimed at reducing risk by increasing the allocation to cash and short term securities and government bonds, reducing exposure to mortgages and asset-backed securities and corporate bonds while emphasizing credit protection in structured securities. The duration of the fixed income portfolio at December 31, 2008 has decreased compared to December 31, 2007 primarily due to the sale of longer duration government bonds, asset-backed securities, mortgage-backed securities and corporates and subsequent reinvestment in short duration government securities and cash and cash equivalents.
During 2008, 2007 and 2006, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The Company considered how long the securities had been in a loss position, the expected maturity of the investments, the significance of the decline, the financial condition of the issuer, on the security’s structure and ability to continue to pay interest and return principal upon maturity or via prepayments and the Company’s intent and ability to hold such investments for a period of time sufficient for the recovery of value. For a more detailed description of the Company’s investment accounting policy, see “Application of Critical Accounting Estimates - Investments “ above. As a result of each review, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The unrealized loss position of these securities was principally a result of credit spread widening and deterioration of global economic conditions. Consequently, the book value of such securities was written down to fair value, and the Company recognized a realized loss on these securities.
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 2008, the Company’s net loss ratio was adversely impacted by losses from Hurricanes Gustav and Ike compared to 2007 and 2006, which benefited from the absence of major catastrophes. The Company recorded losses, net of reinstatement premiums, related to Hurricanes Gustav and Ike during 2008 of $148.0 million primarily in the Reinsurance segment. Losses from Hurricanes Gustav and Ike added 8.9 percentage points to the Company’s net loss ratio for 2008. In addition, decreased commodity prices for certain agriculture products, severe weather and worse than expected growing conditions for major crops in the U.S. adversely impacted the agriculture line of the Insurance segment.
Partially offsetting the adverse impact of the hurricanes in 2008 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 2008, 2007 and 2006, the Company’s previously estimated ultimate losses for prior accident years were reduced by $156.5 million, $159.4 million and $57.7 million, respectively. The overall net reduction in the Company’s estimated losses for prior accident years experienced in 2008 was primarily in the Company’s short tail, long tail and other lines of both the Insurance and Reinsurance segments.
The Company’s general and administrative expense ratio for 2008 decreased as compared to 2007 and increased from 2006. The decrease in the general and administrative expense ratio for 2008 as compared to 2007 principally resulted from more premiums earned in the Insurance segments’ agriculture line, which benefits from third party expense reimbursements. At December 31, 2008, the Company had a total of 781 employees as compared to 709 employees at December 31, 2007 and 481 employees at December 31, 2006.
Premiums. Net premiums written in the Insurance segment increased in 2008 by 77.7% over 2007 and 135.4% over 2006 net premiums written. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2008, 2007 and 2006 were as follows:
Ceded premiums written by the Company in the Insurance segment increased in 2008 compared to 2007 and 2006 because of increased cessions to third party reinsurers associated with increased 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 2008 increased compared to 2007 and 2006 due to the increase in agriculture premiums written during 2008 as a result of the acquisition of ARMtech at the end of 2007.
Net Losses and Loss Expenses. The net loss ratio in the Company’s Insurance segment in 2008 compared to 2007 and 2006 reflected losses recorded in relation to the Company’s agriculture line. 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. during 2008. In general, the Company expects higher levels of attritional losses in the agriculture line compared to other lines of business, resulting in higher initial expected loss ratios as the agriculture line contributes a greater amount of premiums to the Insurance segment.
Partially offsetting the impact of the losses in the agriculture line was favorable prior year loss reserve development recorded for 2008. Prior year loss reserves were reduced in 2008 by $71.0 million as compared to reductions of $80.4 million and $54.4 million for the years ended December 31, 2007 and 2006. Of the lines of business in the Company’s Insurance segment, both the short tail property, long tail healthcare liability and other agriculture lines experienced net reductions in the Company’s estimated losses for prior accident years in 2008 as claims have not materialized as originally estimated by the company. In addition, the Company recorded favorable loss emergence on its agriculture line.
The decrease in 2008 gross premiums written as compared to 2007 and 2006 was primarily due to declines in agriculture premiums written. Agriculture premiums written declined in 2008 due to expected attrition stemming from the Company’s acquisition of ARMtech within the Insurance segment in December of 2007. Declines in the Company’s other reinsurance business lines resulted from non-renewal of contracts that no longer met the Company’s underwriting standards, changes in client retentions, rate reductions and reduced positive premium adjustments.
Ceded premiums written by the Company in the Reinsurance segment during 2008 compared to 2007 was relatively consistent. In addition during 2008, the Company’s $235 million multi-year, collateralized catastrophe reinsurance protection purchased in 2006 expired. 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.
Net losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for 2008 increased as a result of losses recorded in relation to Hurricanes Gustav and Ike as compared to the low level of catastrophic loss activity, in particular outside of Europe, in 2007 and 2006. In 2008, the Company recorded combined losses, net of reinstatement premiums, of approximately $148 million due to Hurricanes Gustav and Ike, which added 18.9 percentage points to the net loss ratio as compared to 2007, which was impacted by $33.9 million of net losses or 3.2 net loss ratio points due to European Windstorm Kyrill.
In each year, the Company experienced favorable loss reserve development from prior years in its Reinsurance segment, with the majority of the current year favorable loss reserve development emanating from this segment’s short tail catastrophe, other tail agriculture and long tail casualty lines. During 2008, 2007 and 2006, the Company’s previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $88.6 million, $74.4 million and $5.0 million, respectively. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company.
For internal management reporting purposes, underwriting results by business segment are presented on the basis of applying reinsurance accounting to all reinsurance contracts written. The following table presents the activity related to deposit accounted contracts included in the Company’s segment results above, which reconciles the Company’s underwriting results to the Company’s consolidated financial statement presentation for the years ended December 31, 2008, 2007 and 2006.
During the years ended December 31, 2008, 2007 and 2006, the Company realized $5.1 million, $28.6 million and $159.0 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 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, 2008, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $737 million without prior regulatory approval based upon the Bermuda insurance and Companies Act regulations.
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and American Merchants 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, 2008, 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, 2008, American Merchants and ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $5.7 million and $3.5 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.
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 imposed 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 distributions. At December 31, 2008, Endurance U.K. did not have profits available for distributions.
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, 2008 totaled $5.4 billion compared to aggregate invested assets of $5.6 billion as of December 31, 2007. The decrease in invested assets since December 31, 2007 resulted from losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid, the repurchase of the Company’s ordinary shares and realized losses in the investment portfolio, offset in part by collections of premiums on insurance policies and reinsurance contracts and investment income.
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, 2008, 2007 and 2006 was $479.4 million, $480.5 million, and $630.3 million, respectively.
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 dividends paid by Endurance Holdings or the occurrence of certain events.
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 things, 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 preferred equity securities 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.’’
At December 31, 2008, letters of credit totaling $635.5 million were outstanding, $200.0 million face value of 6.15% Senior Notes were outstanding and $250.0 million face value of 7% Senior Notes (the “7% Senior Notes”) were outstanding.
Variable Delivery Forward. On September 11, 2007, Endurance Holdings consummated a variable delivery equity forward sale arrangement as described above under the section entitled “Liquidity and Capital Resources.”
The Company had outstanding as of December 31, 2008 and 2007 $635.5 million and $574.4 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, 2008. The Company was in compliance with all covenants contained in the 2007 Credit Facility as of December 31, 2008.
At December 31, 2008, the carrying value of the Senior Notes stood at $447.3 million while the fair value as determined by quoted market valuation was $334.2 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2008.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of Endurance Holdings, holders of the Series A Preferred Shares and any parity shares are entitled to receive out of Endurance Holdings’ assets available for distribution to shareholders, before any distribution is made to holders of Endurance Holdings’ common equity securities, a liquidating distribution in the amount of $25 per Series A Preferred Share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Distributions will be made pro rata as to the Series A Preferred Shares and any parity shares and only to the extent of Endurance Holdings’ assets, if any, that are available after satisfaction of all liabilities to creditors.
Shackleton Re Limited (“Shackleton”), the entity from which Endurance Bermuda purchased $235 million of collateralized catastrophe reinsurance in 2006, is a variable interest entity under the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”. The final component of the Company’s coverage under Shackleton expired as of July 31, 2008. The Company had a variable interest in Shackleton but was not the primary beneficiary of Shackleton and therefore was not required to consolidate Shackleton in its consolidated financial statements. Please see “Ceded Reinsurance” section below for further details related to this transaction.
The Company’s reserving actuaries, who are independent of the Company’s business units, review the Company’s loss and loss expense reserves on a quarterly basis for both current and prior accident years using the most current claims data. These reserve reviews incorporate a variety of actuarial methods and judgments, including the three most common methods of actuarial evaluation used within the insurance industry, the Bornhuetter-Ferguson method, the expected loss ratio method and the loss development method. One actuarial method used by the Company to estimate reserves for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). The Bornhuetter-Ferguson method involves the application of selected loss ratios to the Company’s earned premiums to determine estimates of ultimate expected unpaid claims and claims expenses for each underwriting year. When the IBNR reserves are added to the losses and loss expenses amounts with respect to claims that have been reported to date, an estimated ultimate expected loss results. The Company believes that this method provides a more stable estimate of IBNR reserves that is insulated from wide variations in reported losses. In contrast, the loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. The Company uses these multiple methods, supplemented with its own actuarial and professional judgment, to establish its best estimate of loss and loss expense reserves.
Losses and loss expenses for the year ended December 31, 2008 include $156.5 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2008 year benefited the Company’s 2008 reported loss ratio by approximately 8.9 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in the Company’s short tail, long tail and other lines within both the Insurance and Reinsurance segments.
For the year ended December 31, 2008, the Company did not materially alter the two key inputs it utilizes to establish its reserve for losses and loss expenses, initial expected loss ratios or loss reporting patterns, for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2008 for those reserve categories were within the range of possible results anticipated by the Company.
Other Insurance. Lower than anticipated agriculture claims settlements for the 2007 crop year resulted in a reduction in estimated losses and loss expenses for prior years within this reserve category.
Long Tail Insurance. The absence of significant claims with respect to prior years resulted in a reduction in estimated losses and loss expenses related to prior years primarily in relation to the Company’s healthcare liability and professional lines offset modestly by unfavorable development in the Company’s workers’ compensation line.
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, 2008. Information presented herein may differ materially from that reported in Endurance’s financial statements prepared in accordance with GAAP due to differences in foreign currency exchange rates.
Two key inputs utilized in determining loss and loss expense reserves for the Company’s two business segments are the initial expected loss ratio and the speed of the loss reporting pattern. The following tables illustrate the possible percentage effects on current estimates of the reserve for losses and loss expenses due to 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern as of December 31, 2008. The 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern in the tables below were chosen consistent with commonly accepted actuarial practice, due to the Company’s limited empirical data regarding loss and loss expense reserves variability. In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the lines of business within each business segment are aggregated based on their potential expected length of loss emergence or tail.
Ceded premiums written were $462.1 million for the year ended December 31, 2008, $206.1 million for the year ended December 31, 2007 and $204.1 million for the year ended December 31, 2006. The increase in ceded premiums written was due to business written and ceded by our U.S. insurance operations, specifically related to the agriculture line, and strategic cessions of business in 2007 and 2006 for the purpose of managing the Company’s catastrophe risk profile. The Company’s U.S. insurance operating subsidiaries use proportional and excess reinsurance to protect larger limits on certain business written by this segment. Excess reinsurance coverage is often purchased in relation to the workers’ compensation line to protect against catastrophic events. ARMtech participates in a federally sponsored crop reinsurance program offered by the U.S. government.
Goodwill and other intangibles that arise from business combinations are accounted for by the Company in accordance with SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.” These standards require 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 American Merchants, and as a result of that transaction recorded an indefinite lived intangible of $2.2 million related to state insurance licenses acquired.
In accordance with SFAS No. 142, the Company’s intangible assets and goodwill are tested at least annually for impairment and more often if a triggering event is deemed to have occurred. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The fair value of the reporting unit is impacted by the performance of the business. If it is determined that the goodwill has been impaired, the Company must write down the goodwill by the amount of the impairment, with a corresponding charge to net income.
During the fourth quarter of 2008, the Company performed its annual impairment testing of goodwill. The Company has two primary sources of goodwill - Goodwill obtain from a renewal rights transaction completed in 2003 with HartRe and goodwill obtain 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 line 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, 2008 and 2007.
The Company’s balance sheet at December 31, 2008 contains a net deferred tax asset in the amount of $20.7 million (2007 - $0.9 million deferred tax liability). The current year net deferred tax asset consists of gross deferred tax assets of $106.9 million, gross deferred tax liabilities of $70.6 million and a valuation allowance of $15.7 million. Of the Company’s gross deferred tax assets, $23.0 million (2007 - $14.4 million) relates to net operating loss carryforwards that are available to offset future taxable income generated by the Company’s U.K. subsidiary. The Company’s net operating losses may be carried forward indefinitely. Based on its analysis of various potential tax planning strategies and projected taxable income for the Company’s U.K. subsidiary, management believes that it is more likely than not that the Company’s U.K. subsidiary will generate sufficient taxable income to realize the net operating loss carryforwards in the near term and prior to their expiration, except as provided for as follows.
We have audited Endurance Specialty Holdings Ltd.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Endurance Specialty Holdings Ltd.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
In our opinion, Endurance Specialty Holdings Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
Consolidated Statements of Income and Comprehensive (Loss) Income for the years ended December 31, 2008, 2007 and 2006
Notes to the Consolidated Financial Statements for the years ended December 31, 2008, 2007 and 2006
Endurance Specialty Holdings Ltd. (“Endurance Holdings”) was organized on June 27, 2002 under the laws of Bermuda to act as a holding company of providers of property and casualty insurance and reinsurance on a worldwide basis.
The Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company. One actuarial method used by the Company to estimate reserves for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). Another actuarial method used by the Company to estimate reserves for losses and loss expenses is known as the Bornhuetter-Ferguson method. The Bornhuetter-Ferguson method 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. Management uses these multiple actuarial methods, supplemented with professional judgment, to establish the best estimate of reserves for losses and loss expenses.
A portion of the Company’s assumed proportional reinsurance agreements contain occurrence limitations or loss sensitive provisions, such as adjustable or sliding scale commissions, that may impact the ultimate amounts paid to or received from ceding companies based on loss experience. In some loss scenarios, these features would result in the ceding company’s results not being proportional to the Company’s results from the proportional agreement, and such differences may be meaningful. The Company evaluates these contracts on an individual basis in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 113 - ‘‘Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts’’ (‘‘SFAS No. 113’’).
The Company participates in a securities lending program whereby fixed income securities are loaned by the Company to third parties, primarily major brokerage firms and commercial banks. 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 $112.6 million and $169.3 million in securities on loan at December 31, 2008 and 2007, respectively.
Identifiable intangible assets and goodwill that arise from business combinations are accounted for in accordance with SFAS No. 141R, “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.
Offering and registration costs incurred in connection with equity offerings, including investment banking fees and legal fees, are deducted from the proceeds of the offerings. Offering and registration costs incurred in connection with the issuance of the Senior Notes are capitalized and amortized over the term of the Senior Notes.
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 investment realized losses in the Consolidated Statements of Income and Comprehensive (Loss) Income.
The Company accounts for income taxes in accordance with the Financial Accounting Standards Board’s (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB statement No. 109” (“FIN 48”) for its subsidiaries operating in taxable jurisdictions. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. FIN 48 allows for the recognition of tax benefits of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is established for any tax benefit claimed in a tax return in excess of this threshold. Income tax related interest and penalties are included as income tax expense.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In June 2008, the FASB issued EITF No. 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” which establishes criteria for evaluation of an instrument including assessing the instrument’s contingent exercise provisions, if any, and the instrument’s settlement provisions in order to conclude if such an instrument is indexed to an entity’s own stock. EITF No. 07-05 is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. The Company does not expect the adoption of EITF No. 07-05 to have a material impact on the Company’s financial condition or results of operations.
The amortized cost, fair value and related gross unrealized gains and losses on the Company’s securities classified as available for sale at December 31, 2008 and 2007 are as follows:
At December 31, 2007, 702 available for sale securities were in an unrealized loss position. Of those, 331 securities had been in a continuous unrealized loss position for twelve months or greater. The unrealized loss position of these securities was principally a result of changes in the interest rate environment. During the year ended December 31, 2007, 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 $17.3 million in relation to these securities for 2007.
At December 31, 2008, the Company held $25.4 million of perpetual preferred equity securities. The Company evaluated these preferred equity securities for potential impairment in a manner similar to the evaluation procedures utilized for its debt securities. In addition, the Company examined each security held for deterioration in the credit quality of the issuer to determine if the preferred equity securities held should be deemed impaired. Included in the other-than-temporary impairments of $82.1 million above was $24.0 million of impairments related to the Company’s preferred equity securities.
The components of net investment income for the years ended December 31, 2008, 2007 and 2006 are as follows:
The analysis of realized investment losses for the years ended December 31, 2008, 2007 and 2006, respectively, is as follows:
The Company also participates in a securities lending program whereby fixed income securities are loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The borrowers of the Company’s securities provide the Company with collateral, typically in cash, which the Company separately maintains. The Company invests such cash collateral in other securities. In the first quarter of 2008, the Company restricted future investment of cash collateral in its securities lending program to overnight repurchase agreements. Previously, the Company allowed investments in U.S. Treasuries, U.S. government agencies securities, mortgage-backed securities, asset-backed securities and corporate fixed income securities. At December 31, 2008, the cash collateral was invested in senior credit card and auto asset-backed securities, bank notes, debentures and repurchase agreements. Securities with an estimated fair value of $112.6 million and $169.3 million were on loan under the program at December 31, 2008 and December 31, 2007, respectively. The Company was liable for cash collateral under the Company’s control of $115.6 million and $173.0 million at December 31, 2008 and December 31, 2007, respectively. As of December 31, 2008 and December 31, 2007, the fair value of the investments purchased with the cash collateral received from the borrower was $112.9 million and $173.0 million. The investments purchased with the cash collateral had an average credit quality rating of “Aa1” by Moody’s and “AA” by Standard & Poor’s. All securities on loan are issued on a term or overnight basis and are subject to daily recall at the Company’s discretion.
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement” (“SFAS No. 157”). SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
Level 2 Quoted prices for similar assets in markets that are active, quoted prices for identical or similar assets in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
In accordance with SFAS No. 157, the Company maximizes the use of observable inputs in its valuation techniques and applies unobservable inputs only to the extent that observable inputs are unavailable. The major classes of assets and liabilities carried at fair value by the Company at December 31, 2008 included fixed maturity investments, short term investments, preferred equity securities and securities lending collateral.
The determination of fair values in the absence of quoted market prices is based on: (i) valuation methodologies; (ii) securities we deem to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
There have been no material changes in the Company’s valuation techniques since the adoption of SFAS No. 157 effective January 1, 2008. On October 10, 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When Market for That Asset is Not Active,” which provided further clarification on fair value measurement for financial assets in inactive markets. The adoption of this statement did not impact the Company’s results of operations or financial position.
The following table sets forth the Company’s available for sale investments categorized by the level within the SFAS No. 157 hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2008:
The following table presents the securities lending collateral reinvested by the Company in connection with its securities lending program, categorized by the level within the SFAS No. 157 hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2008:
The following table presents a reconciliation of the beginning and ending balances for all available for sale investments measured at fair value on a recurring basis using Level 3 inputs during the year ended December 31, 2008:
Losses on Level 3 securities in the amount of ($0.8) million, representing realized losses due to other-than-temporary impairments, were included in earnings (net realized investment losses) for the year ended December 31, 2008 and were attributable to the change in unrealized gains or losses related to fixed maturity investments still held at December 31, 2008.
Activity in the reserve for losses and loss expenses for the years ended December 31, 2008, 2007 and 2006 is summarized as follows:
The effects of reinsurance on premiums earned and written during the years ended December 31, 2008, 2007 and 2006 are as follows:
If the modeled loss exceeded the designated attachment point for the peril at issue, then Endurance Bermuda could have made a recovery under the applicable reinsurance agreement. The amount recoverable was related to and limited by the Company’s ultimate net loss from the loss event. Endurance Bermuda was not entitled to any recovery from Shackleton.
On May 8, 2007, Endurance Holdings amended its existing credit facility among Endurance Holdings, various designated subsidiary borrowers, fifteen lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, among other things, 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’’.
On July 15, 2004, the Company issued $250 million principal amount of 7% Senior Notes due 2034 (the “7% Senior Notes”). The 7% Senior Notes were offered by the underwriters at a price of 99.108% of their principal amount, providing an effective yield to investors of 7.072%, and, unless previously redeemed, will mature on July 15, 2034.
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 (loss) income and is being recognized as a component of interest expense in the statement of income as the interest expense related to the 7% Senior Notes affects earnings. The net income effect of the interest rate lock was not material.
Insurance - This segment is comprised of six lines of business: property, casualty, healthcare liability, workers’ compensation, agriculture 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 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 agriculture line of business is comprised of multiple peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products.
Reinsurance - This segment is comprised of six lines of business: casualty, property, catastrophe, agriculture, aerospace and marine and surety and other specialty. The casualty line of business is comprised of third party liability exposures and workers’ compensation coverages. The property line of business includes proportional and excess of loss reinsurance of personal and commercial exposures. Catastrophe coverages include reinsurance for catastrophic perils on a treaty basis. The agriculture line includes coverages for weather related perils as well as protection from yield and price risks. The marine line includes proportional and non-proportional reinsurance of hull and cargo insurance business. Aerospace coverages include the reinsurance of aviation and space business. Surety and other specialty coverages include proportional and excess of loss coverages of contract and commercial surety business as well as personal accident coverages.
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 of the combined ratio that is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. General and administrative expenses incurred by segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the segment to which they apply. Group reinsurance protection purchased and any subsequent recoveries are allocated to segments based on the underlying exposures covered.
Reconciles the Company’s underwriting results by segment to the Company’s financial statement presentation.
The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2008, 2007 and 2006:
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 million, which the Company paid in 2007. An additional $3.2 million was recorded in 2008 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 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.
On June 5, 2006, the Company completed the purchase of Endurance American, an admitted insurer in the United States and the District of Columbia. The fair value of the U.S. state licenses was $3.5 million at acquisition.
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, 2008 and 2007 amounted to $557.8 million and $187.4 million, respectively, and resulted from reinsurance arrangements entered into in the normal course of operations. A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of funds, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. As of December 31, 2008, $187.9 million of losses recoverable (2007 - $117.1 million) was due from reinsurers rated A- or better by A.M. Best or Standard & Poor’s. An additional $369.5 million (2007 - $67.6 million) of losses recoverable was due from a U.S. government sponsored reinsurance program as of December 31, 2008.
Letters of credit. As of December 31, 2008, the Company had issued letters of credit of $635.5 million (December 31, 2007 - $574.4 million) under its credit facility in favor of certain ceding companies.
Investment commitments. As of December 31, 2008 and 2007, the Company had pledged cash and cash equivalents and fixed maturity investments of $147.9 million and $223.2 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2008 and 2007, the Company had also pledged $591.9 million and $594.7 million of its cash and fixed maturity investments as required to meet collateral obligations for $550.8 million and $532.3 million in letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2008 and 2007, cash and fixed maturity investments with fair values of $234.8 million and $120.3 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $14.2 million and $33.8 million were on deposit with Canadian regulators, respectively.
Operating Leases. The Company leases office space and office equipment under operating leases.
Future minimum lease commitments at December 31, 2008 are as follows:
Total rent expense under operating leases for the year ended December 31, 2008 was $10.1 million (2007 - $10.2 million; 2006 - $8.4 million).
During 2008, the Company issued restricted shares under its equity compensation plans (Note 16). The common shares, issued, outstanding and fully paid for 2008 includes 1,134,213 restricted shares.
The Company follows SFAS No. 128, “Earnings per Share”, to account for its weighted average shares. 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 discussed in Note 16.
The following table sets forth dividends declared in the years ended December 31, 2008, 2007 and 2006 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 year ended December 31, 2006, the Company incurred $23.0 million in brokerage fees and commissions in connection with these transactions.
On January 1, 2006, the Company implemented Statement of Financial Accounting Standard 123(R) (“SFAS 123(R)”) under the modified-prospective method as it relates to its stock-based employee and non-employee compensation plan and other stock plans. As part of the adoption of SFAS 123(R), the Company has elected the alternative simplified approach to calculating the excess tax benefits as allowed by Financial Statement of Position 123(R)-3.
No options expired during the year ended December 31, 2008. The total grant date fair value of options vested during the years ended December 31, 2008, 2007, and 2006 was Nil, $0.3 million, and $2.1 million, respectively. There were no unrecognized stock-based compensation expenses related to unvested stock options at December 31, 2008.
The Company also issues 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.
A summary of the restricted share and restricted share unit activity during the year ended December 31, 2008 is presented below:
During the years ended December 31, 2008, 2007 and 2006, the Company granted an aggregate of 539,137, 565,321 and 397,763 restricted share and restricted share unit awards with weighted average grant date fair values of $20.9 million, $22.3 million and $12.7 million. During the years ended December 31, 2008, 2007 and 2006, the aggregate fair value of restricted shares and restricted share units that vested was $13.8 million, $7.8 million and $6.3 million, respectively.
On October 26, 2005, Endurance Holdings’ shareholders approved the Employee Share Purchase Plan (the “ESPP”) and the 2005 Sharesave Scheme. Neither the ESPP nor the 2005 Sharesave Scheme is subject to any provisions of the Employee Retirement Income Security Act of 1974 as amended, and neither plan is a qualified plan within the meaning of Section 402(a) of the Internal Revenue Code of 1986, as amended (the “Code”) the ESPP is a qualified plan under 423 of the code. Total expenses related to these plans for the year ended December 31, 2008 was approximately $197,000 (2007 - $148,000, 2006 - $123,000).
The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company’s defined contribution plans, the Company makes contributions to its employees’ accounts in amounts ranging from 4% to 10% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Contributions for the year ended December 31, 2008 resulted in an expense of $6.4 million being recorded in earnings (2007 - $6.4 million; 2006 - $4.6 million).
Endurance U.K. and the Company’s Singapore branch are currently completing 2008 statutory profit and loss statements. The Company’s Zurich branch had no statutory filing requirement at or for the year ended December 31, 2008.
As a holding company, Endurance Holdings relies on dividends from Endurance Bermuda to provide cash flow required for debt service and dividends to shareholders. Endurance Bermuda’s ability to pay dividends and make capital distributions is subject to certain regulatory restrictions based on the enhanced capital requirement calculated using the Bermuda standard model in addition to limits on the amount of Endurance Bermuda’s premiums written and net reserves for losses and loss expenses, subject to an overall minimum capital and surplus requirement of $100 million. At December 31, 2008, Endurance Bermuda can pay approximately $737 million (2007 - $1,042 million) to Endurance Holdings without prior approval under Bermuda law. In addition, Endurance Bermuda is required to maintain a minimum statutory liquidity ratio and solvency margin.
The actual income tax benefit (expense) attributable to income for the years ended December 31, 2008, 2007 and 2006 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income before income tax benefit, as a result of the following: