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, 2010, please see Note 11 - “Commitments and Contingencies” to our Audited Consolidated Financial Statements.
Endurance Risk Solutions Assurance Co. (“Endurance Risk Solutions”), domiciled in Delaware; and
In the Insurance segment, the Company writes agriculture, professional lines, casualty, property, healthcare liability, and workers’ compensation insurance. In the Reinsurance segment, the Company writes catastrophe, casualty, property, aerospace and marine, and surety and other specialty reinsurance.
Expenses. The Company’s expenses consist primarily of losses and loss expenses, acquisition expenses, interest expense, amortization of intangible assets and general and administrative expenses. Losses and loss expenses are estimated by management and reflect its best estimate of ultimate losses and loss adjustment costs arising during the current reporting period and revisions of prior period estimates. The Company records losses and loss expenses based on an actuarial analysis of the estimated losses the Company expects to be reported on policies and contracts written. The ultimate losses and loss expenses will depend on the actual costs to settle claims. Acquisition expenses consist principally of commissions and brokerage expenses that are typically a percentage of the premiums on insurance policies or reinsurance contracts written. General and administrative expenses consist primarily of personnel expenses and general operating expenses.
In 2011, we believe the following four primary influences may affect the market for our insurance and reinsurance products - the continuation of the challenging global economy, increased pricing competition in many of our markets, increased volatility in agriculture commodity prices and a low interest rate environment. The United States and other markets around the world have continued to experience unsettled economic conditions, including high levels of unemployment, significant governmental regulation initiatives and continued uncertainty in global financial markets. Although economies are slowly recovering, the lower levels of economic activity are likely to continue to suppress growth in demand for insurance and reinsurance. This, combined with the continued increase in recovery of most of the industry’s surplus position in 2010, is likely to result in a more competitive global insurance and reinsurance market in 2011. Potentially offsetting these factors is the increased volatility of agriculture commodity prices which could lead to increased risk exposure and higher demand in our agriculture insurance business. In addition, the current low interest rate environment will likely encourage a lower appetite for risks that are not adequately priced as there will be reduced investment earnings from underwriting cash flows. We believe these four factors have and will continue to contribute to changes in market conditions within both the reinsurance and insurance market places in which we operate.
anticipated changes in the marketplace and the ceding company’s competitive position therein;
Proportional reinsurance contracts accounted for approximately 22%, 20%, and 14% of the Company’s gross premiums written during the years ended December 31, 2010, 2009, and 2008, respectively.
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, 2010 and 2009:
As a result of recognizing the estimated gross premium written at the inception of the policy and collecting that premium over an extended period, we include a premiums receivable asset on our balance sheet. We actively monitor our premiums receivable asset to consider whether we need an allowance for doubtful accounts. As part of this process, we consider the credit quality of our cedants and monitor premium receipts versus expectations. At December 31, 2010, the Company has an allowance for estimated uncollectible premiums receivable of $4.9 million (2009 - $12.8 million).
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, 2010. 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.
The inherent uncertainty of estimating the Company’s loss and loss expense reserves for its Reinsurance segment increases principally due to:
changes in the general economic environment that could cause unanticipated changes in claim frequency or severity;
Investments. The Company currently classifies its entire fixed income portfolio, which consists of fixed maturity investments, short-term investments and preferred equity securities, as “available for sale” and, accordingly, they are carried at estimated 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. The Company determines the fair value of its fixed income portfolio in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. Current accounting guidance establishes three levels as follows:
The Company determines the estimated fair value of each individual security utilizing the highest level inputs available.
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, 2010, the Company has not adjusted any pricing provided by broker/dealers and has classified all such securities as Level 2.
For the remaining fixed income investments in an unrealized loss position for which a decision to sell has not been made and it is more likely than not that the Company will not be required to sell, the Company performs additional reviews to determine whether the investment will recover its amortized cost. Analysis and reviews performed to determine if the amortized cost of the Company’s fixed income portfolio is likely to be recovered include the following actions, among others, depending on the type of security being reviewed or tested:
analysis to determine cash flow projections under base and stressed case scenarios using historical information to determine significant inputs such as expected default rates, delinquency rates, foreclosure costs, etc.;
review of credit ratings, expected loss tables by ratings, default rated securities, sector weaknesses and business prospects;
review of the time period in which there has been a significant decline in value; and
Goodwill. The Company is required to make an annual assessment as to whether the value of the Company’s goodwill asset is impaired. Impairment, which can be either partial or full, is based on a fair value analysis by individual reporting unit. Based upon the Company’s assessment at the reporting unit level, there was no impairment of its goodwill asset of $87.0 million as of December 31, 2010.
Recent Accounting Pronouncements. See Note 2(p), “Summary of Significant Accounting Policies-Recent Accounting Pronouncements,” of the notes accompanying our Audited Consolidated Financial Statements.
Net premiums written in 2010 were $1,763.7 million, an increase of $157.7 million, or 9.8%, compared to 2009 and a decrease of $20.5 million, or 1.2% compared to 2008. The change in net premiums written for 2010 compared to 2009 and 2008 was driven primarily by the following factors:
Modest growth in the casualty and property lines of the Reinsurance segment, primarily as a result of new business written and positive premium adjustments recorded on the casualty line and new business written and increased shares on renewal contracts within the property line as compared to 2009;
Declines in the workers’ compensation line of the Insurance segment as a result of the Company’s exit from this business in the first quarter of 2009. The workers’ compensation line contributed $215.8 million of net premiums written in 2008; and
The $3.9 million of other-than-temporary impairment losses recognized by the Company in 2010 relating to specific credit events occurred primarily due to reductions in expected recovery values on mortgage and asset-backed securities during the period. For the years ended December 31, 2009 and 2008, the Company recorded $20.3 million and $82.1 million of OTTI losses in earnings, respectively. These amounts included a portion related to credit losses and a portion related to non-credit factors. Non-credit related factors included market and sector related factors such as limited liquidity and credit spread widening.
The Company’s reported net losses and loss expenses are characterized by various factors and are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. In 2010, the Chilean earthquake, the New Zealand earthquake and European Windstorm Xynthia adversely affected the Company’s net loss ratio in the Reinsurance segment. The Company’s recorded losses, net of reinstatement premiums and other loss sensitive accruals, added 4.8 percentage points to the Company’s net loss ratio for 2010. In addition, the Company maintained reserves for attritional losses to reflect a number of smaller catastrophes that occurred in 2010. A small number of individual risk casualty events adversely impacted losses incurred in the Insurance segment in 2010. The impact of the increased loss activity in 2010 was partially offset by improved crop growing conditions in the U.S. resulting in a lower loss ratio in the agriculture line of business of the Insurance segment compared to the prior two years. In 2009, the Company’s net loss ratio benefited from a relative absence of major catastrophes. In 2008 net losses and loss expenses were adversely impacted by losses from Hurricanes Gustav and Ike and severe weather and worse than expected growing conditions and lower prices for major crops in the U.S., which adversely impacted the agriculture line of the Insurance segment.
During 2010, 2009 and 2008, the Company’s previously estimated ultimate losses for prior accident years were reduced by $126.8 million, $150.9 million and $156.5 million, respectively, as the loss emergence related to prior accident years was lower than expected, resulting in the reserves held by the Company for those accident years being moderately redundant. The overall net reduction in the Company’s estimated losses for prior accident years experienced in 2010 emerged 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 2010 decreased compared to 2009 and increased compared to 2008. The reduction as compared to 2009 was primarily due to higher earned premiums in the Reinsurance segment, partially offset by an increase in overall expenditures which was driven by higher professional service fees and lower expense reimbursements in the agriculture line of the Insurance segment. The increase in the 2010 expense ratio compared to 2008 was as a result of higher incentive compensation expenses in 2010 and lower expense reimbursements in the agriculture line of the Insurance segment. At December 31, 2010, the Company had a total of 820 employees as compared to 759 employees at December 31, 2009 and 781 employees at December 31, 2008.
The following table summarizes the underwriting results and associated ratios for the Company’s Insurance segment for the years ended December 31, 2010, 2009 and 2008.
Premiums. Net premiums written in the Insurance segment increased in 2010 by 12.1% compared to 2009 and decreased 15.4% compared to 2008, respectively. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2010, 2009 and 2008 were as follows:
The change in the Insurance business segment net premiums written in 2010 compared to 2009 was driven by the following factors:
Increased premium retentions in the agriculture line of business. The Company decreased its ceded premiums to the Federal Crop Insurance Corporation and reduced third party reinsurance purchases. The increase in net premiums written due to reduced cessions was partially offset by a decline in gross premiums written in the agriculture line for the current year compared to the prior year as reduced commodity price volatility resulted in a decline in rates;
Reduced premiums written in the professional lines as the Company nonrenewed a portion of the business due to increased competition and significant rate reductions; and
Net premiums earned by the Company in the Insurance segment in 2010 were comparable to 2009 in total; however, there were changes in the business mix resulting from the Company exiting the workers’ compensation line early in 2009, together with changes in the levels of premiums ceded in 2010. Net premiums earned in 2010 declined compared to 2008 as a result of the Company exiting the workers’ compensation line, which contributed $242.4 million of net premiums earned in 2008.
Acquisition Expenses. The Company’s acquisition expense ratio in the Insurance segment decreased in 2010 as compared to 2009 and 2008 due to shifts in business mix, notably as earned premiums have increased in the agriculture line of business and decreased the workers’ compensation line of business following the Company’s exit from this line during 2009.
General and Administrative Expenses. The Company’s general and administrative expense ratio in the Insurance segment increased for 2010 compared to both 2009 and 2008 as a result of reductions in third party commissions and expense reimbursement offsets. In addition, the Company continued to make strategic employee additions in its agriculture and other U.S. specialty insurance operations.
The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance segment for the years ended December 31, 2010, 2009 and 2008.
Premiums. Net premiums written in the Reinsurance segment increased in 2010 by 7.9% over 2009 and 16.2% over 2008, respectively. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2010, 2009 and 2008 were as follows:
The change in the Reinsurance business segment net premiums written during 2010 compared to 2009 and 2008 was driven by the following factors:
Growth in the property line in 2010 from the Company’s international operations through new business and increased participation on renewed contracts, offset in part by the absence of favorable premium adjustments that contributed $19.8 million to net written premium in 2009;
Increased premiums written in the casualty line from growth in premiums on renewal business, a new non-standard auto reinsurance treaty with an existing client, and significant positive premium adjustments of $12.3 million in 2010. These increases have been partially offset by reductions in rates on renewed contracts;
A decline in the marine portion of the aerospace and marine line of business from non-renewals, as the international portion of this line of business was reduced in the first quarter of 2009.
Ceded premiums written by the Company in the Reinsurance segment amounted to $7.2 million in 2010 as compared to $3.6 million and $16.4 million in 2009 and 2008, respectively. During 2008, the Company’s $235 million multi-year, collateralized catastrophe reinsurance protection (which was originally purchased in 2006) expired.
Net premiums earned increased in 2010 compared to 2009 and 2008 primarily due to the growth in gross premiums written.
The Company experienced higher favorable loss reserve development in its Reinsurance segment in 2010 compared to 2009 and lower favorable loss reserve development than in 2008. The majority of the current year favorable loss reserve development emanated from the segment’s short tail catastrophe, property and surety and other specialty lines of business. During 2010, 2009 and 2008, the Company’s previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $79.9 million, $58.8 million and $85.5 million, respectively. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company.
Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance segment in 2010 decreased as compared to 2009 and 2008 due to reduced commissions incurred in the catastrophe and casualty lines of business.
The Company had an investment portfolio (including cash and cash equivalents) with a value of $6.2 billion as of December 31, 2010. The Company’s investment portfolio is comprised of cash, cash equivalents, fixed maturity investments, short-term investments, preferred equity securities and investments in hedge funds, private equity funds and high yield loan funds, which we categorize as “Other Investments.” Set forth below is a description of the elements and salient characteristics of the Company’s investment portfolio.
The following tables set forth the types of securities, amortized costs, fair values and related gross unrealized gains and losses of our fixed income portfolio held as of December 31, 2010 and 2009:
U.S. Government and Agencies Securities. U.S. government and agencies securities are comprised of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation (“FreddieMac”) and the Federal National Mortgage Association (“FannieMae”).
Government Guaranteed Corporate Securities. Corporate issued securities backed by the full faith and credit of the sponsor country. In the U.S., government guaranteed corporates were issued under the Temporary Liquidity Guarantee Program (“TLGP”) program and issued with maturities of up to three years.
Residential Mortgage-Backed Securities. The majority of the residential mortgage-backed securities in our investment portfolio are FreddieMac and FannieMae. The principal risks inherent in holding agency mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash flows will be received. Non-agency mortgage-backed securities also have credit risk should losses on the underlying collateral exceed the credit protection provided by subordinated tranches of mortgage-backed securities. Endurance has no exposure to subprime mortgages, and Alt-A mortgages represented 1.0% of the fixed income portfolio as of December 31, 2010.
Asset-Backed Securities. Asset-backed securities are diversified both by type of collateral and issuer. The majority of our asset-backed securities are AAA-rated bonds backed by pools of automobile loan receivables and credit card receivables and other collateral originated by a variety of financial institutions. The principal risks in holding asset-backed securities are structural and credit risks. Structural risks include the security’s priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include performance of the underlying consumer or corporate loans, which act as collateral to these securities.
The preferred equity securities in the Company’s portfolio are comprised of perpetual preferred equity securities, which may remain outstanding indefinitely, if they are not called by the issuer. Preferred equity securities generally pay a dividend at a fixed rate. Perpetual preferred equity securities usually rank above common equity but below debt securities in an issuer’s capital structure.
The investment ratings (provided by major rating agencies) for our fixed income portfolio held as of December 31, 2010 and 2009 and the percentage of our total fixed income portfolio they represented at such date were as follows:
Other Investments are accounted for under the equity method of accounting. Adjustments to the carrying value of these investments are made based upon the net valuation criteria established by the managers of the Other Investments, which in turn are established based upon the valuation criteria in the governing documents of the Other Investments. Such valuations may differ significantly from the values that would have been used had liquid markets existed for the shares or partnership interests of the Other Investments. Due to a delay in the valuations reported by certain of the fund managers, our investments in certain alternative funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements. Investments in high yield loan funds are reported as of the current date. Many of the Other Investments are subject to restrictions on redemptions and sale that limit our ability to liquidate these investments in the short-term. Interest income, income distributions and realized and unrealized gains and losses on our investments in the Other Investments are included in net investment income and totaled $40.3 million of income for the year ended 2010.
We have engaged outside investment managers to provide us with investment advisory and management services. Investment management fees, which vary depending on the amount of assets under management and the type of assignment, are offset against net investment income. Agreements with our investment managers may be terminated by either party upon written notice.
Our investment returns for the years ended December 31, 2010, 2009 and 2008 were as follows:
During 2010, 2009 and 2008, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. During the second quarter of 2009, the Company adopted new accounting guidance related to identifying whether an investment is considered to be other than temporarily impaired, which is described in Note 2(d), “Summary of Significant Accounting Policies-Investments,” of our Audited Consolidated Financial Statements for the year ended December 31, 2010. As a result, the Company initially considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at December 31, 2010. During 2010, the Company did not identify any such securities meeting these criteria. The Company then performed various analysis and reviews, to determine whether the investments in an unrealized loss position were other-than-temporarily impaired as a result of credit factors or non-credit related factors. We identified certain securities that we believe will not recover their amortized costs. As such, the Company recorded total other than temporary impairments of $3.9 million (2009 - $20.3 million) which was related to credit factors and recognized in earnings.
Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries. Endurance Holdings relies primarily on dividends and other permitted distributions from its subsidiaries to pay its operating expenses, interest on debt and dividends, on its Series A Preferred Shares and common shares, if any. There are restrictions on the payment of dividends by Endurance Holdings’ operating subsidiaries to Endurance Holdings, which are described in more detail below.
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance. ARMtech is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2010, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends during 2011 without the prior approval of the applicable insurance regulator. At December 31, 2010, ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $2.8 million without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.
Under the jurisdiction of the United Kingdom’s Financial Services Authority (“FSA”), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The FSA regulatory requirements impose no explicit restrictions on Endurance U.K.’s ability to pay a dividend, but Endurance U.K. would have to notify the FSA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At December 31, 2010, 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, 2010 totaled $6.2 billion compared to aggregate invested assets of $6.0 billion as of December 31, 2009. The increase in invested assets since December 31, 2009 resulted from collections of premiums on insurance policies and reinsurance contracts, investment income and change in market value, offset in part by losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid, interest and dividends paid, the repurchase of the Company’s ordinary shares and realized losses in the investment portfolio.
Cash flows from operating activities on a consolidated basis are provided by premiums collected and investment income, offset by loss and loss expense payments, acquisition expenses and other general and administrative expenses. Consolidated cash provided by operating activities for the years ended December 31, 2010, 2009 and 2008 was $407.2 million, $471.9 million, and $479.4 million, respectively.
During the years ended December 31, 2010 and 2009, the Company used its capital to repurchase its ordinary shares and share equivalents in open market and private transactions. The Company has continued its repurchase activity, and on January 28, 2011, the Company repurchased 7,143,056 ordinary shares and options to purchase 10,000 ordinary shares from two affiliated funds of Perry Corp., a founding shareholder of Endurance. The aggregate repurchase price for the shares and the options was $321.5 million. The repurchase price per ordinary share was $44.99 per share. The ordinary shares acquired by the Company represented approximately 15% of its ordinary shares outstanding at December 31, 2010. Endurance Holdings funded the repurchase of these shares primarily from calling an outstanding loan between Endurance Holdings and Endurance Bermuda. Endurance Bermuda funded the settlement of the loan from its existing cash and investments. The repurchase does not impact the disclosed dividend payment captacity of Endurance Bermuda as of December 31, 2010.
At December 31, 2010, letters of credit totaling $439.3 million were outstanding, $200 million face value of 6.15% Senior Notes due October 15, 2015 (the “6.15% Senior Notes”) were outstanding and $335 million face value of 7% Senior Notes due July 15, 2034 (the “7% Senior Notes”) were outstanding.
The Company’s contractual obligations as of December 31, 2010 are summarized as follows:
The Company entered into investment agreements to invest additional amounts in Other Investments.
Variable Delivery Forward. On September 11, 2007, Endurance Holdings consummated a variable delivery equity forward sale arrangement that was terminated on June 18, 2010 as described above under “Liquidity”.
At December 31, 2010, the carrying value of the Senior Notes stood at $528.3 million while the fair value as determined by quoted market valuation was $536.9 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2010.
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.
The Company’s functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all entities is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K which was valued at £88.9 million as of December 31, 2010. Endurance U.K. is subject to the United Kingdom’s Financial Services Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.’s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company’s results of operations.
The 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 inflation causes these costs to increase above reserves established for these claims, the Company will be required to increase the reserve for losses and loss expenses with a corresponding reduction in its earnings in the period in which the deficiency is identified. In addition, inflation could lead to higher interest rates causing the current unrealized gain position on the Company’s fixed income portfolio to decrease. The current short duration of the Company’s fixed income portfolio has the potential to help reduce the negative effects of higher interest rates on the Company’s fixed income portfolio. The Company may also choose to hold its fixed income portfolio to maturity which would result in the unrealized gains largely amortizing through net investment income.
The estimate of the reserve for losses and loss expenses is reviewed each quarter by the Company’s Loss Reserve Committee, consisting of the Company’s Chief Executive Officer, President, Chief Financial Officer, Chief Actuary and representatives of various disciplines from within the Company, such as claims, underwriting and legal.
Losses and loss expenses for the year ended December 31, 2010 include $126.8 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2010 year benefited the Company’s 2010 reported loss ratio by approximately 7.3 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company’s reserve categories within both the Insurance and Reinsurance segments.
Short Tail Reinsurance. The Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity and favorable case reserve development within the catastrophe, treaty property, surety and other specialty, and property lines of business.
Long Tail Reinsurance. The Company recorded a modest amount of favorable prior period development within this reserve category overall, primarily within the professional liability line of business due to lower than anticipated claim activity.
Losses and loss expenses for the year ended December 31, 2009 include $150.9 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2009 year benefited the Company’s 2009 reported loss ratio by approximately 9.2 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.
Short Tail Reinsurance. The Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity and favorable case reserve development within the catastrophe, surety and other specialty, and property lines of business and the aerospace portion of the aerospace and marine line of business. The favorable emergence was partially offset by unfavorable loss development within the marine portion of the aerospace and marine line of business.
Long Tail Reinsurance. The Company recorded a modest amount of favorable loss emergence within this reserve category during 2009. For the year, the Company experienced favorable prior period development within the direct casualty and professional liability lines of business due to lower than anticipated claim activity. This was partially offset by adverse development within the casualty line of business, primarily due to higher than expected reported loss activity from prior years.
Other Reinsurance. Favorable loss emergence in the other reinsurance reserve category was due to lower than expected loss activity within the agriculture, personal accident, self-insured and special accounts lines of business. The agriculture line of business contributed a significant amount to the favorable development which resulted from lower than anticipated claim settlements for the 2008 crop year.
Selected quarterly activity in the reserve for losses and loss expenses for the year ended December 31, 2010 is summarized as follows:
The following table represents the development of GAAP balance sheet reserve for losses and loss expenses, net of losses and loss expenses recoverable, for 2004 through December 31, 2010. This table does not present accident or policy year development data. The top line of the table shows the gross and net reserve for losses and loss expenses at the balance sheet date for each of the indicated years. This represents the estimated amounts of gross and net losses and loss expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “cumulative redundancy” represents the aggregate change to date from the original estimate.
The Company’s estimated reserve for losses and loss expenses can change over time because of unexpected changes in the external business environment in which the Company operates or changes in internal Company operations. For a discussion of the factors which can contribute to uncertainty in the reserving process and volatility in the reserve for losses and loss expenses, see “Critical Accounting Estimates - Reserves for Losses and Loss Expenses” above.
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, 2010. The 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern in the tables below were chosen consistent with commonly accepted actuarial practice, due to the Company’s limited empirical data regarding loss and loss expense reserves variability. In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the lines of business within each business segment are aggregated based on their potential expected length of loss emergence or tail.
At December 31, 2010 and 2009, the Company had reinsurance recoverables of $319.3 million and $467.7 million, respectively, related to its reinsurance agreements. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded related to the agriculture line of business. Accordingly, the Company has evaluated the reinsurers and retrocessionaires that are providing reinsurance and retrocessional protection and will continue to monitor the stability of its reinsurers and retrocessionaires. No allowance for uncollectible reinsurance was deemed necessary on the recoverable balances outstanding at December 31, 2010 and 2009.
During the fourth quarter of 2010, the Company performed its annual impairment testing of goodwill. The Company has two primary sources of goodwill - goodwill obtained from a renewal rights transaction completed in 2003 with HartRe and goodwill obtained from the Company’s acquisition of ARMtech in 2007. The Company determined that the appropriate reporting units for evaluation were the Reinsurance segment in relation to HartRe goodwill and the Insurance segment for ARMtech goodwill. The Company used a discounted cash flow approach to estimate the fair value of these reporting units. The fair value determined was in excess of the carrying value including goodwill for both reporting units noted. As a result of the impairment testing, no write-downs were deemed necessary at December 31, 2010 and 2009.
The Company has established a valuation allowance of $13.6 million (2009 - $9.6 million) against certain operating loss carryforwards at December 31, 2010. The $13.6 million valuation allowance was established against net operating loss carryforwards in the United Kingdom as the Company does not expect to generate enough operating income in the short-term to offset the full amount of the carryforwards. The increase in the valuation allowance was charged to the Company’s income tax expense during 2010. 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, 2010. 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Endurance Specialty Holdings Ltd. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its seven wholly-owned operating subsidiaries: Endurance Specialty Insurance Ltd. (“Endurance Bermuda”), domiciled in Bermuda including branches in Zurich and Singapore; Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware; Endurance Worldwide Insurance Limited (“Endurance U.K.”), domiciled in London, England; American Agri-Business Insurance Company, domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together, “ARMtech”); Endurance American Insurance Company (“Endurance American”), domiciled in Delaware; Endurance American Specialty Insurance Company (“Endurance American Specialty”), domiciled in Delaware and Endurance Risk Solutions Assurance Co., (“Endurance Risk Solutions”), domiciled in Delaware.
The Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company. One actuarial method used by the Company to estimate reserves for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). Another actuarial method used by the Company to estimate reserves for losses and loss expenses is known as the Bornhuetter-Ferguson method. The Bornhuetter-Ferguson method involves the application of selected loss ratios to the Company’s earned premiums to determine estimates of ultimate
The Company currently classifies its entire fixed income portfolio, which consists of fixed maturity investments, short-term investments and preferred equity securities, as “available for sale” and accordingly, they are carried at estimated 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. The Company determines the fair value of its fixed income portfolio in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any
The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Transfers between levels are assumed to occur at the end of each period.
The Company’s available for sale investments are comprised of a variety of different securities, which are grouped based on the valuation technique and inputs used in their valuation. The valuation of current issue U.S. government securities is generally based on Level 1 inputs, which use the market approach valuation technique. The valuation of the Company’s other available for sale investments, including non-current U.S. government and agency securities, U.S. state, municipal and foreign government securities, government guaranteed and other corporate debt, U.S. agency and non-agency residential and commercial mortgage-backed securities, asset-backed securities, short-term investments and preferred equity securities, generally incorporate significant Level 2 inputs using the market and income approach techniques. Level 3 includes any available for sale investments that use unobservable inputs, which will vary from period to period.
Following a determination of fair value, the Company reviews its fixed income portfolio to determine whether any declines in the fair value below the amortized cost basis of its fixed income portfolio are other-than-temporary. Since April 1, 2009, if the Company determines that a decision to sell the security has been made or that it is not more likely than not that the Company will be required to sell the security, the Company deems the security to be other-than-temporarily impaired and writes down the value to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other than temporary impairment (“OTTI”) loss.
To the extent the Company determines that the amortized cost of the Company’s fixed income portfolio is likely to be recovered and the decline in value is related to non-credit factors (such as interest rates, market conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive income in the shareholders’ equity section of the Company’s balance sheet.
Prior to April 1, 2009, the Company assessed securities for declines in value that were considered to be other-than-temporary through the 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 was determined to be other-than-temporary, the cost of the security was written down to fair value and the amount was included in net impairment losses recognized in earnings in the Consolidated Statements of Income and Comprehensive Income (Loss).
The Company participates in a securities lending program whereby fixed income investments 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.
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.
Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities (“VIE”). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-6”). ASU 2010-6 amends Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) to require a number of additional disclosures regarding fair value measurements. Specifically, ASU 2010-6 requires entities to disclose the following:
The amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers. Transfers into each level are to be disclosed separately from transfers out of each level.
Information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis.
In addition, ASU 2010-6 also amends ASC 820 to clarify certain existing disclosure requirements as follows:
In June 2009, the FASB issued updated guidance on the accounting for variable interest entities that eliminates the concept of a qualifying special-purpose entity and the quantitative-based risks and rewards calculation for determining which company, if any, has a controlling financial interest in a variable interest entity. The updated guidance requires an analysis of whether a company has the following:
The obligation to absorb the losses that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity.
The updated guidance is effective for all variable interest entities owned on or formed after January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations or financial condition.
In October 2010, the FASB issued ASU 2010-26, which modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new or renewal insurance contracts. The amended guidance specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts should be charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should also be charged to expense as incurred. ASU 2010-26 will be effective for fiscal periods beginning on or after December 15, 2011 with prospective or retrospective application permitted. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.
Contractual maturities of available for sale securities are shown below as of December 31, 2010 and 2009. 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.
In addition to the Company’s available for sale investments, the Company invests in (i) hedge funds and private equity funds that generally invest in senior secured bank debt, high yield securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan funds. The Company’s alternative funds and high yield loan funds are recorded on the Company’s balance sheet as “Other Investments”. At December 31, 2010 and 2009, the Company had invested, net of capital returned, a total of $279.6 million and $295.5 million, respectively, in Other Investments. At December 31, 2010 and 2009, the carrying value of Other Investments was $376.7 million and $351.4 million, respectively. Certain of Other Investments are subject to redemption restriction provisions (see Note 11).
Realized gains and losses on investment sales are recognized in earnings using the first in and first out method. The analysis of net realized gains on investment sales for the years ended December 31, 2010, 2009 and 2008, respectively, is as follows:
The amortized cost, fair value and related gross unrealized gains and losses and OTTI on the Company’s securities classified as available for sale at December 31, 2010 and 2009 are as follows:
Balances include amounts related to collateralized debt obligations held with total fair values of $13.1 million.
The following tables summarize, for all available for sale securities in an unrealized loss position at December 31, 2010 and 2009, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.
Gross unrealized losses include unrealized losses on non-OTTI and OTTI securities recognized in accumulated other comprehensive income (loss) at December 31, 2010.
As of December 31, 2010, 376 available for sale securities were in an unrealized loss position. Of those, 112 securities had been in a continuous unrealized loss position for twelve months or greater.
The analysis of OTTI for the years ended December 31, 2010, 2009 and 2008 is as follows:
The $3.9 million of OTTI losses recognized by the Company for the year ended December 31, 2010 relating to specific credit events occurred primarily due to reductions in expected recovery values on mortgage and asset-backed securities during the period, along with certain credit related downgrades in corporate securities. At December 31, 2010, the Company had not made any decisions to sell securities in an unrealized loss position and determined that it was unlikely that the Company would be required to sell securities in an unrealized loss position.
For the three months ended March 31, 2009 and the year ended December 31, 2008, the Company recorded $12.1 million and $82.1 million of OTTI losses in earnings, respectively. Such amounts included a portion related to credit losses and a portion related to non-credit factors.
The Company also participates in a securities lending program whereby fixed maturity investments are loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The borrowers of the Company’s securities provide the Company with collateral, typically cash, which the Company separately maintains. The Company invests such cash collateral in other securities, typically overnight repurchase agreements. Securities with an estimated fair value of $58.7 million and $65.7 million were on loan under the program at December 31, 2010 and 2009, respectively. The Company was liable for cash collateral under the Company’s control of $59.9 million and $67.0 million at December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, the fair value of the investments purchased with the cash collateral received from the borrower was $59.9 million and $66.9 million. The investments purchased with the cash collateral had an average credit quality rating of “Aaa” by Moody’s and “AAA” by Standard & Poor’s at December 31, 2010. All securities on loan are issued on a term or overnight basis and are subject to daily recall at the Company’s discretion.
Preferred equity securities - These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its preferred equity securities in Level 2.
During the year ended December 31, 2010, $68.9 million of fixed maturity and short-term investments were transferred from Level 1 to Level 2 as they no longer qualified as on the run U.S. treasury securities.
During the year ended December 31, 2010, $14.4 million of fixed maturity investments and short-term investments were transferred into Level 2 from Level 3. The reclassifications were largely related to high yield commercial mortgage-backed securities. At times during the year, the market activity for these securities increased and therefore the fair value of these securities was based on observable inputs.
The following tables present the securities lending collateral reinvested by the Company in connection with its securities lending program, categorized by the level within the hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2010 and 2009, respectively:
The following tables present a reconciliation of the beginning and ending balances for all available for sale securities measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2010 and 2009. Level three assets included below are related to our fixed maturity investments including corporate debt securities, non-agency residential and non-agency commercial mortgage-backed securities.
Level 3 securities are primarily comprised of non-agency commercial mortgaged-backed securities. Net impairment losses recognized in earnings for the year ended December 31, 2010 included losses on Level 3 securities in the amount of ($1.1) million (2009 - ($0.5) million), representing realized losses due to OTTI.
The effects of reinsurance on premiums earned and written during the years ended December 31, 2010, 2009 and 2008 are as follows:
In August 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 Re Limited (“Shackleton”), a Cayman Island reinsurance company. On August 1, 2006, Shackleton financed the reinsurance coverage provided to Endurance Bermuda through the issuance of a $125 million risk-linked catastrophe bond pursuant to Rule 144A under the Securities Act of 1933 and the entrance into a $110 million multi-year risk-linked credit facility.
On May 8, 2007, Endurance Holdings amended its 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 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 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 additional interest 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 on an uncollateralized basis, the Company is required to pay a fee ranging from 0.275% to 0.375% on the daily stated amount of such letters of credit. In addition, the 2007 Credit Facility requires the Company to pay to the lenders a facility fee and a utilization fee.
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, 2010, 2009 and 2008, the Company recognized a realized foreign exchange gain (loss) on forward contracts of approximately $317,000, ($543,000), and $544,000, respectively.
Reinsurance - This segment is comprised of five lines of business: catastrophe, casualty, property, aerospace and marine and surety and other specialty. Catastrophe coverages include reinsurance for catastrophic perils on a treaty basis. 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. The aerospace and marine line coverages include the reinsurance of aviation and space business and proportional and non-proportional reinsurance of hull and cargo insurance business. Surety and other specialty coverages include proportional and excess of loss coverages of contract and commercial surety business, personal accident coverages and agriculture coverages for weather related perils as well as protection from yield and price risks.
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 net 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.
The following table provides a summary of the segment revenues and results for the year ended December 31, 2009, reserve for losses and loss expenses as of December 31, 2009 and the carrying value of goodwill as of December 31, 2009:
The following table provides a summary of the segment revenues and results for the year ended December 31, 2008, reserve for losses and loss expenses as of December 31, 2008 and the carrying value of goodwill as of December 31, 2008:
The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2010, 2009 and 2008:
Investment commitments. As of December 31, 2010 and 2009, the Company had pledged cash and cash equivalents and fixed maturity investments of $146.3 million and $158.5 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2010 and 2009, the Company had also pledged $500.9 million and $664.0 million of its cash and fixed maturity investments as required to meet collateral obligations for $439.3 million and $605.3 million in letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2010 and 2009, cash and fixed maturity investments with fair values of $369.1 million and $361.6 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $3.5 million and $12.4 million were on deposit with Canadian regulators, respectively.
Reinsurance commitments. In the ordinary course of business, the Company enters into reinsurance agreements which may include terms which could require the Company to collateralize certain of its obligations.
Operating Leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2010 are as follows:
Total rent expense under operating leases for the year ended December 31, 2010 was $11.1 million (2009 - $11.4 million; 2008 - $10.1 million).
The Company’s share capital at December 31, 2010 and 2009 is comprised as follows:
During 2010, the Company issued restricted shares under its equity compensation plans (Note 15). The common shares, issued, outstanding and fully paid for 2010 includes 959,622 restricted shares.
On June 18, 2010, Endurance Holdings, Deutsche Bank AG, London Branch and Deutsche Bank Securities Inc. entered into an agreement to terminate the variable delivery equity forward sale agreement. Prior to its termination, the equity forward sale agreement gave Endurance Holdings the ability to sell its ordinary shares to an affiliate of Deutsche Bank Securities, Inc. for proceeds of approximately $150 million. The equity forward sale agreement was originally scheduled to be settled or terminate commencing on July 20, 2010. The Company did not issue any of its ordinary shares in connection with the equity forward sale agreement, nor has the Company incurred any early termination penalties in connection with the termination of the agreement.
The following tables set forth the computation of basic and diluted earnings per share for the years ended December 31, 2010, 2009 and 2008.
The following table sets forth dividends declared in the years ended December 31, 2010, 2009 and 2008, respectively:
A summary of option activity, including options held by employees and non-employee directors, during the year ended December 31, 2010 is presented below:
No options were granted during the years ended December 31, 2010, 2009 and 2008. The total intrinsic value of options exercised during the years ended December 31, 2010, 2009, and 2008 was $9.9 million, $4.2 million, and $0.6 million, respectively. The Company received proceeds of $6.4 million from the exercise of options during the year ended December 31, 2010. The Company issued new ordinary shares in connection with the exercise of the above options.
No options expired during the year ended December 31, 2010. No options vested during the years ended December 31, 2010, 2009, and 2008. There were no unrecognized stock-based compensation expenses related to unvested stock options at December 31, 2010.
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, 2010 is presented below:
For the years ended December 31, 2010, 2009 and 2008, compensation costs recognized in earnings for all restricted shares and restricted share units were $12.9 million, $13.3 million, and $17.3 million, respectively. At December 31, 2010, compensation costs not yet recognized related to non-vested awards was $11.6 million (2009 - $9.4 million). This expense is expected to be recognized between 2011 and 2013, with approximately 62.3% expected to be recognized during 2011.
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. During 2009, all outstanding options under the Sharesave Scheme were exercised or repurchased by the Company. No options under the Sharesave Scheme remained outstanding at December 31, 2010.
Total expenses related to these plans for the year ended December 31, 2010 was approximately $172,000 (2009 - $100,000, 2008 - $197,000).
The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company’s defined contribution plans, the Company makes contributions to its employees’ accounts in amounts ranging from 4% to 10% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Company contributions for the year ended December 31, 2010 resulted in an expense of $8.4 million being recorded in earnings (2009 - $9.2 million; 2008 - $6.4 million).
Bermuda statutory capital and surplus includes an investment in affiliate asset, which represents its interest in the remaining insurance and reinsurance operations of the Company included in the United States and Other columns above.
Endurance U.K. and the Company’s Singapore branch are currently completing 2010 statutory profit and loss statements. The Company’s Zurich branch had no statutory filing requirement at or for the years ended December 31, 2010, 2009 and 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. The Bermuda Solvency Capital Requirement (“BSCR”) employs a standard mathematical model that correlates the risk underwritten to the capital that is dedicated to the business. The regulatory requirements are designed to have insurers operate at or above a threshold capital level, which exceeds the BSCR. The Company is currently completing the 2010 BSCR for Endurance Bermuda and believes that Endurance Bermuda will exceed the target level of required capital as of December 31, 2010. At December 31, 2010, Endurance Bermuda can pay $640.4 million (2009 - $610.0 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.
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the Delaware Department of Insurance. ARMtech is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2010, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions, and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2011 without the prior approval of the applicable insurance regulator. If the parent company is also an insurer, as is the case with Endurance American, Endurance
The actual income tax (expense) benefit attributable to income for the years ended December 31, 2010, 2009 and 2008 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income before income tax (expense) benefit, as a result of the following:
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 2010, management has established a valuation allowance of $13.6 million (2009 - $9.6 million) against net operating loss carryforwards in the Company's United Kingdom subsidiary and non-U.S. branches. The valuation allowance in 2009 was established against realized investment losses for which the Company did not have current plans to produce future realized investment gains in the United Kingdom and the United States.
The Company’s income before income taxes was distributed as follows for the years ended December 31, 2010, 2009 and 2008, respectively:
As of December 31, 2010 and 2009, the Company had no uncertain tax positions.
The following is a summary of the unaudited quarterly data for the year ended December 31, 2009:
During January, 2011, major flooding occurred in and around Brisbane, Australia. On February 3, 2011, Tropical Cyclone Yasi made landfall in northern Queensland, Australia. In addition, on February 22, 2011, Christchurch, New Zealand experienced a severe earthquake causing substantial structural damage to the city. Preliminary information indicates that these events have the potential to cause significant losses within the insurance industry generally. To date, reported claims as a result of these events have been limited. Accordingly, while losses emanating from these events cannot be accurately estimated at this time, the Company may need to establish appropriate loss reserves related to these events in the first quarter of 2011, which may have a negative impact on its first quarter results of operations.