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 successful insurance policies or reinsurance contracts written. General and administrative expenses consist primarily of personnel expenses and general operating expenses.
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 reserves. 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, 2011, the Company was not involved in any material claims litigation or arbitration proceedings.
Declines in the property, healthcare liability and professional lines due to increased competition which led to either non-renewing business or a move to higher policy attachment points combined with reduced premium retentions; and
General and Administrative Expenses. The general and administrative expense ratio experienced by the Reinsurance segment in 2011, as compared to 2010 and 2009 reduced slightly due to modest growth in net premiums earned.
The Company’s investments in (i) hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan and convertible debt funds (“specialty funds”) are recorded on the Company’s balance sheet as “Other Investments.” As of December 31, 2011, our Board of Directors had approved investments in alternative funds at the time of commitment of capital of up to the lesser of (x) 15% of total shareholders’ equity, or (y) $350 million. This restriction does not apply to investments in specialty funds. As of December 31, 2011, the Company had invested, net of capital returned, a total of $230.7 million in alternative funds. The Company had $119.3 million available for additional alternative fund commitments at December 31, 2011. As of December 31, 2011, the market value of alternative funds represented $309.8 million or approximately 71.6% of Other Investments, and specialty funds represented $122.9 million or approximately 28.4% of Other Investments. As of December 31, 2011, our $432.7 million of Other Investments represented 6.9% of the Company’s invested assets including cash and cash equivalents, fixed maturity investments, short-term investments, equity securities, Other Investments and net pending securities transactions.
During 2011, our cash and cash equivalents increased $281.1 million to $890.9 million at December 31, 2011, compared to $609.9 million at December 31, 2010, and increased compared to $528.9 million of cash and cash equivalents held at December 31, 2009.
In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the key lines of business within each business segment are aggregated based on their potential expected length of loss emergence. The period over which loss emergence occurs is typically referred to as the tail. The Company has classified its lines of business as either having a “short,” “long” or “other” tail pattern. The Company views short tail business as that for which development typically emerges within a period of several quarters while long tail business would emerge over many years. The Company’s short tail lines of business in the Insurance segment includes property; long tail lines of business include casualty, healthcare liability, professional lines and surety and other specialty; and other tail lines of business include certain specialty lines of business for which loss emergence is considered unique in nature, such as the Company’s agriculture insurance
Losses and loss expenses for the year ended December 31, 2010 are summarized as follows:
Long Tail Insurance. The favorable loss emergence within the long tail insurance reserve category during 2010 was primarily due to lower than expected claims activity and favorable case settlement within the Bermuda based healthcare liability, casualty and professional lines of business. This favorable loss emergence was partially offset by adverse loss development in the U.S. based primary and excess casualty and the workers’ compensation line of business. The Company exited the workers’ compensation business in 2009.
Earnings per share is calculated using the two-class method, which is an earnings allocation formula that determines earnings per share for the holders of Endurance Holdings’ ordinary shares (also referred to as “common shares”) and participating common shares according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted shares, which receive cash dividends, are considered participating common shares. Net (loss) income (attributable) available to common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company’s common and participating common shares. The remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. In periods of loss, no losses are allocated to participating common shareholders. Instead, all such losses are allocated solely to the common shareholders.
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 debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan and convertible debt funds (“specialty funds”). The Company’s alternative funds and specialty funds are recorded on the Company’s balance sheet as “Other Investments”. At December 31, 2011 and 2010, the Company had invested, net of capital returned, a total of $336.3 million and $279.6 million, respectively, in Other Investments. At December 31, 2011 and 2010, the carrying value of Other Investments was $432.7 million and $376.7 million, respectively. Certain of Other Investments are subject to redemption restriction provisions (see Note 11).
(1) Balances include amounts related to collateralized debt obligations held with total fair values of $13.1 million.
The $3.5 million (2010-$3.9 million) of OTTI losses recognized by the Company for the year ended December 31, 2011, 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, 2011, 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