the Company’s need to rely on its ceding companies for loss information; and
Due to the inherent complexity of the assumptions used in establishing the Company’s loss and loss expense reserve estimates, final claim settlements made by the Company may vary significantly from the present estimates, particularly when those settlements may not occur until well into the future. For an illustration of the effect of a 10% change in the Company’s two key inputs used in determining its loss and loss expense reserves - the expected loss ratio and the expected loss reporting pattern - please see “Reserve for Losses and Loss Expenses” below.
The Company’s general and administrative expense ratio for 2012 was lower than that of 2011 and 2010 as a result of increased earned premiums in the current year, lower compensation costs and an increase in third party commissions and expense reimbursement offsets in the agriculture line of the Insurance segment. Personnel costs were down particularly as a result of lower annual incentive expense. At December 31, 2012, the Company had a total of 881 employees as compared to 844 employees at December 31, 2011 and 820 employees at December 31, 2010.
A decline in premiums in the property line of the Insurance segment over the current period as the Company curtailed the underwriting of several insurance products in order to reallocate capital to more profitable lines of business;
The Company’s investment portfolio (including cash and cash equivalents) was valued at $6.6 billion as of December 31, 2012. The Company’s investment portfolio is comprised of cash, cash equivalents, fixed maturity investments, short-term investments, equity securities and Other Investments, comprised of alternative funds and specialty funds. Alternative funds include investments in hedge funds and private investment funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies. Specialty funds currently include high yield loan and convertible debt funds.
On February 22, 2013, Moody’s downgraded the sovereign ratings of the United Kingdom from “Aaa” to “Aa1”. The Company had sovereign and non-sovereign securities of the United Kingdom with a total fair value of $182.0 million at December 31, 2012. If this downgrade had been in effect at December 31, 2012, total fair value of securities in the above table with the following ratings would have increased by:
Cash flows provided by operating activities. Cash flows provided by operating activities for the year ended December 31, 2012 were $272.8 million compared to $281.3 million for the year ended December 31, 2011 and $407.2 million for the year ended December 31, 2010. The decrease in cash flows provided by operating activities in 2012 compared to 2010 was primarily due to higher claim payments which was partially offset by increased premium collections.
The Company is subject to income taxes in certain jurisdictions in which the Company operates; however, since the majority of the Company’s income is currently earned in Bermuda, a jurisdiction with no corporate income tax, the tax impact to the Company’s operations has historically been minimal. In 2012, the Company generated cumulative losses before income taxes in its subsidiaries, which generated a consolidated 2.0% effective income tax rate. In 2011, certain subsidiaries of the Company in the U.S. generated losses, largely contributing to the Company’s income tax benefit.
We have audited Endurance Specialty Holdings Ltd.‘s internal control over financial reporting as of December 31, 2012, 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.
The Company invests a portion of its fixed maturity assets with a third party investment manager with investment guidelines that permit the use of derivative instruments.
Insurance - This segment is comprised of four lines of business: agriculture, casualty and other specialty, professional lines, and property. The agriculture line of business is comprised of multi-peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products. The casualty and other specialty line of business is comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty and healthcare liability. The professional line of business includes directors’ and officers’ liability, errors and omissions, employment practices liability, environmental liability and pension trust liability insurance. The property line of business is comprised of the insurance and facultative reinsurance of commercial properties. The types of risks insured are generally properties with sufficiently large values to require multiple insurers and reinsurers to accommodate their insurance capacity needs.