You should read the following selected consolidated financial information along with the information contained in the Company’s Annual Report on Form 10-K, including ''
Proportional reinsurance contracts accounted for approximately 14%, 27%, and 32% of the Company’s gross premiums written during the years ended December 31, 2008, 2007, and 2006, respectively.
Investments. The Company currently classifies all of its fixed income investments, which consist 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 (loss) income. The Company determines the fair value of its fixed income investments in accordance with Statement of Financial Accounting Standards (“SFAS No. 157”), 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. SFAS No. 157 establishes three levels as follows:
the issuer of the fixed income investment becomes subject to bankruptcy laws or any similar laws intended for court supervised reorganization of insolvent enterprises;
Premiums. Gross premiums written in the Reinsurance segment decreased in 2008 by 22.7% over 2007 and 39.9% over 2006 gross premiums written. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2008, 2007 and 2006 were as follows:
The following table reconciles total segment results including Insurance, Reinsurance and Deposit Accounting detailed above to income before income taxes for the years ended December 31, 2008, 2007 and 2006, respectively:
At December 31, 2008 and 2007, the Company had reinsurance recoverables of $557.8 million and $187.4 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, 2008 and 2007.
During 2007, we acquired ARMtech. As a part of that transaction we recorded total goodwill of $45.2 and intangible assets of $96.7 million, which included licenses, customer relationships, internally developed software and non-compete agreements. The finite lived intangibles are being amortized over terms ranging from five to fifteen years.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endurance Specialty Holdings Ltd.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009 expressed an unqualified opinion thereon.
The following table summarizes the composition of the available for sale portfolio by investment ratings assigned by rating agencies at December 31, 2008 and 2007. In some cases, where bonds are unrated, the rating of the issuer has been applied.
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 and U.S. agency and non-agency mortgage, asset-backed securities, short term investments and preferred equity securities generally incorporate significant Level 2 inputs using the market and income approach techniques. The Company may assign a lower level to inputs typically considered to be Level 2 based on its assessment of liquidity and relative level of uncertainty surrounding the inputs. Prices provided by independent pricing services and independent broker quotes can vary widely, even for the same security.
The interest rate for revolving loans under the 2007 Credit Facility is either (i) the higher of (a) the Federal Funds Effective Rate plus 0.5% and (b) the prime commercial lending rate of JPMorgan Chase Bank or (ii) LIBOR plus a fee ranging from 0.165% to 0.375% depending on the Company’s leverage ratio and if the loan is collateralized or uncollateralized. For letters of credit issued on a collateralized basis, the Company is required to pay a fee ranging from 0.165% to 0.29% on the daily stated amount of such letters of credit. For letters of credit issued 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 following table reconciles total segment results to income before income tax (expense) benefit for the years ended December 31, 2008, 2007 and 2006, respectively:
The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2008, 2007 and 2006:
At December 31, 2008 and 2007, 5,094,727 and 7,094,727 warrants were outstanding. Such warrants are exercisable for ordinary and class A shares as follows:
At the Company’s exclusive option restricted share units may be settled in cash, ordinary shares or in a combination thereof. With respect to certain subsidiaries, the Company generally withholds an amount sufficient to satisfy any federal, state or local withholding tax requirements associated with awards under the 2007 Plan.