(iv) the Company’s need to rely on its ceding companies for loss information.
standards, as well as from the absence of positive premium adjustments and policy extension premiums associated with workers’ compensation business, the majority of which, beginning in the second quarter of 2006 was written as direct insurance and therefore recorded in the Insurance segment. In addition, the Company exited the offshore energy business and non-renewed certain aviation exposures during 2007.
At December 31, 2007, letters of credit totaling $574.4 million were outstanding, $200.0 million of 6.15% Senior Notes were outstanding and $250.0 million of 7% Senior Notes (the ‘‘7% Senior Notes’’) were outstanding. In October 2005, the Company used a portion of the net proceeds from the offering and sale of the 6.15% Senior Notes to repay the $143.5 million then outstanding under the Company’s credit facility. No additional borrowings were made against the credit facility during the remainder of 2005 or during 2006 and 2007.
Other Reinsurance. Favorable loss settlement activity arising from the Company’s agricultural reinsurance line of business resulted in the Company adjusting downward during 2006 its estimated losses and loss expenses in this reserve category for prior years.
The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the terms of the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the
reinsurance contract term. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24 month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period.
The Company applies the guidance in FASB Interpretation No. 46 (Revised December 2004) ‘‘Consolidation of Variable Interest Entities’’ (‘‘FIN 46(R)’’), which defines a variable interest entity as a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. Based on the criteria included in FIN 46(R), the Company determined that it has a relationship with a variable interest entity. FIN 46(R) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company’s relationship with the variable interest entity, described in more detail in Note 5, does not meet the requirements for consolidation as established under FIN 46(R) nor does the Company have any exposure to or risk of loss from its involvement with the variable interest entity.
The effects of reinsurance on premiums earned and written during the years ended December 31, 2007, 2006 and 2005 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.
The reinsurance coverage provided by Shackleton to Endurance Bermuda was based on a modeled loss trigger designed to closely mimic the exposures in the Company’s portfolio of insurance and reinsurance business. Upon the occurrence of a hurricane or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios.
For the year ended December 31, 2007, 2006 and 2005, the Company entered into contracts accounted for as deposits with gross premiums of $28.6 million, $159.0 million, and $143.3 million, respectively, and recorded other underwriting income (loss) of $1.6 million, $1.4 million, and ($4.8) million, respectively, related to such contracts. Gross premiums associated with treaties deemed to transfer only significant underwriting risk were $17.5 million, $135.9 million and $81.4 million during 2007, 2006 and 2005, respectively. Gross premiums associated with treaties deemed to transfer only significant timing risk were $11.1 million, $23.1 million and $61.9 million during 2007, 2006 and 2005, respectively.
During 2007, the Company repurchased its common shares through open market transactions authorized by the Company’s Board of Directors. The repurchases were accomplished in open market or privately negotiated transactions, from time to time, depending on market conditions.
additional restricted share units and holders of restricted shares are entitled to vote such shares at the Company’s annual or special general meeting of shareholders.
The actual income tax (expense) benefit attributable to income for the years ended December 31, 2007, 2006 and 2005 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income before income tax benefit, as a result of the following:
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, 2007, management has established a valuation allowance of $10.3 million against realized investment losses and other items for which the Company does not have current plans to produce future realized investment gains and other income.