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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended March 31, 2003, or
|_| Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-31599
ENDURANCE SPECIALTY HOLDINGS LTD.
(Exact Name of Registrant as Specified in Its Charter)
Bermuda 98-0392908
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
Crown House
4 Par-la-Ville Road
Hamilton, Bermuda HM 08
(Address of Principal Executive (Zip Code)
Offices)
(441) 278-0400
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |_| No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Description of Class as of May 8, 2003
- ---------------------------------------- -------------------------------
Ordinary Shares - $1.00 par value 63,661,185
- ---------------------------------------- -------------------------------
Class A Shares - $1.00 par value 938,815
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 2
Condensed Consolidated Statements of Income and Comprehensive
Income, Three Months Ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Changes in Shareholders'
Equity, Three Months Ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 5
Notes to the Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
CERTIFICATIONS 30
1
ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars except share amounts)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
ASSETS (UNAUDITED) (AUDITED)
Cash and cash equivalents $ 312,810 $ 256,840
Fixed maturity investments available for sale, at fair value
(amortized cost: $1,670,807 and $1,358,027 at March 31, 2003
and December 31, 2002, respectively) 1,718,221 1,406,409
Premiums receivable, net (includes $230 and $45,368 from
related parties at March 31, 2003 and December 31, 2002,
respectively)
379,238 264,355
Deferred acquisition costs 121,715 81,676
Prepaid reinsurance premiums 6,705 7,501
Accrued investment income 17,561 11,209
Intangible assets 15,221 14,344
Other assets 13,984 12,260
---------- ----------
Total assets $2,585,455 $2,054,594
========== ==========
LIABILITIES
Reserve for losses and loss expenses $ 297,754 $ 200,840
Reserve for unearned premiums 572,768 403,305
Reinsurance balances payable 20,579 16,443
Bank debt 141,429 192,000
Net payable for investments purchased 67,525 6,470
Other liabilities 16,853 18,036
---------- ----------
Total liabilities 1,116,908 837,094
---------- ----------
SHAREHOLDERS' EQUITY
Common shares
Ordinary - 63,661,185 issued and outstanding (2002 - 54,061,185) 63,661 54,061
Class A - 938,815 issued and outstanding (2002 - 938,815) 939 939
Additional paid-in capital 1,205,112 1,009,415
Accumulated other comprehensive income 45,256 50,707
Retained earnings 153,579 102,378
---------- ----------
Total shareholders' equity 1,468,547 1,217,500
---------- ----------
Total liabilities and shareholders' equity $2,585,455 $2,054,594
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
2
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
2003 AND 2002
(In thousands of United States dollars, except share and per share amounts)
2003 2002
------------ ------------
Revenues
Gross premiums written $ 362,115 $ 130,921
============ ============
Net premiums written 360,054 130,921
Change in unearned premiums (170,401) (113,289)
------------ ------------
Net premiums earned (includes $129 and $1,920 from related
parties in 2003 and 2002, respectively) 189,653 17,632
Net investment income 14,356 5,618
Net foreign exchange gains (losses) 2,506 (285)
Net realized gains on sales of investments 4,404 --
------------ ------------
Total revenues 210,919 22,965
------------ ------------
Expenses
Losses and loss expenses (includes $46 and $1,010 from related
parties in 2003 and 2002, respectively) 104,145 9,571
Acquisition expenses (includes $14 and $457 from related
parties in 2003 and 2002, respectively) 34,560 2,708
General and administrative expenses 19,466 7,429
Amortization of intangibles 405 --
Interest expense 1,207 --
------------ ------------
Total expenses 159,783 19,708
------------ ------------
Income before income taxes 51,136 3,257
Income tax benefit 65 --
------------ ------------
Net income 51,201 3,257
------------ ------------
Other comprehensive income (loss)
Holding gains (losses) on investments arising during the period
(2003: net of applicable deferred income taxes of $48) 3,417 (4,775)
Foreign currency translation adjustments (3,022) --
Net (loss) on derivatives designated as cash flow hedge (1,442) --
Reclassification adjustment for net realized gains included in net
income (4,404) --
------------ ------------
Other comprehensive (loss) (5,451) (4,775)
------------ ------------
Comprehensive income (loss) $ 45,750 $ (1,518)
============ ============
Per share data
Weighted average number of common and common equivalent
shares outstanding:
Basic 58,457,745 60,000,000
============ ============
Diluted 59,671,510 60,000,000
============ ============
Basic earnings per share $ 0.88 $ 0.05
============ ============
Diluted earnings per share $ 0.86 $ 0.05
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(In thousands of United States dollars)
2003 2002
----------- -----------
Common shares
Balance, beginning of period $ 55,000 $ 60,000
Issuance of common shares 9,600 --
----------- -----------
Balance, end of period 64,600 60,000
----------- -----------
Additional paid-in capital
Balance, beginning of period 1,009,415 1,102,000
Issuance of common shares 195,744 --
Issuance of phantom shares 3,064 --
Public offering costs (3,711) --
Stock-based compensation expense 600 --
----------- -----------
Balance, end of period 1,205,112 1,102,000
----------- -----------
Accumulated other comprehensive income (loss)
Cumulative foreign currency translation adjustments:
Balance, beginning of period 3,662 --
Foreign currency translation adjustments (3,022) --
----------- -----------
Balance, end of period 640 --
----------- -----------
Unrealized holding gains on investments:
Balance, beginning of period 47,045 (58)
Net unrealized holding gains arising during the period, net of
reclassification adjustment (987) (4,775)
----------- -----------
Balance, end of period 46,058 (4,833)
----------- -----------
Accumulated derivative gain (loss) on cash flow hedging instruments:
Balance, beginning of period -- --
Net change from current period hedging transactions (1,457) --
Net derivative loss reclassified to earnings 15 --
----------- -----------
Balance, end of period (1,442) --
----------- -----------
Total accumulated other comprehensive income (loss) 45,256 (4,833)
----------- -----------
Retained earnings
Balance, beginning of period 102,378 312
Net income 51,201 3,257
----------- -----------
Balance, end of period 153,579 3,569
----------- -----------
Total shareholders' equity $ 1,468,547 $ 1,160,736
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
4
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(In thousands of United States dollars)
2003 2002
--------- -----------
Cash flows provided by (used in) operating activities:
Net income $ 51,201 $ 3,257
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 6,955 528
Net realized gains on sales of investments (4,404) --
Deferred taxes 2,405 --
Stock-based compensation expense 600 --
Premiums receivable, net (114,883) (84,977)
Deferred acquisition costs (40,039) (21,067)
Prepaid reinsurance premiums 796 --
Accrued investment income (6,352) (4,342)
Other assets (2,245) (3,035)
Reserve for losses and loss expenses 96,914 9,571
Reserve for unearned premiums 169,463 113,289
Reinsurance balances payable 3,259 --
Other liabilities (1,966) 37,902
--------- -----------
Net cash provided by operating activities 161,704 51,126
--------- -----------
Cash flows provided by (used in) investing activities:
Proceeds from sales of fixed maturity investments 319,178 --
Purchases of fixed maturity investments (574,262) (495,178)
Purchases of fixed assets (777) (270)
--------- -----------
Net cash (used in) investing activities (255,861) (495,448)
--------- -----------
Cash flows provided by (used in) financing activities:
Issuance of common shares 205,344 --
Offering costs paid (3,711) --
Bank debt repaid (50,571) --
--------- -----------
Net cash provided by financing activities 151,062 --
--------- -----------
Effect of exchange rate changes on cash and cash equivalents (935) --
--------- -----------
Net increase (decrease) in cash and cash equivalents 55,970 (444,322)
Cash and cash equivalents, beginning of period 256,840 1,162,440
--------- -----------
Cash and cash equivalents, end of period $ 312,810 $ 718,118
========= ===========
See accompanying notes to unaudited condensed consolidated financial statements.
5
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of United States dollars,
except share and per share amounts)
1. General
Endurance Specialty Holdings Ltd. ("Endurance Holdings") was organized as
a Bermuda holding company on June 27, 2002. Endurance Holdings writes
specialty lines of insurance and reinsurance on a global basis through its
three wholly-owned operating subsidiaries: Endurance Specialty Insurance
Ltd. ("Endurance Bermuda"), based in Bermuda; Endurance Worldwide
Insurance Limited ("Endurance U.K."), based in London, England; and
Endurance Reinsurance Corporation of America ("Endurance U.S."), based in
New York.
The accompanying unaudited condensed consolidated financial statements
have been prepared on the basis of accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Results for the three month
period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2003. The unaudited
condensed consolidated financial statements include the accounts of
Endurance Holdings and its wholly-owned subsidiaries, which are
collectively referred to herein as the "Company". All intercompany
transactions and balances have been eliminated on consolidation.
Management is required to make estimates and assumptions that affect the
amounts reported in the unaudited condensed consolidated financial
statements and accompanying disclosures. Actual results could differ from
those estimates. Among other matters, significant estimates and
assumptions are used to record premiums written and ceded, and to record
reserves for losses and loss expenses and contingencies. Estimates and
assumptions are periodically reviewed and the effects of revisions are
recorded in the consolidated financial statements in the period that they
are determined to be necessary.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. These
unaudited condensed consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 2002 contained in
Endurance Holdings' final prospectus filed with the United States
Securities and Exchange Commission on February 28, 2003 (Registration No.
333-102026) in connection with the initial public offering of Endurance
Holdings' ordinary shares.
Certain reclassifications have been made for 2002 to conform to the 2003
presentation.
2. Significant events
On March 5, 2003, Endurance Holdings completed an initial public offering
which resulted in the issuance of 9,600,000 of its ordinary shares. The
ordinary shares are listed for trading on the New York Stock Exchange
under the symbol "ENH". Total proceeds received net of underwriting
discounts and other offering expenses were $201.6 million. Net proceeds
have been credited to shareholders' equity. Pursuant to the terms of its
term loan facility, upon consummation of the public offering, the Company
repaid $50.6 million of its outstanding principal under the term loan. The
Company invested the remaining net proceeds of the offering in
investment-grade, fixed maturity investments, pending their use to provide
additional capital to the operating subsidiaries and for other general
corporate purposes.
6
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars,
except share and per share amounts)
3. Debt and financing arrangements
On August 13, 2002, the Company entered into a $192 million three-year
term loan facility and a $108 million letter of credit and revolving
credit facility with a syndicate of commercial banks. At March 31, 2003,
the Company had $141.4 million of the term loan outstanding after the
repayment of $50.6 million in conjunction with the public offering and
letters of credit totaling $67.0 million outstanding. Under the terms of
the term loan facility, the Company is committed to making further
repayments of $38.4 million by September 30, 2003, $76.8 million by
September 30, 2004 and $26.2 million by September 30, 2005.
Interest rates on the term loan are LIBOR plus a spread that is based on
the Company's debt to capital ratio. The interest rate applied to the
outstanding balance averaged 2.70% during the three month period ended
March 31, 2003. The letter of credit and revolving credit facility expires
on August 11, 2003, at which point any revolving credit balance will be
converted into a six-month term loan. The agreements contain certain
covenants including requirements that debt, as defined in the agreements,
to shareholders' equity does not exceed a ratio of 0.35:1; consolidated
tangible net worth must exceed $750 million; and the consolidated fixed
charge ratio, as defined in the agreements, must exceed 2:1. In addition,
the Company must apply 25% of the cash proceeds received from any sale of
equity securities to the repayment of outstanding principal of term loans
outstanding under the term loan facility. The Company was in compliance
with all covenants of these agreements at March 31, 2003.
The Company recorded interest expense of $1.2 million for the period ended
March 31, 2003 and at March 31, 2003, the fair value of the borrowings
approximates the carrying value.
As part of its overall strategy to manage the level of interest rate
exposure, the Company has entered into an interest rate swap contract to
hedge the variable cash outflows related to the term loan facility. The
contract became effective on March 27, 2003 and provides for the exchange
of floating rate payments for fixed rate payments (2.62% per annum) on a
declining notional amount corresponding to the outstanding principal
amount of the $100 million drawn down on the term loan facility on
September 27, 2002. The agreement has been designated as a "cash flow
hedge" under SFAS No. 133, and accordingly, the changes in fair value of
the derivative are recorded in other comprehensive income and recognized
as a component of interest expense in the statement of income when the
variable interest expense affects earnings. At March 31, 2003 the fair
value of the interest rate swap amounted to a liability of $1.4 million
and is included on the balance sheet as a component of other liabilities;
the estimated net amount of the existing loss that is expected to be
reclassified into earnings in the next twelve months is $1.2 million. The
fair value of the interest rate swap was estimated by calculating the net
present value of expected future cash flows based on market rates at March
31, 2003.
4. Earnings per share
Basic earnings per common share are calculated by dividing net income
available to holders of Endurance Holdings' ordinary shares and class A
shares (collectively referred to as "common shares") by the weighted
average number of common shares outstanding. In addition to the actual
common shares outstanding, the weighted average number of common shares
included in the basic earnings per common share calculation also includes
the fully vested phantom shares discussed in note 5. Diluted earnings per
common share are based on the weighted average number of common shares and
dilutive potential common shares outstanding during the period of
calculation using the treasury stock method.
7
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars,
except share and per share amounts)
4. Earnings per share, cont'd.
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2003 and 2002,
respectively:
2003 2002
----------- -----------
Numerator:
Net income available to common shareholders $ 51,201 $ 3,257
----------- -----------
Denominator:
Weighted average shares - basic
Ordinary shares outstanding 58,413,333 60,000,000
Phantom shares outstanding 44,412 --
----------- -----------
58,457,745 60,000,000
Share equivalents
Warrants 908,744 --
Options 305,021 --
----------- -----------
Weighted average shares - diluted 59,671,510 60,000,000
----------- -----------
Basic earnings per common share $ 0.88 $ 0.05
----------- -----------
Diluted earnings per common share $ 0.86 $ 0.05
----------- -----------
5. Stock-based employee compensation plans
The Company has a stock-based employee compensation plan (the "Option
Plan") which provides for the grant of options to purchase shares of the
Company's common shares, share appreciation rights, restricted shares,
phantom shares, share bonuses and other awards to key employees. On March
1, 2003, the Company settled $3.1 million of its 2002 annual bonus
obligations to certain employees with grants of 133,234 fully vested
phantom shares. Each phantom share represents the right to receive an
equivalent number of ordinary shares of the Company. The phantom shares
will be automatically settled over a three year period. At the Company's
exclusive option, the phantom shares may be settled in cash, ordinary
shares or in a combination thereof. The fair value of the phantom stock
grants at the date of grant was equal to the 2002 bonus obligation
recognized during the year ended December 31, 2002, and as such, no
additional compensation expense has been recognized in 2003.
Effective January 1, 2002, the Company adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation",
prospectively to all employee awards granted, modified, or settled after
January 1, 2002. Awards under the Option Plan vest over periods of up to
five years. Therefore, the cost related to stock-based employee
compensation included in the determination of net income for 2003 and 2002
is less than that which would have been recognized if the fair value based
method had been applied to all awards granted.
8
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars,
except share and per share amounts)
5. Stock-based employee compensation plans, cont'd.
The following table illustrates the effect on net income and earnings per
share if the fair value based method had been applied to all outstanding
and unvested awards for the three months ended March 31, 2003 and 2002,
respectively.
2003 2002
--------------- ---------------
Net income, as reported $ 51,201 $ 3,257
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects 600 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (2,797) (1,270)
--------------- ---------------
Pro forma net income $ 49,004 $ 1,987
=============== ===============
Earnings per share:
Basic - as reported $ 0.88 $ 0.05
=============== ===============
Basic - pro forma $ 0.84 $ 0.03
=============== ===============
Diluted - as reported $ 0.86 $ 0.05
=============== ===============
Diluted - pro forma $ 0.82 $ 0.03
=============== ===============
6. Segment reporting
The determination of the Company's business segments is based on how the
Company monitors the performance of its underwriting operations. The
Company has six reportable business segments: property per risk treaty
reinsurance, property catastrophe reinsurance, casualty treaty
reinsurance, property individual risk, casualty individual risk and other
specialty lines.
o Property Per Risk Treaty Reinsurance - reinsures individual
property risks of ceding companies on a treaty basis.
o Property Catastrophe Reinsurance - reinsures catastrophic
perils for ceding companies on a treaty basis.
o Casualty Treaty Reinsurance - reinsures third party liability
exposures from ceding companies on a treaty basis.
o Property Individual Risk - insurance and facultative
reinsurance of commercial properties.
o Casualty Individual Risk - insurance and facultative
reinsurance of third party liability exposures.
o Other Specialty Lines - insurance and reinsurance of unique
opportunities, including aerospace, self insured risks and a
limited number of other reinsurance programs such as surety,
marine, energy, personal accident, terrorism and others.
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 losses and loss expenses,
acquisition expenses and general and administrative expenses by net
premiums earned.
9
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars,
except share and per share amounts)
6. Segment reporting, cont'd.
General and administrative expenses incurred by segments are allocated
directly. Remaining corporate overhead is allocated based on the segment's
proportional share of gross premiums written. The following table provides
a summary of the segment revenues and results for the three months ended
March 31, 2003 and the reserve for losses and loss expenses as of March
31, 2003:
Property Per Property Casualty
Risk Treaty Catastrophe Treaty
Reinsurance Reinsurance Reinsurance
--------------- --------------- ---------------
Revenues
Gross premiums written $91,979 $60,634 $ 83,427
------- ------- --------
Net premiums written 91,979 61,344 81,162
------- ------- --------
Net premiums earned 41,036 36,027 40,252
------- ------- --------
Expenses
Losses and loss expenses 24,794 6,292 26,654
Acquisition expenses 9,119 5,207 10,927
General and administrative expenses 5,403 2,792 3,913
------- ------- --------
39,316 14,291 41,494
------- ------- --------
Underwriting income (loss) $ 1,720 $21,736 $ (1,242)
======= ======= ========
Loss ratio 60.4% 17.5% 66.2%
Acquisition expense ratio 22.2% 14.5% 27.2%
General and administrative expense ratio 13.2% 7.7% 9.7%
------- ------- --------
Combined ratio 95.8% 39.7% 103.1%
------- ------- --------
Reserve for losses and loss expenses $58,146 $45,988 $ 82,077
======= ======= ========
Property Casualty Other Specialty
Individual Risk Individual Risk Lines
--------------- --------------- ---------------
Revenues
Gross premiums written $14,597 $33,522 $ 77,956
------- ------- --------
Net premiums written 14,091 33,522 77,956
------- ------- --------
Net premiums earned 15,015 31,915 25,408
------- ------- --------
Expenses
Losses and loss expenses 2,239 24,153 20,013
Acquisition expenses 1,585 3,865 3,857
General and administrative expenses 1,158 2,546 3,654
------- ------- --------
4,982 30,564 27,524
------- ------- --------
Underwriting income (loss) $10,033 $ 1,351 $ (2,116)
======= ======= ========
Loss ratio 14.9% 75.7% 78.8%
Acquisition expense ratio 10.6% 12.1% 15.2%
General and administrative expense ratio 7.7% 8.0% 14.4%
------- ------- --------
Combined ratio 33.2% 95.8% 108.4%
------- ------- --------
Reserve for losses and loss expenses $15,508 $58,111 $ 37,924
======= ======= ========
10
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars,
except share and per share amounts)
6. Segment reporting, cont'd.
The following table provides a summary of the segment revenues and results
for the three months ended March 31, 2002 and the reserve for losses and
loss expenses as of March 31, 2002:
Property Per Property Casualty
Risk Treaty Catastrophe Treaty
Reinsurance Reinsurance Reinsurance
--------------- --------------- ---------------
Revenues
Gross premiums written $ 13,378 $ 21,584 $ 44,896
-------- -------- --------
Net premiums written 13,378 21,584 44,896
-------- -------- --------
Net premiums earned 1,306 5,199 7,031
-------- -------- --------
Expenses
Losses and loss expenses 785 2,466 3,918
Acquisition expenses 170 507 1,628
General and administrative expenses 1,563 1,657 1,894
-------- -------- --------
2,518 4,630 7,440
-------- -------- --------
Underwriting income (loss) $ (1,212) $ 569 $ (409)
======== ======== ========
Loss ratio 60.1% 47.4% 55.7%
Acquisition expense ratio 13.0% 9.8% 23.2%
General and administrative expense ratio 119.7% 31.9% 26.9%
-------- -------- --------
Combined ratio 192.8% 89.1% 105.8%
-------- -------- --------
Reserve for losses and loss expenses $ 785 $ 2,466 $ 3,918
======== ======== ========
Property Casualty Other Specialty
Individual Risk Individual Risk Lines
--------------- --------------- ---------------
Revenues
Gross premiums written $ 11,960 $ 2,614 $ 36,489
-------- -------- --------
Net premiums written
11,960 2,614 36,489
-------- -------- --------
Net premiums earned 1,703 671 1,722
-------- -------- --------
Expenses
Losses and loss expenses 888 484 1,030
Acquisition expenses 128 22 253
General and administrative expenses 585 994 736
-------- -------- --------
1,601 1,500 2,019
-------- -------- --------
Underwriting income (loss) $ 102 $ (829) $ (297)
======== ======== ========
Loss ratio 52.1% 72.1% 59.8%
Acquisition expense ratio 7.5% 3.3% 14.7%
General and administrative expense ratio 34.4% 148.1% 42.7%
-------- -------- --------
Combined ratio 94.0% 223.5% 117.2%
-------- -------- --------
Reserve for losses and loss expenses $ 888 $ 484 $ 1,030
======== ======== ========
11
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars,
except share and per share amounts)
6. Segment reporting, cont'd.
The following table reconciles total segment results to consolidated
income before income taxes for the three months ended March 31, 2003 and
2002, respectively:
2003 2002
-------- -------
Total underwriting income (loss) $ 31,482 $(2,076)
Net investment income 14,356 5,618
Net foreign exchange gains (losses) 2,506 (285)
Net realized gains on sales of investments 4,404 --
Amortization of intangibles (405) --
Interest expense (1,207) --
-------- -------
Consolidated income before income taxes $ 51,136 $ 3,257
======== =======
7. Commitments and contingencies
Concentrations of credit risk. As of March 31, 2003 and December 31 2002,
substantially all the Company's cash and investments were held by one
custodian. The Company's investment guidelines limit the amount of credit
exposure to any one issuer other than the U.S. Treasury.
Major production sources. During the period ended March 31, 2003, the
Company obtained 82% of its gross premiums written through four brokers:
Aon Corporation - 31.6%, Willis Companies - 23.9%, Marsh & McLennan
Companies, Inc. - 13.9%, and Benfield Group - 12.1%.
Letters of credit. As of March 31, 2003, the Company's bankers have issued
letters of credit of approximately $67.0 million (2002 - $nil) in favor of
certain ceding companies.
Employment agreements. The Company has entered into employment agreements
with certain officers that provide for option awards, executive benefits
and severance payments under certain circumstances.
Operating Leases. The Company leases office space and office equipment
under operating leases. Future minimum lease commitments at March 31, 2003
are as follows:
Year Ended
March 31 Amount
-------- ------
2004 $ 1,510
2005 1,217
2006 832
2007 559
2008 469
2009 and thereafter 3,610
---------
$ 8,197
=========
Total rent expense under operating leases for the period ended March 31,
2003 was $429,000 (2002 - $nil).
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and
results of operations for the three month periods ended March 31, 2003 and 2002.
This discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and related notes contained in this
Form 10-Q and the audited consolidated financial statements and related notes
for the fiscal year ended December 31, 2002, as well as the discussions of
critical accounting policies and qualitative and quantitative disclosure about
market risk, contained in our final prospectus filed with the Securities and
Exchange Commission on February 28, 2003 (Registration No. 333-102026) in
connection with the initial public offering of our ordinary shares.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this Form 10-Q, including information with respect to our plans and
strategy for our business, includes forward looking statements that involve risk
and uncertainties. Please see the section captioned "Cautionary Statement
Regarding Forward-Looking Statements" for more information on factors that could
cause actual results to differ materially from the results described in or
implied by any forward-looking statements contained in this discussion and
analysis.
Overview
Endurance Specialty Holdings Ltd. ("Endurance Holdings") was organized as a
Bermuda holding company on June 27, 2002. Endurance Holdings writes specialty
lines of commercial property and casualty insurance and reinsurance on a global
basis through its three wholly-owned operating subsidiaries: Endurance Specialty
Insurance Ltd. ("Endurance Bermuda"), based in Bermuda; Endurance Worldwide
Insurance Limited ("Endurance U.K."), based in London, England; and Endurance
Reinsurance Corporation of America " ("Endurance U.S."), based in New York.
Endurance Holdings and its wholly-owned subsidiaries are collectively referred
to in this discussion and analysis as the "Company".
Application of Critical Accounting Estimates
Our condensed consolidated financial statements are based on the selection of
accounting policies and application of significant accounting estimates, which
require management to make significant estimates and assumptions. We believe
that some of the more critical judgments in the areas of accounting estimates
and assumptions that affect our financial condition and results of operations
are related to the recognition of premiums written and ceded and reserves for
losses and loss expenses. For a detailed discussion of our critical accounting
estimates please refer to our final prospectus filed with the Securities and
Exchange Commission on February 28, 2003 (Registration No. 333-102026). There
were no material changes in the application of our critical accounting estimates
subsequent to that report. We have discussed the application of these critical
accounting estimates with our Board of Directors and Audit Committee.
Results of operations
The following is a discussion and analysis of the Company's consolidated results
of operations for the three month periods ended March 31, 2003 and March 31,
2002.
Premiums. In the period ended March 31, 2003, gross premiums written were $362.1
million compared to gross premiums written of $130.9 million for the period
ended March 31, 2002. Gross premiums written increased in the first three months
of 2003 as a result of the formation of Endurance U.S. and Endurance U.K., the
significant expansion of our team of underwriters (47 at March 31, 2003 compared
to 11 at March 31, 2002) and the renewal of business acquired from LaSalle Re
Limited on May 16, 2002.
13
Reinsurance premiums ceded for the period ended March 31, 2003 were $2.1
million. The Company did not purchase reinsurance in the period ended March 31,
2002.
Net premiums earned for the period ended March 31, 2003 were $189.7 million
compared to net premiums earned for the period ended March 31, 2002 of $17.6
million. Net premiums earned increased in 2003 as a result of the higher level
of premiums written in the period ended March 31, 2003 compared to 2002 in
addition to the earning of net premiums that were written in the period since
the inception of the Company.
Net Investment Income. Net investment income for the period ended March 31, 2003
was $14.4 million, compared to net investment income of $5.6 million for the
period ended March 31, 2002. During the period ended March 31, 2003, net
investment income was derived primarily from interest earned on fixed maturity
investments partially offset by investment management fees. Net investment
income during the period ended March 31, 2002 was derived primarily from
interest earned on cash and short term deposits. Invested assets increased
substantially in the year, standing at $2.0 billion at March 31, 2003 compared
to $1.2 billion at March 31, 2002. Investment management fees for the period
ended March 31, 2003 were $0.5 million compared to $0.1 million in the first
quarter of 2002.
The annualized period book yield (which is the average yield of the invested
portfolio after adjusting for accretion and amortization from the purchase dates
of its aggregate assets) and total return (which is the implied yield
attributable to the accretion in market value of the invested portfolio) were
3.81% and 3.87%, respectively, for the period ended March 31, 2003. Total return
includes unrealized gains and losses. The invested portfolio represents cash and
cash equivalents and fixed maturity investments managed by the investment
managers. For the period ended March 31, 2002, the annualized period book yield
and total return were 3.14% and 0.29%, respectively. The performance for the
period ended March 31, 2002 was derived primarily from investments in cash and
short term deposits given that the Company did not commence allocating the
portfolio to its fixed maturity investment managers until the latter part of
that period. The transition period was approximately half completed at March 31,
2002 with 57% of invested assets held in cash and cash equivalent securities
with an overall portfolio duration of 1.56 years and the book yield of 3.14%.
Throughout the rest of the year the portfolio was invested to capitalize on
spread sectors as the Federal Reserve continued to cut interest rates by an
additional 50 basis points. By March 31, 2003 the proportion of cash and cash
equivalent securities had been reduced to 10% of invested assets with the
overall portfolio duration being extended to 2.52 years and the book yield
rising to 3.81%. Both increases are primarily due to the redeployment of assets
into longer term spread sectors.
Net Realized Investment Gains. Net realized investment gains for the period
ended March 31, 2003 were $4.4 million, compared to no net realized investment
gains in the period ended March 31, 2002. In 2003, net investment gains were
realized from the sale of fixed maturity securities, executed as part of the
ongoing management of our investment portfolio. Declining interest rates in the
U.S. over the last twelve months have resulted in gains on the Company's fixed
maturity investments that were initially purchased with yields higher than
current market rates. During the period ended March 31, 2002, no investment
securities were sold.
Losses and Loss Expenses. Losses and loss expenses for the periods ended March
31, 2003 and 2002 were $104.1 million and $9.6 million, respectively. The loss
ratios for the periods ended March 31, 2003 and 2002 were 54.9% and 54.3%,
respectively. During the period ended March 31, 2003 the Company's results were
impacted by three loss events which resulted in aggregate specific case reserves
recorded of $6.1 million. The reported claims relating to these events in the
period ended March 31, 2003 relate to the Company's underwriting activities in
property per risk treaty reinsurance, property catastrophe reinsurance and the
casualty treaty reinsurance lines of business. There were no reported claims in
the period ended March 31, 2002. The Company participates in lines of business
where claims may not be reported for many years. Accordingly, management does
not believe that reported claims are currently a valid means for estimating
ultimate obligations. The overall loss reserves were established by the
Company's actuaries and reflect management's best estimate of ultimate losses.
14
As of March 31, 2003, there were no known emerging loss events or loss trends
that management is aware of that may result in material adjustments to the prior
period reserves for the Company. Should such events or trends become evident in
the future, the reserves for the Company will be adjusted as necessary.
Acquisition Expenses. Acquisition expenses for the period ended March 31, 2003
were $34.6 million compared to acquisition expenses of $2.7 million for the
period ended March 31, 2002. The acquisition expense ratio for the period ended
March 31, 2003 was 18.2% compared to an acquisition expense ratio of 15.4% for
the period ended March 31, 2002. The increase in acquisition expense ratio is
due to changes in the mix of business underwritten by the Company.
General and Administrative Expenses. General and administrative expenses for the
period ended March 31, 2003 were $19.5 million, compared to general and
administrative expenses of $7.4 million for the period ended March 31, 2002.
General and administrative expenses in the period were comprised of $12.1
million in personnel costs, $1.5 million relating to technology and
communication and $5.9 million in other expenses. General and administrative
expenses in 2002 were comprised of $3.4 million in personnel costs, $1.5 million
relating to recruitment of staff and $2.5 million in other expenses.
The general and administrative expense ratio for the period ended March 31, 2003
was 10.3% compared to a general and administrative expense ratio of 42.1% for
the period ended March 31, 2002. The much higher 2002 ratio was due to the
Company's significant start-up costs which contrasted with the early stages of
underwriting activity and limited premium earnings. In the period ended March
31, 2003, the ratio has declined as a result of growth in premiums earned.
Net Income. Net income for the period ended March 31, 2003 was $51.2 million
compared to $3.3 million for the period ended March 31, 2002. Net income in the
2003 period was comprised of net underwriting income of $31.5 million, net
investment income of $14.4 million, net realized investment gains of $4.4
million, net foreign exchange gains of $2.5 million, interest expense of $1.2
million and amortization of intangible assets of $0.4 million. Net income in the
2002 period was comprised of a net underwriting loss of $2.1 million, net
investment income of $5.6 million and a net foreign exchange loss of $0.2
million. The increase in net income for the three months ended March 31, 2003
compared to the same period in 2002 is due to the expansion of the Company's
underwriting activities and personnel and continued implementation of its
business plan subsequent to March 31, 2002.
Comprehensive Income. Comprehensive income for the period ended March 31, 2003
was $45.8 million compared to a comprehensive loss for the period ended March
31, 2002 of $1.5 million. Comprehensive income for the 2003 period was comprised
of the net income of $51.2 million described above, a decrease in net unrealized
investment gains of $1.0 million, losses on foreign currency translation
adjustments of $3.0 million and a net loss on derivatives designated as a cash
flow hedge of $1.4 million. Comprehensive income for the 2002 period was
comprised of the net income of $3.3 million described above and a net decrease
in unrealized investment gains of $4.8 million.
Underwriting results by operating segments
The determination of the Company's business segments is based on how the Company
monitors the performance of its underwriting operations. Management measures
segment results on the basis of the combined ratio, which is obtained by
dividing the sum of the losses and loss expenses, acquisition expenses and
general and administrative expenses by net premiums earned. As a newly formed
company, our historical combined ratio may not be indicative of future
underwriting performance. The Company does not manage its assets by segment;
accordingly, investment income and total assets are not allocated to the
individual segments. General and administrative expenses incurred by segments
are allocated directly. Remaining corporate overhead is allocated based on the
segment's proportional share of gross premiums written.
15
Property per risk treaty reinsurance
Our Property Per Risk Treaty Reinsurance business segment reinsures individual
property risks of ceding companies on a treaty basis. Our property per risk
reinsurance contracts cover claims from individual insurance policies written by
our ceding company clients and include both personal lines and commercial lines
exposures. The following table summarizes the underwriting results, associated
ratios and the reserve for losses and loss expenses for the Property Per Risk
Treaty Reinsurance business segment for the periods ended March 31, 2003 and
2002, respectively.
March 31, March 31,
2003 2002 Change
--------- --------- --------
Revenues
Gross premiums written $91,979 $ 13,378 $ 78,601
------- -------- --------
Net premiums written 91,979 13,378 78,601
------- -------- --------
Net premiums earned 41,036 1,306 39,730
------- -------- --------
Expenses
Losses and loss expenses 24,794 785 24,009
Acquisition expenses 9,119 170 8,949
General and administrative expenses 5,403 1,563 3,840
------- -------- --------
39,316 2,518 36,798
------- -------- --------
Underwriting income (loss) $ 1,720 $ (1,212) $ 2,932
======= ======== ========
Loss ratio 60.4% 60.1% 0.3%
Acquisition expense ratio 22.2% 13.0% 9.2%
General and administrative expense ratio 13.2% 119.7% (106.5%)
------- -------- --------
Combined ratio 95.8% 192.8% (97.0%)
------- -------- --------
Reserve for losses and loss expenses $58,146 $ 785 $ 57,361
======= ======== ========
Premiums. For the period ended March 31, 2003, gross premiums written were $92.0
million and net premiums earned were $41.0 million compared to gross premiums
written of $13.4 million and net premiums earned of $1.3 million for the same
period in 2002. The increase in gross premiums written was primarily due to the
significant expansion of the Company's underwriting staff. Endurance U.S. and
Endurance U.K. contributed to this increase, recording gross premiums written of
$38.0 million and $17.0 million, respectively in the period ended March 31,
2003. The ratio of net premiums earned to net premiums written during the first
three months of 2003 was 44.6% compared to 9.8% for the period to March 31,
2002. These levels of earnings compared to premiums written are due to the
earning of policies attaching contracts which have comprised 63.3% of premiums
written in this segment since the inception of the Company. The majority of the
policies attaching contracts have a 24-month risk period and, as such, the
premiums are earned over that risk period. The higher ratio of net premiums
earned to net premiums written for the period to March 31, 2003 was a result of
the earning of premiums that have been recorded over the period since the
inception of the Company.
Losses and Loss Expenses. Losses and loss expenses for the periods ended March
31, 2003 and March 31, 2002 were $24.8 million and $0.8 million, respectively.
The loss ratio was 60.4% for the three months ended March 31, 2003 and 60.1% for
the same period in 2002.
Acquisition Expenses. Acquisition expenses for the period ended March 31, 2003
were $9.1 million or 22.2% of net premiums earned. For the period ended March
31, 2002, acquisition expenses were $0.2 million or 13.0% of net premiums
earned. The higher expense ratio in the period to March 31, 2003 is due to an
increased percentage of business in this segment relating to quota share
reinsurance contracts which incur higher commissions.
16
General and Administrative Expenses. General and administrative expenses for the
periods ended March 31, 2003 and March 31, 2002 were $5.4 million and $1.6
million, respectively. This increase is due to the Company having been in its
early stages of development in the period ended March 31, 2002 and therefore
incurred lower levels of operating expenses at that time. However, general and
administrative expenses as a percentage of net premiums earned has decreased as
premiums have increased significantly.
Property catastrophe reinsurance
Our Property Catastrophe Reinsurance business segment reinsures catastrophic
perils for ceding companies on a treaty basis. Our property catastrophe
reinsurance contracts provide protection for most catastrophic losses that are
covered in the underlying insurance policies written by our ceding company
clients. Protection under property catastrophe treaties is provided on an
occurrence basis, allowing our ceding company clients to combine losses that
have been incurred in any single event from multiple underlying policies. The
following table summarizes the underwriting results, associated ratios and the
reserve for losses and loss expenses for the Property Catastrophe Reinsurance
business segment for the periods ended March 31, 2003 and 2002, respectively.
March 31, March 31,
2003 2002 Change
--------- --------- --------
Revenues
Gross premiums written $60,634 $21,584 $ 39,050
------- ------- --------
Net premiums written 61,344 21,584 39,760
------- ------- --------
Net premiums earned 36,027 5,199 30,828
------- ------- --------
Expenses
Losses and loss expenses 6,292 2,466 3,826
Acquisition expenses 5,207 507 4,700
General and administrative expenses 2,792 1,657 1,135
------- ------- --------
14,291 4,630 9,661
------- ------- --------
Underwriting income $21,736 $ 569 $ 21,167
======= ======= ========
Loss ratio 17.5% 47.4% (29.9%)
Acquisition expense ratio 14.5% 9.8% 4.7%
General and administrative expense ratio 7.7% 31.9% (24.2%)
------- ------- --------
Combined ratio 39.7% 89.1% (49.4%)
------- ------- --------
Reserve for losses and loss expenses $45,988 $ 2,466 $ 43,522
======= ======= ========
Premiums. For the period ended March 31, 2003, gross premiums written were $60.6
million and net premiums earned were $36.0 million compared to gross premiums
written of $21.6 million and net premiums earned of $5.2 million for the same
period in 2002. The majority of the contracts associated with this segment are
written on a losses occurring basis. Accordingly, the premium is earned evenly
over the term, most often a twelve month period. The increase in gross premiums
written is partly due to the renewal of business acquired from LaSalle Re
Limited on May 16, 2002 with contracts incepting in the period to March 31,
2003. In addition, four underwriters were hired in relation to the business
acquired from LaSalle Re Limited that have generated additional premiums for
this segment. The growth in premiums earned is a result of the earning of
premiums that have been written over the twelve months leading up to March 31,
2003 compared to the short period of premium generation to March 31, 2002. There
were no reinsurance premiums ceded during the three months ended March 31, 2002.
17
Losses and Loss Expenses. Losses and loss expenses for the periods ended March
31, 2003 and March 31, 2002 were $6.3 million and $2.5 million, respectively.
The loss ratio was 17.5% for the three months ended March 31, 2003 and 47.4% for
the same period in 2002. The loss ratios in 2003 and 2002 in this segment were
principally attributable to the small number of catastrophe losses experienced
in the respective periods. The reduction in loss ratio is the result of a lower
incidence of loss activity in the period ended March 31, 2003 compared to the
period ended March 31, 2002. The losses and loss expenses recorded have not
resulted in any recoveries in either period under the reinsurance protection
purchased. Accordingly, no losses recoverable have been recorded in either
period.
Acquisition Expenses. Acquisition expenses for the period ended March 31, 2003
were $5.2 million or 14.5% of net premiums earned. For the period ended March
31, 2002, acquisition expenses were $0.5 million or 9.8% of net premiums earned.
General and Administrative Expenses. General and administrative expenses for the
periods ended March 31, 2003 and March 31, 2002 were $2.8 million and $1.7
million, respectively. This increase is due to the Company having been in its
early stages of development in the period ended March 31, 2002 and therefore
incurred lower levels of operating expenses at that time. However, general and
administrative expenses as a percentage of net premiums earned has decreased as
premiums have increased significantly.
Casualty treaty reinsurance
Our Casualty Treaty Reinsurance business segment reinsures third party liability
exposures from ceding companies on a treaty basis. The exposures that we
reinsure include automobile liability, professional liability, directors' and
officers' liability, umbrella liability and workers' compensation. We focus on
business that is exposed to severity losses and not expected to produce high
levels of claims frequency. The following table summarizes the underwriting
results, associated ratios and the reserve for losses and loss expenses for the
Casualty Treaty Reinsurance business segment for the periods ended March 31,
2003 and 2002, respectively.
March 31, March 31,
2003 2002 Change
--------- --------- --------
Revenues
Gross premiums written $ 83,427 $ 44,896 $ 38,531
-------- -------- --------
Net premiums written 81,162 44,896 36,266
-------- -------- --------
Net premiums earned 40,252 7,031 33,221
-------- -------- --------
Expenses
Losses and loss expenses 26,654 3,918 22,736
Acquisition expenses 10,927 1,628 9,299
General and administrative expenses 3,913 1,894 2,019
-------- -------- --------
41,494 7,440 34,054
-------- -------- --------
Underwriting (loss) $ (1,242) $ (409) $ (833)
======== ======== ========
Loss ratio 66.2% 55.7% 10.5%
Acquisition expense ratio 27.2% 23.2% 4.0%
General and administrative expense ratio 9.7% 26.9% (17.2%)
-------- -------- --------
Combined ratio 103.1% 105.8% (2.7%)
-------- -------- --------
Reserve for losses and loss expenses $ 82,077 $ 3,918 $ 78,159
======== ======== ========
18
Premiums. In the period ended March 31, 2003, gross premiums written were $83.4
million and net premiums earned were $40.3 million compared to gross premiums
written of $44.9 million and net premiums earned of $7.0 million for the same
period in 2002. The increase in gross premiums written is primarily due to the
expansion of the Company's underwriting staff through the period after March 31,
2002 with Endurance U.S. contributing $23.0 million and Endurance Bermuda
generating the remaining increase. The ratio of net premiums earned to net
premiums written during the first three months of 2003 was 49.6% compared to
15.7% for the period to March 31, 2002. These levels of earnings compared to
premiums written are due to the effect of policies attaching contracts which
have comprised 71.8% of premiums written in this segment since the inception of
the Company. The majority of the policies attaching contracts have a 24-month
risk period and, as such, the premiums are earned over that risk period. The
higher ratio of net premiums earned to net premiums written for the period to
March 31, 2003 is a result of the earning of premiums that have been recorded
over the period since the inception of the Company.
Losses and Loss Expenses. Losses and loss expenses for the periods ended March
31, 2003 and March 31, 2002 were $26.7 million and $3.9 million, respectively.
The loss ratio was 66.2% for the three months ended March 31, 2003 and 55.7% for
the same period in 2002. The increase in loss ratio is due to a change in the
mix of premium earnings for this segment. There is a lower percentage of
workers' compensation reinsurance which is booked with a lower loss ratio than
other lines. In contrast, there is a higher percentage of quota share contract
business which is booked with higher loss ratios.
Acquisition Expenses. Acquisition expenses for the period ended March 31, 2003
were $10.9 million or 27.2% of net premiums earned. For the period ended March
31, 2002, acquisition expenses were $1.6 million or 23.2% of net premiums
earned. The higher expense ratio in the period to March 31, 2003 is due to an
increased weighting of business in this segment relating to quota share
reinsurance contracts which incur higher commissions.
General and Administrative Expenses. General and administrative expenses for the
periods ended March 31, 2003 and March 31, 2002 were $3.9 million and $1.9
million, respectively. This increase is due to the Company having been in its
early stages of development in the period ended March 31, 2002 and therefore
incurred lower levels of operating expenses at that time. However, general and
administrative expenses as a percentage of net premiums earned has decreased as
premiums have increased significantly.
Property individual risk
Our Property Individual Risk business segment is comprised of the insurance and
facultative reinsurance of commercial properties. The policies written in this
segment provide coverage for one insured for each policy. The types of risks
insured are generally commercial properties with sufficiently large values to
require multiple insurers and reinsurers to accommodate their insurance capacity
needs. The table on the following page summarizes the underwriting results,
associated ratios and the reserve for losses and loss expenses for the Property
Individual Risk business segment for the periods ended March 31, 2003 and 2002,
respectively.
19
March 31, March 31,
2003 2002 Change
--------- --------- --------
Revenues
Gross premiums written $14,597 $11,960 $ 2,637
------- ------- --------
Net premiums written 14,091 11,960 2,131
------- ------- --------
Net premiums earned 15,015 1,703 13,312
------- ------- --------
Expenses
Losses and loss expenses 2,239 888 1,351
Acquisition expenses 1,585 128 1,457
General and administrative expenses 1,158 585 573
------- ------- --------
4,982 1,601 3,381
------- ------- --------
Underwriting income $10,033 $ 102 $ 9,931
======= ======= ========
Loss ratio 14.9% 52.1% (37.2%)
Acquisition expense ratio 10.6% 7.5% 3.1%
General and administrative expense ratio 7.7% 34.4% (26.7%)
------- ------- --------
Combined ratio 33.2% 94.0% (60.8%)
------- ------- --------
Reserve for losses and loss expenses $15,508 $ 888 $ 14,620
======= ======= ========
Premiums. In the period ended March 31, 2003, gross premiums written were $14.6
million and net premiums earned were $15.0 million compared to gross premiums
written of $12.0 million and net premiums earned of $1.7 million for the same
period in 2002. Policies written in this segment are written on a losses
occurring basis and typically earn over the 12-month period of the contract. The
increase in premiums written in the period ended March 31, 2003 is due primarily
to new business generated by Endurance U.K. and Endurance U.S. both of which
wrote no business in the period ended March 31, 2002. The increase in premiums
earned is a result of the earning of premiums that have been written over the
twelve months leading up to March 31, 2003 compared to the short period of
premium generation to March 31, 2002. During the first three months of 2003, the
Company ceded $0.5 million of reinsurance premiums in order to increase the
limits it could offer its clients.
Losses and Loss Expenses. Losses and loss expenses for the periods ended March
31, 2003 and March 31, 2002 were $2.2 million and $0.9 million, respectively.
The loss ratio was 14.9% for the three months ended March 31, 2003 and 52.1% for
the same period in 2002. The reduction in loss ratio is the result of a lower
incidence of estimated loss activity during the period ended March 31, 2003
compared to the period ended March 31, 2002.
Acquisition Expenses. Acquisition expenses for the period ended March 31, 2003
were $1.6 million or 10.6% of net premiums earned. For the period ended March
31, 2002, acquisition expenses were $0.1 million or 7.5% of net premiums earned.
General and Administrative Expenses. General and administrative expenses for the
periods ended March 31, 2003 and March 31, 2002 were $1.2 million and $0.6
million, respectively. This increase is due to the Company having been in its
early stages of development in the period ended March 31, 2002 and therefore
incurred lower levels of operating expenses at that time. However, general and
administrative expenses as a percentage of net premiums earned has decreased as
premiums have increased significantly.
20
Casualty individual risk
Our Casualty Individual Risk business segment is comprised of the insurance and
facultative reinsurance of third party liability exposures. This includes third
party general liability insurance, directors' and officers' liability insurance,
errors and omissions insurance and employment practices liability insurance, all
written for a wide range of industry groups, as well as medical professional
liability insurance which is written for large institutional healthcare
providers. The following table summarizes the underwriting results, associated
ratios and the reserve for losses and loss expenses for the Casualty Individual
Risk business segment for the periods ended March 31, 2003 and 2002,
respectively.
March 31, March 31,
2003 2002 Change
--------- --------- --------
Revenues
Gross premiums written $33,522 $ 2,614 $ 30,908
------- -------- --------
Net premiums written 33,522 2,614 30,908
------- -------- --------
Net premiums earned 31,915 671 31,244
------- -------- --------
Expenses
Losses and loss expenses 24,153 484 23,669
Acquisition expenses 3,865 22 3,843
General and administrative expenses 2,546 994 1,552
------- -------- --------
30,564 1,500 29,064
------- -------- --------
Underwriting income (loss) $ 1,351 $ (829) $ 2,180
======= ======== ========
Loss ratio 75.7% 72.1% 3.6%
Acquisition expense ratio 12.1% 3.3% 8.8%
General and administrative expense ratio 8.0% 148.1% (140.1%)
------- -------- --------
Combined ratio 95.8% 223.5% (127.7%)
------- -------- --------
Reserve for losses and loss expenses $58,111 $ 484 $ 57,627
======= ======== ========
Premiums. In the period ended March 31, 2003, gross premiums written were $33.5
million and net premiums earned were $31.9 million compared to gross premiums
written of $2.6 million and net premiums earned of $0.7 million for the same
period in 2002. All premiums written by this segment are earned ratably over the
terms of the insurance policies, typically 12-month periods. At March 31, 2002,
two underwriters were employed in this business segment and at March 31, 2003,
there were thirteen underwriters on the team. The increase in staff is a result
of the Company identifying opportunities to underwrite directors' and officers'
liability insurance, errors and omissions insurance, employment practices
liability insurance and medical professional liability insurance. As the number
of underwriters has increased, the amount of premiums written has increased.
Losses and Loss Expenses. Losses and loss expenses for the periods ended March
31, 2003 and March 31, 2002 were $24.2 million and $0.5 million, respectively.
The loss ratio was 75.7% for the three months ended March 31, 2003 and 72.1% for
the same period in 2002. The Company has received only a limited number of
notices of potential losses for this segment, none of which have yet reached a
level which would result in our paying a claim. Accordingly, the losses and loss
expenses for the first three months of 2003 and 2002 were established by the
Company's actuaries based on historical industry loss data and program specific
loss information.
21
Acquisition Expenses. Acquisition expenses for the period ended March 31, 2003
were $3.9 million or 12.1% of net premiums earned compared to negligible
acquisition expenses for the three months ended March 31, 2002. The lower
acquisition expenses in the prior period resulted from this business segment
having been in the early stages of underwriting activity and therefore, having
not yet established a typical expense ratio.
General and Administrative Expenses. General and administrative expenses for the
periods ended March 31, 2003 and March 31, 2002 were $2.5 million and $1.0
million, respectively. This increase is due to the Company having been in its
early stages of development in the period ended March 31, 2002 and therefore
incurred lower levels of operating expenses at that time. However, general and
administrative expenses as a percentage of net premiums earned has decreased as
premiums have increased significantly.
Other Specialty Lines
Our Other Specialty Lines business segment is comprised of the insurance and
reinsurance of unique opportunities, including Aerospace, Self Insured Risks and
a limited number of other reinsurance programs such as surety, marine, energy,
personal accident, terrorism and others. Aerospace includes aviation hull,
aircraft liability and aircraft products coverage, and the space business
includes satellite launch and in-orbit coverage. Our Self Insured Risks business
provides traditional property and casualty insurance products to entities that
are able to bear a significant portion of their own risk. The coverages the
Company provides include general liability, automobile liability, workers'
compensation and property insurance. The following table summarizes the
underwriting results, associated ratios and the reserve for losses and loss
expenses for the Other Specialty Lines business segment for the periods ended
March 31, 2003 and 2002, respectively.
March 31, March 31,
2003 2002 Change
--------- --------- --------
Revenues
Gross premiums written $ 77,956 $ 36,489 $ 41,467
-------- -------- --------
Net premiums written 77,956 36,489 41,467
-------- -------- --------
Net premiums earned 25,408 1,722 23,686
-------- -------- --------
Expenses
Losses and loss expenses 20,013 1,030 18,983
Acquisition expenses 3,857 253 3,604
General and administrative expenses 3,654 736 2,918
-------- -------- --------
27,524 2,019 25,505
-------- -------- --------
Underwriting (loss) $ (2,116) $ (297) $ (1,819)
======== ======== ========
Loss ratio 78.8% 59.8% 19.0%
Acquisition expense ratio 15.2% 14.7% 0.5%
General and administrative expense ratio 14.4% 42.7% (28.3%)
-------- -------- --------
Combined ratio 108.4% 117.2% (8.8%)
-------- -------- --------
Reserve for losses and loss expenses $ 37,924 $ 1,030 $ 36,894
======== ======== ========
Premiums. In the period ended March 31, 2003, gross premiums written were $78.0
million and net premiums earned were $25.4 million compared to gross premiums
written of $36.5 million and net premiums earned of $1.7 million for the same
period in 2002. For the period since the inception of the Company to March 31,
2003, 54.1% of premiums were written on a policies attaching basis. The majority
of the policies attaching contracts are earned ratably over a 24-month risk
period.
22
The increase in premiums written was due primarily to the Company's expansion of
its Aerospace underwriting resulting in an increase in Aerospace premiums of
$31.4 million in the period ended March 31, 2003. In addition, $19.3 million of
premiums were written in the Self Insured Risks line of business, which had not
been established at March 31, 2002. These increases in premiums written were
offset by reductions in other non-recurring business. The growth in premiums
earned is a result of significant growth in the Aerospace and Self Insured Risks
lines of business.
Losses and Loss Expenses. Losses and loss expenses for the periods ended March
31, 2003 and March 31, 2002 were $20.0 million and $1.0 million, respectively.
The loss ratio was 78.8% for the three months ended March 31, 2003 and 59.8% for
the same period in 2002. The increased loss ratio in 2003 is the result of the
impact of losses incurred in a small number of programs in the Self Insured
Risks line of business.
Acquisition Expenses. Acquisition expenses for the period ended March 31, 2003
were $3.9 million or 15.2% of net premiums earned. For the period ended March
31, 2002, acquisition expenses were $0.3 million or 14.7% of net premiums
earned.
General and Administrative Expenses. General and administrative expenses for the
periods ended March 31, 2003 and March 31, 2002 were $3.7 million and $0.7
million, respectively. This increase is due to the Company having been in its
early stages of development in the period ended March 31, 2002 and therefore
incurred lower levels of operating expenses at that time. However, general and
administrative expenses as a percentage of net premiums earned has decreased as
premiums have increased significantly.
Significant transactions
On March 5, 2003, the Company consummated the initial public offering of its
ordinary shares, $1.00 par value per share. The managing underwriters were
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities Inc., Credit Suisse First Boston LLC and Deutsche Bank
Securities Inc. All of the ordinary shares were sold by the Company and there
were no selling shareholders in the offering. The estimated aggregate net
proceeds to the Company from the offering were approximately $201.6 million
after deducting an aggregate of $15.5 million in underwriting discounts and
commissions paid to the underwriters and an estimated $3.7 million in other
direct expenses incurred in connection with the offering. Upon consummation of
the offering, the Company applied $50.6 million of the net proceeds of the
offering to the repayment of principal under the Company's term loan facility.
The Company invested the remaining net proceeds of the offering in short-term,
investment-grade, interest bearing instruments.
Liquidity and capital resources
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, including Endurance Bermuda, Endurance U.K. and Endurance
U.S. Endurance Holdings relies primarily on dividends and other permitted
distributions from its insurance subsidiaries to pay its operating expenses,
interest on debt and dividends, if any, on its common shares. There are
restrictions on the payment of dividends by Endurance Bermuda, Endurance U.K.
and Endurance U.S. to Endurance Holdings, which are described in more detail
below.
The ability of Endurance Bermuda to pay dividends is dependent on its ability to
meet the requirements of applicable Bermuda law and regulations. Under Bermuda
law, Endurance Bermuda may not declare or pay a dividend if there are reasonable
grounds for believing that Endurance Bermuda is, or would after the payment be,
unable to pay its liabilities as they become due, or the realizable value of
Endurance Bermuda's assets would thereby be less than the aggregate of its
liabilities and its issued share capital and
23
share premium accounts. Further, Endurance Bermuda, as a regulated insurance
company in Bermuda, is subject to additional regulatory restrictions on the
payment of dividends or distributions. As of March 31, 2003, Endurance Bermuda
could pay a dividend or return additional paid-in capital totaling approximately
$200 million without prior regulatory approval based upon insurance and Bermuda
Companies Act regulations.
We have agreed with the New York Insurance Department not to take a dividend
from Endurance U.S. until December 2004 without prior regulatory approval.
Endurance U.K. is subject to significant regulatory restrictions limiting its
ability to pay dividends. Accordingly, we do not currently intend to seek a
dividend from Endurance U.K.
Our aggregate invested assets as of March 31, 2003 totaled $2.0 billion compared
to aggregate invested assets of $1.7 billion as of December 31, 2002. The
increase in invested assets since December 31, 2002 resulted from collections of
premiums on insurance policies and reinsurance contracts, investment income and
proceeds from the initial public offering, offset by acquisition expenses paid,
reinsurance premiums paid, general and administrative expenses paid. Total net
cash flow from operations from December 31, 2002 through March 31, 2003 was
approximately $161.7 million.
In accordance with the terms of our term loan facility, we prepaid $50.6 million
of the outstanding principal on our term loan facility on March 5, 2003 with a
portion of the proceeds from our initial public offering of our ordinary shares.
We have $20.0 million and $18.4 million in principal payments due and payable on
September 27, 2003 and September 30, 2003, respectively, for outstanding
borrowings under our term loan facility. Our remaining term loan borrowings are
subject to principal payments of $76.8 million in September, 2004 and $26.2
million in September, 2005. Our term loan borrowings currently bear interest at
the London Interbank Offered Rate ("LIBOR") plus 1.0%: 2.31% per annum on our
first term loan borrowing and 2.50% per annum on our second term loan borrowing.
The different rates are a result of entering into LIBOR contracts on each loan
borrowing at different times.
On an ongoing basis, we expect our internally generated funds, together with
borrowings available under our credit facilities and our capital base
established by our initial public offering and the private placement, to be
sufficient to operate our business. There can be no assurance that we will not
be required to incur other indebtedness to implement our business strategy or
pay claims.
Quantitative and qualitative information about market risk
There have been no material changes in market risk from the information provided
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quantitative and Qualitative Information about
Market Risk" included in our final prospectus filed with the Securities and
Exchange Commission on February 28, 2003 (Registration No. 333-102026).
Currency
Our functional currency is U.S. dollars for Endurance Bermuda and Endurance U.S.
and British Sterling for Endurance U.K. The reporting currency for all entities
is U.S. dollars. We maintain a portion of our investments and liabilities in
currencies other than the U.S. dollar. We have made a significant investment in
the capitalization of Endurance U.K. 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. We may,
from time to time, experience losses resulting from fluctuations in the values
of foreign currencies, which could have a material adverse effect on our results
of operations.
24
Effects of inflation
The effects of inflation could cause the severity of claims to rise in the
future. Our 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, we will be
required to increase the reserve for losses and loss expenses with a
corresponding reduction in our earnings in the period in which the deficiency is
identified.
Reserve for losses and loss expenses
As of March 31, 2003, the Company had accrued losses and loss expense reserves
of $297.8 million. This amount represents the Company's actuarial best estimate
of the ultimate liability for payment of losses and loss expenses. During the
three month period ended March 31, 2003, the Company paid losses and loss
expenses of $7.1 million.
As of March 31, 2002, the Company had been notified of only a small number of
claims and potential claims under its insurance policies and reinsurance
contracts. Of these notifications, management expected a limited number of the
claims to penetrate layers in which we provide coverage; however, case reserves
were established for these expected losses.
The Company participates in lines of business where claims may not be reported
for many years. Accordingly, management does not believe that reported claims
are currently a valid means for estimating ultimate obligations. See "--Critical
Accounting Policies -- Reserve for Losses and Loss Expenses." included in our
final prospectus filed with the Securities and Exchange Commission on February
28, 2003 (Registration No. 333-102026).
Cautionary statement regarding forward-looking statements
Some of the statements contained herein, and certain statements that the Company
may make in a press release or that Company officials may make orally may
include forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. Such statements include
forward-looking statements both with respect to us in general and the insurance
and reinsurance sectors specifically, both as to underwriting and investment
matters. Statements which include the words "expect," "intend," "plan,"
"believe," "project," "anticipate," "seek," "will," and similar statements of a
future or forward-looking nature identify forward-looking statements for
purposes of the federal securities laws or otherwise.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. We believe that these factors include, but are not limited to, the
following:
- the effects of competitors' pricing policies, and of changes in laws
and regulations on competition, including industry consolidation and
development of competing financial products;
- the impact of acts of terrorism and acts of war;
- the effects of terrorist related insurance legislation and laws;
- greater frequency or severity of claims and loss activity, including
as a result of natural or man-made catastrophic events, than our
underwriting, reserving or investment practices have anticipated;
25
- decreased level of demand for property and casualty insurance or
reinsurance or increased competition due to an increase in capacity
of property and casualty reinsurers;
- the inability to obtain or maintain financial strength or
claims-paying ratings by one or more of our subsidiaries;
- uncertainties in our reserving process;
- Endurance Holdings or Endurance Bermuda becomes subject to income
taxes in the United States or the United Kingdom;
- changes in regulations or tax laws applicable to us, our
subsidiaries, brokers or customers;
- acceptance of our products and services, including new products and
services;
- changes in the availability, cost or quality of reinsurance or
retrocessional coverage;
- loss of key personnel;
- political stability of Bermuda;
- changes in accounting policies or practices; and
- changes in general economic conditions, including inflation, foreign
currency exchange rates and other factors which could affect our
investment portfolio.
The foregoing review of important factors should not be construed as exhaustive.
We undertake no obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future developments or
otherwise.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer (the "CEO") and the
Chief Financial Officer (the "CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based on that evaluation, the Company's management, including the
CEO and CFO, concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in the Company's periodic SEC reports. In addition, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to the date of their
evaluation, including any corrective actions with respect to significant
deficiencies or material weaknesses. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
26
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings generally arising in the
normal course of its business. The Company does not believe that the eventual
outcome of any such proceeding will have a material effect on its financial
condition or business. The Company's subsidiaries are regularly engaged in the
investigation and the defense of claims arising out of the conduct of their
business. Pursuant to the Company's insurance and reinsurance arrangements,
disputes are generally required to be finally settled by arbitration.
Item 2. Changes in Securities and Use of Proceeds
(c) Use of Proceeds
On March 5, 2003, the Company consummated the initial public offering of its
ordinary shares, $1.00 par value per share. The managing underwriters were
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities Inc., Credit Suisse First Boston LLC and Deutsche Bank
Securities Inc. The ordinary shares sold in the offering were registered under
the Securities Act of 1933, as amended on a Registration Statement on Form S-1
(Registration No. 333-102026) that was declared effective by the Securities and
Exchange Commission on February 27, 2003. Of the ordinary shares registered
under the Registration Statement, 9,600,000 were sold at a price to the public
of $23.00 per share. All of the ordinary shares were sold by the Company and
there were no selling shareholders in the offering. The offering terminated
without the sale of 1,440,000 ordinary shares registered on the Registration
Statement. The aggregate gross proceeds from the ordinary shares sold by the
Company were $220.8 million. The estimated aggregate net proceeds to the Company
from the offering were approximately $201.6 million after deducting an aggregate
of $15.5 million in underwriting discounts and commissions paid to the
underwriters and an estimated $3.7 million in other direct expenses incurred in
connection with the offering. None of the proceeds from the offering were paid,
directly or indirectly, to any of the Company's officers or directors or any of
their associates, or to any persons owning ten percent or more of the Company's
outstanding ordinary shares or to any of the Company's affiliates. Upon
consummation of the offering, the Company applied $50.6 million of the net
proceeds of the offering to the repayment of principal under the Company's term
loan facility. The Company invested the remaining net proceeds of the offering
in short-term, investment-grade, interest bearing instruments.
For a description of working capital restrictions and other limitations upon the
payment of dividends, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
A special general meeting of shareholders was held in Hamilton, Bermuda, on
January 30, 2003. Represented in person or by proxy at the special general
meeting were 53,129,681ordinary shares and 938,815 class A shares, which was 98%
of outstanding shares eligible to vote.
27
At the special general meeting, the shareholders present in person or by proxy
unanimously approved the amendment and restatement of the 2002 Stock Option Plan
to incorporate changes reflecting the Company's imminent initial public
offering.
An annual general meeting of shareholders was held in Hamilton, Bermuda, on
February 25, 2003. Represented in person or by proxy at the annual general
meeting were 54,061,185 ordinary shares and 938,815 class A shares, which was
100% of outstanding shares eligible to vote.
At the annual general meeting, the shareholders present in person or by proxy
unanimously approved each of the following items: (a) the minutes of the
meetings of shareholders held on June 28, 2002, July 19, 2002 and January 30,
2002; (b) the auditors' report and consolidated financial statements of the
Company for the year ended December 31, 2002; (c) the waiver of a
President's/Directors' report; (d) the appointment of Ernst & Young as auditors
of the Company until the next succeeding annual general meeting; (e) the
election of Bryon G. Ehrhart and Kenneth J. LeStrange as directors of the
Company having a three year term expiring in 2006; (f) the amendment and
restatement of the bye-laws of the Company in order to redesignate the classes
of directors from four to three; (g) the amendment and restatement of the 2002
Stock Option Plan to enable the Company to issue equity incentives other than
options and (h) the approval of the 2003 Non-Employee Director Equity Incentive
Plan providing for annual option grants to the Company's non-employee directors.
The terms of directors James R. Kroner, Charles G. Froland and Richard J. Sterne
continue until the 2004 annual general meeting. The terms of directors William
H. Bolinder, David L. Cole, Richard C. Perry and Robert A. Spass continue until
the 2005 annual general meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following sets forth those exhibits filed pursuant to Item 601
of Regulation S-K:
Exhibit
Number Description
------ -----------
99.1 - Certification Pursuant to 18 U.S.C Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) The Company did not file any reports on Form 8-K during the quarter
for which this report is filed.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: May 9, 2003 By: /s/ Kenneth J. LeStrange
-----------------------------------------------
Kenneth J. LeStrange
Chairman of the Board, Chief Executive Officer,
President
Date: May 9, 2003 By: /s/ James R. Kroner
-----------------------------------------------
James R. Kroner
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
29
CERTIFICATIONS
I, Kenneth J. LeStrange, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Endurance Specialty
Holdings Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ Kenneth J. LeStrange
--------------------------
Chief Executive Officer
30
I, James R. Kroner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Endurance Specialty
Holdings Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ James R. Kroner
----------------------------
Chief Financial Officer
31