ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States dollars)
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED
SEPTEMBER 30,
|
|
2016
|
|
2015
|
Cash flows provided by (used in) operating activities
|
|
Net income
|
$
|
351,672
|
|
|
$
|
247,215
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
Amortization of net premium on investments
|
28,097
|
|
|
34,116
|
|
Amortization of other intangibles and depreciation
|
78,551
|
|
|
29,291
|
|
Net realized and unrealized gains
|
(33,539
|
)
|
|
(32,898
|
)
|
Net impairment losses recognized in earnings
|
10,647
|
|
|
1,111
|
|
Deferred taxes
|
(14,876
|
)
|
|
3,437
|
|
Stock-based compensation expense
|
28,036
|
|
|
46,283
|
|
Equity in losses of other investments
|
201
|
|
|
1,758
|
|
Change in:
|
|
|
|
Premiums receivable, net
|
(888,323
|
)
|
|
(845,891
|
)
|
Insurance and reinsurance balances receivable
|
(25,446
|
)
|
|
21,085
|
|
Deferred acquisition costs
|
(56,393
|
)
|
|
(75,607
|
)
|
Prepaid reinsurance premiums
|
(327,339
|
)
|
|
(227,337
|
)
|
Reinsurance recoverable on unpaid losses
|
(217,032
|
)
|
|
(119,269
|
)
|
Reinsurance recoverable on paid losses
|
(23,298
|
)
|
|
63,141
|
|
Accrued investment income
|
140
|
|
|
4,996
|
|
Other assets
|
(2,575
|
)
|
|
(319
|
)
|
Reserve for losses and loss expenses
|
297,453
|
|
|
(77,954
|
)
|
Reserve for unearned premiums
|
559,418
|
|
|
477,440
|
|
Reinsurance balances payable
|
357,405
|
|
|
338,279
|
|
Other liabilities
|
(63,412
|
)
|
|
37,094
|
|
Net cash flows provided by (used in) operating activities
|
59,387
|
|
|
(74,029
|
)
|
Cash flows provided by investing activities
|
|
|
|
Proceeds from sales and maturities of trading investments
|
2,059,959
|
|
|
103,450
|
|
Proceeds from sales and maturities of available for sale investments
|
3,150,250
|
|
|
4,201,152
|
|
Proceeds from the redemption of other investments
|
246,349
|
|
|
124,801
|
|
Purchases of trading investments
|
(2,643,730
|
)
|
|
(286,416
|
)
|
Purchases of available for sale investments
|
(2,385,309
|
)
|
|
(4,047,359
|
)
|
Purchases of other investments
|
(50,585
|
)
|
|
(116,988
|
)
|
Net settlements of other assets and other liabilities
|
(33,620
|
)
|
|
17,301
|
|
Purchases of fixed assets
|
(10,999
|
)
|
|
(18,053
|
)
|
Net cash (paid) received upon subsidiary acquisition
|
(7
|
)
|
|
675,310
|
|
Net cash flows provided by investing activities
|
332,308
|
|
|
653,198
|
|
Cash flows used in financing activities
|
|
|
|
Issuance of common shares
|
9,550
|
|
|
24,378
|
|
Redemption of Series B, non-cumulative preferred shares
|
(230,000
|
)
|
|
—
|
|
Net distributions to non-controlling interests
|
(27,517
|
)
|
|
—
|
|
Settlement of equity awards
|
(10,842
|
)
|
|
(10,494
|
)
|
Offering and registration costs paid
|
(319
|
)
|
|
—
|
|
Proceeds from issuance of repurchase agreements
|
120,997
|
|
|
—
|
|
Proceeds from issuance of debt
|
537
|
|
|
791
|
|
Repayments of debt
|
(13,645
|
)
|
|
(794
|
)
|
Dividends on preferred shares
|
(20,147
|
)
|
|
(24,564
|
)
|
Dividends on common shares
|
(76,934
|
)
|
|
(54,959
|
)
|
Net cash flows used in financing activities
|
(248,320
|
)
|
|
(65,642
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
1,985
|
|
|
(16,002
|
)
|
Net increase in cash and cash equivalents
|
145,360
|
|
|
497,525
|
|
Cash and cash equivalents, beginning of period
|
1,177,750
|
|
|
745,472
|
|
Cash and cash equivalents, end of period
|
$
|
1,323,110
|
|
|
$
|
1,242,997
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
Endurance Specialty Holdings Ltd. ("Endurance Holdings" and together with its subsidiaries, the "Company") 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 wholly-owned operating subsidiaries.
In addition, as part of its collateralized reinsurance and third party asset management operations, Endurance Holdings and Endurance Specialty Insurance Ltd. ("Endurance Bermuda") together own
33.3%
of Blue Capital Reinsurance Holdings Ltd. ("BCRH"), and Endurance Bermuda owns
25.2%
of Blue Capital Global Reinsurance Fund Limited ("BCGR").
BCRH is a Bermuda-based exempted limited liability holding company managed by Blue Capital Management Ltd. ("BCML"), a wholly-owned subsidiary of the Company. BCRH provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through its wholly-owned Bermuda-based subsidiaries, Blue Capital Re. Ltd. ("Blue Capital Re") and Blue Capital Re ILS Ltd. ("Blue Capital Re ILS"). BCRH's shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange.
BCGR is a closed-ended mutual fund incorporated in Bermuda and managed by BCML. BCGR serves as the feeder fund for the Blue Capital Global Reinsurance SA-I cell (the "BCGR Cell"). BCGR's shares are listed on the Specialist Fund Market of the London Stock Exchange and on the Bermuda Stock Exchange.
|
|
2.
|
Summary of significant accounting policies
|
The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP 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 and nine
months ended
September 30, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
. The consolidated financial statements include the accounts of Endurance Holdings, its wholly-owned subsidiaries, and BCRH and the BCGR Cell. All intercompany transactions and balances have been eliminated in consolidation. Management is required to make estimates and assumptions that affect the amounts reported in the 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, to record the fair value of investments 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, 2015
has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These 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, 2015
contained in Endurance Holdings' Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
(the "
2015
Form 10-K").
Certain comparative information has been reclassified to conform to current year presentation.
There were no material changes in the Company's significant accounting and reporting policies subsequent to the filing of the
2015
Form 10-K with the exception of the additions to the Company's accounting policies described below relating to the Company's investment repurchase agreements in the current quarter.
(a) Investments
The Company has entered into investment repurchase agreements, whereby the Company sells securities and repurchases them at a future date for a predetermined price. These investment repurchase agreements are accounted for as secured borrowings and are recorded at the contractual repurchase price plus accrued interest. The securities to be repurchased are the same, or substantially the same, as those sold. The fair value of the underlying securities is included in securities pledged under repurchase agreements in the Consolidated Balance Sheets. The use of the cash received by the Company from the counterparty pursuant to the repurchase agreement is not restricted.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
2.
|
Summary of significant accounting policies, cont'd.
|
(a) Investments, cont'd.
The obligation to return the cash is included in payable under repurchase agreements in the Consolidated Balance Sheets. In these repurchase transactions, the securities sold by the Company (pledged collateral) may be sold or repledged by the counterparties with whom the repurchase agreement is executed.
(b) Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016, however, in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as a result, ASU 2014-09 will be effective for public business entities in annual and interim period beginning after December 15, 2017. Early adoption is permitted. This guidance is not expected to have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"). Under ASU 2015-02, all legal entities are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 set forth amendments: (1) modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminating the presumption that a general partner should consolidate a limited partnership; (3) affecting the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) providing a scope exception from consolidation guidance for certain reporting entities. ASU 2015-02 became effective for public business entities for annual and interim periods beginning after December 15, 2015. Early adoption was permitted. The Company adopted ASU 2015-02 effective January 1, 2016 and it did not have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. ASU 2015-16 became effective for public business entities in interim and annual periods beginning after December 15, 2015. Early adoption was permitted. The Company adopted ASU 2015-16 effective January 1, 2016 and it did not have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall, Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 requires entities to measure certain equity investments at fair value and recognize any changes in fair value in net income unless the investments qualify for a practicability exception. For financial liabilities measured using the fair value option, entities will need to present any change in fair value caused by a change in instrument-specific credit risk separately in other comprehensive income. ASU 2016-01 also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for public business entities for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted, except for certain provisions. ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively. The Company is currently evaluating the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
2.
|
Summary of significant accounting policies, cont'd.
|
(b) Recent accounting pronouncements, cont'd.
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). The objective of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for public business entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02 must be applied using a modified retrospective approach. The Company is currently evaluating the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The guidance also changes employers' accounting for an employee's use of shares to satisfy the employer's statutory income tax withholding obligation, and accounting for forfeitures. ASU 2016-09 is effective for public business entities for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. This guidance is not expected to have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 will change how companies measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. ASU 2016-13 is effective for public business entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements.
Net Investment Income
The components of net investment income for the
three and nine
months ended
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Fixed income investments
|
$
|
41,078
|
|
|
$
|
36,204
|
|
|
$
|
118,382
|
|
|
$
|
96,145
|
|
Equity investments
|
1,906
|
|
|
1,748
|
|
|
8,754
|
|
|
5,200
|
|
Other investments
|
22,804
|
|
|
(17,716
|
)
|
|
(201
|
)
|
|
(1,758
|
)
|
Cash and cash equivalents
|
392
|
|
|
515
|
|
|
2,043
|
|
|
2,108
|
|
|
$
|
66,180
|
|
|
$
|
20,751
|
|
|
$
|
128,978
|
|
|
$
|
101,695
|
|
Investment expenses
|
(3,944
|
)
|
|
(4,218
|
)
|
|
(11,584
|
)
|
|
(11,049
|
)
|
Net investment income
|
$
|
62,236
|
|
|
$
|
16,533
|
|
|
$
|
117,394
|
|
|
$
|
90,646
|
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
Contractual maturities of the Company's fixed maturity and short-term investments are shown below as of
September 30, 2016
and
December 31, 2015
. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
Due within one year
|
$
|
508,899
|
|
|
$
|
509,417
|
|
|
$
|
622,070
|
|
|
$
|
622,248
|
|
Due after one year through five years
|
2,005,903
|
|
|
2,031,970
|
|
|
2,005,456
|
|
|
1,995,502
|
|
Due after five years through ten years
|
736,318
|
|
|
757,530
|
|
|
683,147
|
|
|
676,932
|
|
Due after ten years
|
45,303
|
|
|
48,537
|
|
|
33,168
|
|
|
34,651
|
|
Residential mortgage-backed securities
|
1,299,811
|
|
|
1,329,069
|
|
|
1,301,083
|
|
|
1,311,373
|
|
Commercial mortgage-backed securities
|
702,760
|
|
|
714,142
|
|
|
817,570
|
|
|
812,886
|
|
Collateralized loan and debt obligations
|
392,578
|
|
|
393,922
|
|
|
419,795
|
|
|
405,128
|
|
Asset-backed securities
|
464,826
|
|
|
466,873
|
|
|
510,540
|
|
|
507,255
|
|
Total
|
$
|
6,156,398
|
|
|
$
|
6,251,460
|
|
|
$
|
6,392,829
|
|
|
$
|
6,365,975
|
|
The following table summarizes the fair value of the fixed maturity investments, short-term investments and equity securities classified as trading at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Fixed maturity investments
|
|
|
|
|
U.S. government and agencies securities
|
|
$
|
396,468
|
|
|
$
|
319,674
|
|
U.S. state and municipal securities
|
|
5,203
|
|
|
5,559
|
|
Foreign government securities
|
|
128,786
|
|
|
49,861
|
|
Government guaranteed corporate securities
|
|
31,526
|
|
|
38,201
|
|
Corporate securities
|
|
951,523
|
|
|
532,192
|
|
Residential mortgage-backed securities
|
|
391,704
|
|
|
258,574
|
|
Commercial mortgage-backed securities
|
|
181,569
|
|
|
127,124
|
|
Collateralized loan and debt obligations
(1)
|
|
93,307
|
|
|
103,219
|
|
Asset-backed securities
|
|
213,266
|
|
|
152,756
|
|
Total fixed maturity investments
|
|
2,393,352
|
|
|
1,587,160
|
|
Short-term investments
|
|
226,454
|
|
|
394,111
|
|
Total fixed income investments
|
|
$
|
2,619,806
|
|
|
$
|
1,981,271
|
|
Equity securities
|
|
|
|
|
Equity investments
|
|
$
|
117
|
|
|
$
|
48
|
|
Preferred equity investments
|
|
5,966
|
|
|
553
|
|
Short-term fixed income fund
|
|
17,037
|
|
|
14,628
|
|
Total equity securities
|
|
$
|
23,120
|
|
|
$
|
15,229
|
|
|
|
(1)
|
Balances include amounts related to collateralized debt obligations held with total fair values of
$3.6 million
and
$38.5 million
at
September 30, 2016
and
December 31, 2015
, respectively.
|
In addition to the Company's fixed maturity, short-term and equity securities, the Company invests in alternative funds and specialty funds. The Company's alternative funds and specialty funds are recorded on the Company's Condensed Consolidated Balance Sheets as "other investments." At
September 30, 2016
and
December 31, 2015
, the Company had invested, net of capital returned, a total of
$569.2 million
and
$737.1 million
, respectively, in other investments. At
September 30, 2016
and
December 31, 2015
, the carrying value of other investments was
$679.0 million
and
$872.6 million
, respectively.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
The following table summarizes the composition, unfunded commitments and redemption restrictions of other investments as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Market Value
|
|
Unfunded
Commitments
|
|
Ineligible for
Redemption over
next 12 months
|
Alternative funds
|
|
|
|
|
|
|
Hedge funds
|
|
$
|
576,291
|
|
|
$
|
—
|
|
|
$
|
97,334
|
|
Private investment funds
|
|
76,665
|
|
|
95,846
|
|
|
76,665
|
|
Other investment funds
|
|
26,051
|
|
|
—
|
|
|
25,575
|
|
Total alternative funds
|
|
679,007
|
|
|
95,846
|
|
|
199,574
|
|
Total other investments
|
|
$
|
679,007
|
|
|
$
|
95,846
|
|
|
$
|
199,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Market Value
|
|
Unfunded
Commitments
|
|
Ineligible for
Redemption in 2016
|
Alternative funds
|
|
|
|
|
|
|
Hedge funds
|
|
$
|
704,966
|
|
|
$
|
—
|
|
|
$
|
57,876
|
|
Private investment funds
|
|
80,690
|
|
|
102,070
|
|
|
80,690
|
|
Other investment funds
|
|
23,465
|
|
|
—
|
|
|
24,958
|
|
Total alternative funds
|
|
809,121
|
|
|
102,070
|
|
|
163,524
|
|
Specialty funds
|
|
|
|
|
|
|
High yield loan funds
|
|
63,496
|
|
|
30,000
|
|
|
—
|
|
Total specialty funds
|
|
63,496
|
|
|
30,000
|
|
|
—
|
|
Total other investments
|
|
$
|
872,617
|
|
|
$
|
132,070
|
|
|
$
|
163,524
|
|
Hedge funds – The redemption frequency of the hedge funds in which the Company invests range from monthly to biennially with notice periods from
30
to
180
days. Over
one
year, it is estimated that the Company can liquidate approximately
83.1%
of its hedge fund portfolio, with the remainder over the following
two
years.
Private investment funds – The Company generally has no right to redeem its interest in any private investment fund in advance of dissolution of the applicable partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the liquidation of or distribution of earnings from the underlying assets of the applicable limited partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over
5
to
10
years from inception of the limited partnership. A secondary market, with unpredictable liquidity, exists for limited partner interests in private equity funds.
Other investment funds – Other investment funds includes funds on deposit with Lloyd's of London ("Lloyd's"), which are restricted, and the Company's investment in BCGR, which represents the net asset or liability of the Company's investment in BCGR that has not been deployed into the BCGR cell.
High yield loan funds – There are generally no restrictions on the Company's right to redeem its interest in high yield loan funds with the exception of certain redemption frequency and notice requirements. The redemption frequency of these funds is monthly with notice periods from
30
to
60
days.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
Net Realized and Unrealized Gains
Realized gains and losses are recognized in earnings using the first in, first out method. The analysis of gross realized gains and losses, net unrealized gains (losses) on trading securities, and the change in the fair value of investment-related derivative financial instruments for the
three and nine
months ended
September 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Gross realized gains on investment sales
|
$
|
11,072
|
|
|
$
|
20,107
|
|
|
$
|
35,776
|
|
|
$
|
57,420
|
|
Gross realized losses on investment sales
|
(3,365
|
)
|
|
(8,236
|
)
|
|
(50,537
|
)
|
|
(18,190
|
)
|
Net unrealized gains (losses) on trading securities
|
6,153
|
|
|
(5,037
|
)
|
|
48,229
|
|
|
(5,037
|
)
|
Change in fair value of investment-related derivative financial instruments
(1)
|
(455
|
)
|
|
(1,805
|
)
|
|
71
|
|
|
(1,295
|
)
|
Net realized and unrealized gains
|
$
|
13,405
|
|
|
$
|
5,029
|
|
|
$
|
33,539
|
|
|
$
|
32,898
|
|
|
|
(1)
|
For additional information on the Company's derivative financial instruments, see Note 7, Derivatives.
|
Unrealized Gains and Losses
The Company classifies some of its investments in fixed maturity investments, short-term investments and equity securities as available for sale. The amortized cost, fair value and related gross unrealized gains and losses on the Company's securities classified as available for sale at
September 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Fixed maturity investments
|
|
|
|
|
|
|
|
|
U.S. government and agencies securities
|
|
$
|
338,564
|
|
|
$
|
8,551
|
|
|
$
|
(79
|
)
|
|
$
|
347,036
|
|
U.S. state and municipal securities
|
|
10,804
|
|
|
125
|
|
|
(157
|
)
|
|
10,772
|
|
Foreign government securities
|
|
82,096
|
|
|
2,196
|
|
|
(2
|
)
|
|
84,290
|
|
Government guaranteed corporate securities
|
|
9,613
|
|
|
298
|
|
|
—
|
|
|
9,911
|
|
Corporate securities
|
|
1,096,722
|
|
|
24,174
|
|
|
(345
|
)
|
|
1,120,551
|
|
Residential mortgage-backed securities
|
|
912,540
|
|
|
25,283
|
|
|
(458
|
)
|
|
937,365
|
|
Commercial mortgage-backed securities
|
|
523,921
|
|
|
11,920
|
|
|
(3,268
|
)
|
|
532,573
|
|
Collateralized loan and debt obligations
(1)
|
|
298,990
|
|
|
2,239
|
|
|
(614
|
)
|
|
300,615
|
|
Asset-backed securities
|
|
252,432
|
|
|
1,860
|
|
|
(685
|
)
|
|
253,607
|
|
Total fixed maturity investments
|
|
3,525,682
|
|
|
76,646
|
|
|
(5,608
|
)
|
|
3,596,720
|
|
Short-term investments
|
|
34,934
|
|
|
—
|
|
|
—
|
|
|
34,934
|
|
Total fixed income investments
|
|
$
|
3,560,616
|
|
|
$
|
76,646
|
|
|
$
|
(5,608
|
)
|
|
$
|
3,631,654
|
|
Equity securities
|
|
|
|
|
|
|
|
|
Equity investments
|
|
$
|
330,971
|
|
|
$
|
22,347
|
|
|
$
|
(2,068
|
)
|
|
$
|
351,250
|
|
Emerging market debt funds
|
|
83,668
|
|
|
4,057
|
|
|
—
|
|
|
87,725
|
|
Convertible funds
|
|
46,331
|
|
|
2,313
|
|
|
—
|
|
|
48,644
|
|
Preferred equity investments
|
|
7,078
|
|
|
1,684
|
|
|
(110
|
)
|
|
8,652
|
|
Short-term fixed income fund
|
|
128
|
|
|
3
|
|
|
—
|
|
|
131
|
|
Total equity securities
|
|
$
|
468,176
|
|
|
$
|
30,404
|
|
|
$
|
(2,178
|
)
|
|
$
|
496,402
|
|
|
|
(1)
|
Balances include amounts related to collateralized debt obligations held with total fair values of
$3.2 million
.
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Fixed maturity investments
|
|
|
|
|
|
|
|
|
U.S. government and agencies securities
|
|
$
|
499,386
|
|
|
$
|
2,561
|
|
|
$
|
(3,153
|
)
|
|
$
|
498,794
|
|
U.S. state and municipal securities
|
|
16,908
|
|
|
120
|
|
|
(181
|
)
|
|
16,847
|
|
Foreign government securities
|
|
110,893
|
|
|
803
|
|
|
(581
|
)
|
|
111,115
|
|
Government guaranteed corporate securities
|
|
19,248
|
|
|
311
|
|
|
(7
|
)
|
|
19,552
|
|
Corporate securities
|
|
1,323,276
|
|
|
5,698
|
|
|
(11,232
|
)
|
|
1,317,742
|
|
Residential mortgage-backed securities
|
|
1,041,540
|
|
|
16,400
|
|
|
(5,141
|
)
|
|
1,052,799
|
|
Commercial mortgage-backed securities
|
|
689,078
|
|
|
4,737
|
|
|
(8,053
|
)
|
|
685,762
|
|
Collateralized loan and debt obligations
(1)
|
|
304,915
|
|
|
796
|
|
|
(3,802
|
)
|
|
301,909
|
|
Asset-backed securities
|
|
356,753
|
|
|
585
|
|
|
(2,839
|
)
|
|
354,499
|
|
Total fixed maturity investments
|
|
4,361,997
|
|
|
32,011
|
|
|
(34,989
|
)
|
|
4,359,019
|
|
Short-term investments
|
|
25,657
|
|
|
28
|
|
|
—
|
|
|
25,685
|
|
Total fixed income investments
|
|
$
|
4,387,654
|
|
|
$
|
32,039
|
|
|
$
|
(34,989
|
)
|
|
$
|
4,384,704
|
|
Equity securities
|
|
|
|
|
|
|
|
|
Equity investments
|
|
$
|
418,822
|
|
|
$
|
6,834
|
|
|
$
|
(31,875
|
)
|
|
$
|
393,781
|
|
Emerging market debt funds
|
|
61,874
|
|
|
—
|
|
|
(5,453
|
)
|
|
56,421
|
|
Convertible funds
|
|
46,331
|
|
|
—
|
|
|
(146
|
)
|
|
46,185
|
|
Preferred equity investments
|
|
15,275
|
|
|
1,946
|
|
|
(151
|
)
|
|
17,070
|
|
Short-term fixed income funds
|
|
127
|
|
|
1
|
|
|
—
|
|
|
128
|
|
Total equity securities
|
|
$
|
542,429
|
|
|
$
|
8,781
|
|
|
$
|
(37,625
|
)
|
|
$
|
513,585
|
|
|
|
(1)
|
Balances include amounts related to collateralized debt obligations held with total fair values of
$11.4 million
.
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
The following tables summarize, for all available for sale securities in an unrealized loss position at
September 30, 2016
and
December 31, 2015
, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or greater
|
|
Total
|
September 30, 2016
|
|
Unrealized
Losses
(1)
|
|
Fair
Value
|
|
Unrealized
Losses
(1)
|
|
Fair
Value
|
|
Unrealized
Losses
(1)
|
|
Fair
Value
|
Fixed maturity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies securities
|
|
$
|
(79
|
)
|
|
$
|
24,932
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(79
|
)
|
|
$
|
24,932
|
|
U.S. state and municipal securities
|
|
(74
|
)
|
|
5,697
|
|
|
(83
|
)
|
|
2,250
|
|
|
(157
|
)
|
|
7,947
|
|
Foreign government securities
|
|
(1
|
)
|
|
1,349
|
|
|
(1
|
)
|
|
549
|
|
|
(2
|
)
|
|
1,898
|
|
Corporate securities
|
|
(161
|
)
|
|
65,619
|
|
|
(184
|
)
|
|
19,814
|
|
|
(345
|
)
|
|
85,433
|
|
Residential mortgage-backed securities
|
|
(188
|
)
|
|
29,949
|
|
|
(270
|
)
|
|
36,070
|
|
|
(458
|
)
|
|
66,019
|
|
Commercial mortgage-backed securities
|
|
(1,356
|
)
|
|
118,481
|
|
|
(1,912
|
)
|
|
63,554
|
|
|
(3,268
|
)
|
|
182,035
|
|
Collateralized loan and debt obligations
|
|
(240
|
)
|
|
18,373
|
|
|
(374
|
)
|
|
52,084
|
|
|
(614
|
)
|
|
70,457
|
|
Asset-backed securities
|
|
(263
|
)
|
|
49,423
|
|
|
(422
|
)
|
|
31,248
|
|
|
(685
|
)
|
|
80,671
|
|
Total fixed income investments
|
|
$
|
(2,362
|
)
|
|
$
|
313,823
|
|
|
$
|
(3,246
|
)
|
|
$
|
205,569
|
|
|
$
|
(5,608
|
)
|
|
$
|
519,392
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
$
|
(1,284
|
)
|
|
$
|
15,453
|
|
|
$
|
(784
|
)
|
|
$
|
14,222
|
|
|
$
|
(2,068
|
)
|
|
$
|
29,675
|
|
Preferred equity investments
|
|
(95
|
)
|
|
1,614
|
|
|
(15
|
)
|
|
235
|
|
|
(110
|
)
|
|
1,849
|
|
Total equity securities
|
|
$
|
(1,379
|
)
|
|
$
|
17,067
|
|
|
$
|
(799
|
)
|
|
$
|
14,457
|
|
|
$
|
(2,178
|
)
|
|
$
|
31,524
|
|
|
|
(1)
|
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at
September 30, 2016
.
|
As of
September 30, 2016
,
478
available for sale securities were in an unrealized loss position aggregating
$7.8 million
. Of those,
210
securities with aggregated unrealized losses of
$4.0 million
had been in a continuous unrealized loss position for twelve months or greater.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or greater
|
|
Total
|
December 31, 2015
|
|
Unrealized
Losses
(1)
|
|
Fair
Value
|
|
Unrealized
Losses
(1)
|
|
Fair
Value
|
|
Unrealized
Losses
(1)
|
|
Fair
Value
|
Fixed maturity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies securities
|
|
$
|
(2,175
|
)
|
|
$
|
347,024
|
|
|
$
|
(978
|
)
|
|
$
|
16,669
|
|
|
$
|
(3,153
|
)
|
|
$
|
363,693
|
|
U.S. state and municipal securities
|
|
(96
|
)
|
|
9,662
|
|
|
(85
|
)
|
|
695
|
|
|
(181
|
)
|
|
10,357
|
|
Foreign government securities
|
|
(404
|
)
|
|
31,881
|
|
|
(177
|
)
|
|
3,966
|
|
|
(581
|
)
|
|
35,847
|
|
Government guaranteed corporate securities
|
|
(7
|
)
|
|
1,692
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
1,692
|
|
Corporate securities
|
|
(9,222
|
)
|
|
830,349
|
|
|
(2,010
|
)
|
|
51,024
|
|
|
(11,232
|
)
|
|
881,373
|
|
Residential mortgage-backed securities
|
|
(3,378
|
)
|
|
365,082
|
|
|
(1,763
|
)
|
|
79,355
|
|
|
(5,141
|
)
|
|
444,437
|
|
Commercial mortgage-backed securities
|
|
(6,708
|
)
|
|
436,387
|
|
|
(1,345
|
)
|
|
42,246
|
|
|
(8,053
|
)
|
|
478,633
|
|
Collateralized loan and debt obligations
|
|
(3,107
|
)
|
|
224,520
|
|
|
(695
|
)
|
|
48,167
|
|
|
(3,802
|
)
|
|
272,687
|
|
Asset-backed securities
|
|
(2,624
|
)
|
|
311,814
|
|
|
(215
|
)
|
|
12,880
|
|
|
(2,839
|
)
|
|
324,694
|
|
Total fixed income investments
|
|
$
|
(27,721
|
)
|
|
$
|
2,558,411
|
|
|
$
|
(7,268
|
)
|
|
$
|
255,002
|
|
|
$
|
(34,989
|
)
|
|
$
|
2,813,413
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
$
|
(31,875
|
)
|
|
$
|
283,095
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(31,875
|
)
|
|
$
|
283,095
|
|
Emerging market debt funds
|
|
—
|
|
|
—
|
|
|
(5,453
|
)
|
|
56,421
|
|
|
(5,453
|
)
|
|
56,421
|
|
Convertible funds
|
|
(146
|
)
|
|
46,185
|
|
|
—
|
|
|
—
|
|
|
(146
|
)
|
|
46,185
|
|
Preferred equity investments
|
|
(151
|
)
|
|
7,361
|
|
|
—
|
|
|
—
|
|
|
(151
|
)
|
|
7,361
|
|
Total equity securities
|
|
$
|
(32,172
|
)
|
|
$
|
336,641
|
|
|
$
|
(5,453
|
)
|
|
$
|
56,421
|
|
|
$
|
(37,625
|
)
|
|
$
|
393,062
|
|
|
|
(1)
|
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive loss at
December 31, 2015
.
|
As of
December 31, 2015
,
1,310
available for sale securities were in an unrealized loss position aggregating
$72.6 million
. Of those,
158
securities with aggregated unrealized losses of
$12.7 million
had been in a continuous unrealized loss position for twelve months or greater.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
The decrease in gross unrealized losses on the Company's available for sale fixed income investments at
September 30, 2016
compared to
December 31, 2015
was primarily due to a decrease in interest rates during the
nine
months ended
September 30, 2016
. At
September 30, 2016
, the Company did not have the intent to sell any of the remaining fixed income investments in an unrealized loss position and determined that it was unlikely that the Company would be required to sell those securities in an unrealized loss position. During the
nine
months ended
September 30, 2016
, the Company impaired certain equity securities that were in an unrealized loss position for more than twelve consecutive months. The Company recognized in earnings total other-than-temporary impairments of
$0.2 million
and
$10.6 million
for the
three and nine
months ended
September 30, 2016
.
Other Investments
The Company is involved in the normal course of business with VIEs as a passive investor in residential and commercial mortgage-backed securities and through its interests in various other investments that are structured as limited partnerships considered to be third party VIEs. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis. The Company determined that it was not the primary beneficiary for any of these investments as of
September 30, 2016
. The Company believes its exposure to loss with respect to these investments is generally limited to the investment carrying amounts reported in the Company's Condensed Consolidated Balance Sheets and any unfunded investment commitments.
Collateralized Reinsurance Entities
As of
September 30, 2016
, Endurance Holdings and Endurance Bermuda together owned
33.3%
of BCRH's common shares. BCRH is considered a VIE under U.S. GAAP due to service agreements for investment management, underwriting and insurance management and administrative services between BCRH and BCML, and the economic penalty to terminate the service agreements by BCRH. The Company has determined that it is BCRH's primary beneficiary due to its ability to direct the activities of BCRH through BCML along with its economic interest in BCRH. As a result, the Company fully consolidates the assets, liabilities and operations of BCRH and its subsidiaries within its Unaudited Condensed Consolidated Financial Statements. The interests in BCRH and its subsidiaries that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Unaudited Condensed Consolidated Financial Statements as non-controlling interests. BCRH's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determination with respect to BCRH on an ongoing basis.
As of
September 30, 2016
, Endurance Bermuda owned
25.2%
of BCGR's ordinary shares. BCGR is considered a "voting interest entity" under U.S. GAAP and, because the Company owns less than
50%
of its outstanding ordinary shares, the Company does not consolidate BCGR's assets, liabilities or operations within its Unaudited Condensed Consolidated Financial Statements. However, the BCGR Cell and Blue Water Re Ltd. ("Blue Water Re"), the Company's wholly-owned Bermuda-based special purpose insurance vehicle, are considered VIEs under U.S. GAAP due to service agreements for investment management, underwriting and insurance management and administrative services between Blue Water Re and BCML. The Company has determined that it is the primary beneficiary of these entities due to its ability to direct the activities of Blue Water Re and the BCGR Cell along with its economic interest in these entities. Therefore, as funds held in BCGR are invested in the BCGR Cell, and ultimately into Blue Water Re, they are included in the Company's Unaudited Condensed Consolidated Financial Statements. Conversely, as funds previously invested by BCGR and the BCGR Cell into Blue Water Re are returned to BCGR, they are no longer included in the Company's Unaudited Condensed Consolidated Financial Statements. The interests in the BCGR Cell and Blue Water Re that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Unaudited Condensed Consolidated Financial Statements as non-controlling interests. BCGR's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determinations with respect to the BCGR Cell and Blue Water Re on an ongoing basis.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
The following table summarizes the movements in the non-redeemable non-controlling interests balance during the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Non-controlling interests, beginning of period
|
|
$
|
259,851
|
|
|
$
|
258,529
|
|
|
$
|
267,810
|
|
|
$
|
258,529
|
|
Income attributable to third-party investments in the BCGR Cell
|
|
3,453
|
|
|
821
|
|
|
11,603
|
|
|
821
|
|
Income attributable to third-party investments in BCRH
|
|
2,226
|
|
|
1,886
|
|
|
6,853
|
|
|
1,886
|
|
Net income attributable to non-controlling interests
|
|
5,679
|
|
|
2,707
|
|
|
18,456
|
|
|
2,707
|
|
Net preferred share redemptions attributable to third-party investments in the BCGR Cell
(1)
|
|
(6,800
|
)
|
|
—
|
|
|
(16,807
|
)
|
|
—
|
|
Net investments attributable to third-parties in BCRH
|
|
20
|
|
|
(7
|
)
|
|
53
|
|
|
(7
|
)
|
Net change in third-party investments in non-controlling interests
|
|
(6,780
|
)
|
|
(7
|
)
|
|
(16,754
|
)
|
|
(7
|
)
|
Dividends declared by BCRH attributable to non-controlling interests
|
|
(1,757
|
)
|
|
(1,755
|
)
|
|
(12,519
|
)
|
|
(1,755
|
)
|
Non-controlling interests, end of period
|
|
$
|
256,993
|
|
|
$
|
259,474
|
|
|
$
|
256,993
|
|
|
$
|
259,474
|
|
(1) The redemption from the BCGR Cell during the three and
nine months ended
September 30, 2016
was required to fund expenses, repay debt and fund dividends by BCGR.
|
|
4.
|
Fair value measurement
|
The Company determines the fair value of its fixed maturity investments, short-term investments, equity securities, debt, and other assets and liabilities in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Valuation inputs by security type may include the following:
|
|
•
|
Government and agencies fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate option adjusted spreads, daily interest rate data and market/sector news. The Company generally classifies the fair values of government and agencies securities in Level 2. Current issue U.S. government securities are generally valued based on Level 1 inputs, which use the market approach valuation technique.
|
|
|
•
|
Government guaranteed corporate fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing service or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical spread models which may incorporate inputs from the U.S. treasury curve or LIBOR. The Company generally classifies the fair values of its government guaranteed corporate securities in Level 2.
|
|
|
•
|
Corporate fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its corporate securities in Level 2. The Company uses models that include unobservable inputs to price its corporate bank loan portfolio. As such, the fair values of the corporate bank loans are generally classified in Level 3.
|
|
|
•
|
Equity securities – These securities are generally priced by pricing services or index providers. Depending on the type of underlying equity security or equity fund, the securities are priced by pricing services or index providers based on quoted market prices in active markets or through a discounted cash flow model that incorporates benchmark curves for treasury, swap and credits for like or similar securities. The Company generally classifies the fair values of its equity securities in Level 1 or 2.
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
4.
|
Fair value measurement, cont'd.
|
|
|
•
|
Structured securities including agency and non-agency, residential and commercial mortgage-backed securities, asset-backed securities and collateralized loan and debt obligations – These securities are generally priced by broker/dealers. Broker/dealers may use current market trades for securities with similar qualities. If no such trades are available, inputs such as bid and offer, prepayment speeds, the U.S. treasury curve, swap curve and cash settlement may be used in a discounted cash flow model to determine the fair value of a security. The Company generally classifies the fair values of its structured securities in Level 2.
|
|
|
•
|
Securities pledged under repurchase agreements - These securities have been sold under a repurchase agreement and consist of U.S. government and agencies and residential mortgage-backed securities. Please refer to the pricing methods used for these types of securities.
|
|
|
•
|
Other assets and liabilities – A portion of other assets and liabilities are composed of a variety of derivative instruments used to enhance the efficiency of the investment portfolio and economically hedge certain risks. These instruments are generally priced by pricing services, broker/dealers and/or recent trading activity. The market value approach valuation technique is used to estimate the fair value for these derivatives based on significant observable market inputs. Certain derivative instruments are priced by pricing services based on quoted market prices in active markets. These derivative instruments are generally classified in Level 1. Other derivative instruments are priced using industry valuation models and are considered Level 2, as the inputs to the valuation model are based on observable market inputs. Also included in this line item are proprietary, non-exchange traded derivative-based risk management products primarily used to address weather and energy risks. The trading market for these weather and energy derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. In instances where market prices are not available, the Company uses industry or internally developed valuation techniques such as spread option, Black Scholes, quanto and simulation modeling to determine fair value and classifies these in Level 3. These models may reference prices for similar instruments.
|
|
|
•
|
Debt – Outstanding debt consists of the Company's 7.0% Senior Notes due July 15, 2034, the 4.7% Senior Notes due October 15, 2022 (together, the "Senior Notes") and the Trust Preferred Securities. The fair values of the Senior Notes were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. The fair values of the Trust Preferred Securities were based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of the Senior Notes and the Trust Preferred Securities are classified in Level 2.
|
The carrying values of cash and cash equivalents, accrued investment income, other investments, net receivable on sales of investments, net payable on purchases of investments, payable under repurchase agreements, the amount outstanding under the BCRH Credit Agreement (as defined in Note 10) and other financial instruments not described above approximated their fair values at
September 30, 2016
and December 31,
2015
.
Transfers between levels are assumed to occur at the end of each period.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
4.
|
Fair value measurement, cont'd.
|
The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, securities pledged under repurchase agreements, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2016
|
|
Total at September 30, 2016
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Fixed maturity investments
|
|
|
|
|
|
|
|
U.S. government and agencies securities
|
$
|
743,504
|
|
|
$
|
51,668
|
|
|
$
|
691,836
|
|
|
$
|
—
|
|
U.S. state and municipal securities
|
15,975
|
|
|
—
|
|
|
15,975
|
|
|
—
|
|
Foreign government securities
|
213,076
|
|
|
—
|
|
|
213,076
|
|
|
—
|
|
Government guaranteed corporate securities
|
41,437
|
|
|
—
|
|
|
41,437
|
|
|
—
|
|
Corporate securities
|
2,072,074
|
|
|
—
|
|
|
1,893,278
|
|
|
178,796
|
|
Residential mortgage-backed securities
|
1,329,069
|
|
|
—
|
|
|
1,329,069
|
|
|
—
|
|
Commercial mortgage-backed securities
|
714,142
|
|
|
—
|
|
|
712,448
|
|
|
1,694
|
|
Collateralized loan and debt obligations
|
393,922
|
|
|
—
|
|
|
393,865
|
|
|
57
|
|
Asset-backed securities
|
466,873
|
|
|
—
|
|
|
466,873
|
|
|
—
|
|
Total fixed maturity investments
|
5,990,072
|
|
|
51,668
|
|
|
5,757,857
|
|
|
180,547
|
|
Equity securities
|
|
|
|
|
|
|
|
Equity investments
|
351,367
|
|
|
163,412
|
|
|
187,955
|
|
|
—
|
|
Emerging market debt funds
|
87,725
|
|
|
—
|
|
|
87,725
|
|
|
—
|
|
Convertible funds
|
48,644
|
|
|
—
|
|
|
48,644
|
|
|
—
|
|
Preferred equity investments
|
14,618
|
|
|
—
|
|
|
14,618
|
|
|
—
|
|
Short-term fixed income fund
|
17,168
|
|
|
17,168
|
|
|
—
|
|
|
—
|
|
Total equity securities
|
519,522
|
|
|
180,580
|
|
|
338,942
|
|
|
—
|
|
Short-term investments
|
261,388
|
|
|
—
|
|
|
261,388
|
|
|
—
|
|
Securities pledged under repurchase agreements (see Note 10)
|
124,303
|
|
|
—
|
|
|
124,303
|
|
|
—
|
|
Other assets (see Note 7)
|
159,273
|
|
|
2,331
|
|
|
124,373
|
|
|
32,569
|
|
Total assets
|
$
|
7,054,558
|
|
|
$
|
234,579
|
|
|
$
|
6,606,863
|
|
|
$
|
213,116
|
|
Liabilities
|
|
|
|
|
|
|
|
Other liabilities (see Note 7)
|
$
|
97,958
|
|
|
$
|
2,942
|
|
|
$
|
67,075
|
|
|
$
|
27,941
|
|
Debt
|
799,393
|
|
|
—
|
|
|
799,393
|
|
|
—
|
|
Total liabilities
|
$
|
897,351
|
|
|
$
|
2,942
|
|
|
$
|
866,468
|
|
|
$
|
27,941
|
|
During the three months ended
September 30, 2016
,
$62.9 million
of primarily corporate securities were transferred into Level 3 as no observable inputs were available.
No
securities were transferred out of Level 3 to Level 2 during the period.
During the three months ended
September 30, 2015
,
$128.9 million
of primarily of corporate securities were transferred into Level 3 as no observable inputs were available. No securities were transferred out of Level 3 to Level 2 during the period.
During the
nine
months ended
September 30, 2016
,
$79.3 million
of primarily corporate securities were transferred into Level 3 as no observable inputs were available.
$5.5 million
of primarily corporate securities were transferred out of Level 3 to Level 2 during the period as market activity for these securities increased and observable inputs became available.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
4.
|
Fair value measurement, cont'd.
|
During the
nine
months ended
September 30, 2015
,
$130.9 million
of primarily of corporate securities were transferred into Level 3 as no observable inputs were available, and
$9.2 million
of primarily asset-backed and commercial mortgage-backed securities were transferred out of Level 3 to Level 2 during the period as market activity for these securities increased and observable inputs became available.
The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
Total at December 31, 2015
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Fixed maturity investments
|
|
|
|
|
|
|
|
U.S. government and agencies securities
|
$
|
818,468
|
|
|
$
|
37,741
|
|
|
$
|
780,727
|
|
|
$
|
—
|
|
U.S. state and municipal securities
|
22,406
|
|
|
—
|
|
|
22,406
|
|
|
—
|
|
Foreign government securities
|
160,976
|
|
|
—
|
|
|
160,976
|
|
|
—
|
|
Government guaranteed corporate securities
|
57,753
|
|
|
—
|
|
|
57,753
|
|
|
—
|
|
Corporate securities
|
1,849,934
|
|
|
—
|
|
|
1,739,002
|
|
|
110,932
|
|
Residential mortgage-backed securities
|
1,311,373
|
|
|
—
|
|
|
1,311,373
|
|
|
—
|
|
Commercial mortgage-backed securities
|
812,886
|
|
|
—
|
|
|
812,174
|
|
|
712
|
|
Collateralized loan and debt obligations
|
405,128
|
|
|
—
|
|
|
404,319
|
|
|
809
|
|
Asset-backed securities
|
507,255
|
|
|
—
|
|
|
507,255
|
|
|
—
|
|
Total fixed maturity investments
|
5,946,179
|
|
|
37,741
|
|
|
5,795,985
|
|
|
112,453
|
|
Equity securities
|
|
|
|
|
|
|
|
Equity investments
|
393,829
|
|
|
260,330
|
|
|
133,499
|
|
|
—
|
|
Emerging market debt funds
|
56,421
|
|
|
—
|
|
|
56,421
|
|
|
—
|
|
Convertible funds
|
46,185
|
|
|
—
|
|
|
46,185
|
|
|
—
|
|
Preferred equity investments
|
17,623
|
|
|
—
|
|
|
17,623
|
|
|
—
|
|
Short-term fixed income fund
|
14,756
|
|
|
14,756
|
|
|
—
|
|
|
—
|
|
Total equity securities
|
528,814
|
|
|
275,086
|
|
|
253,728
|
|
|
—
|
|
Short-term investments
|
419,796
|
|
|
—
|
|
|
419,796
|
|
|
—
|
|
Other assets (see Note 7)
|
68,892
|
|
|
4
|
|
|
27,385
|
|
|
41,503
|
|
Total assets
|
$
|
6,963,681
|
|
|
$
|
312,831
|
|
|
$
|
6,496,894
|
|
|
$
|
153,956
|
|
Liabilities
|
|
|
|
|
|
|
|
Other liabilities (see Note 7)
|
$
|
46,088
|
|
|
$
|
—
|
|
|
$
|
4,059
|
|
|
$
|
42,029
|
|
Debt
|
737,974
|
|
|
—
|
|
|
737,974
|
|
|
—
|
|
Total liabilities
|
$
|
784,062
|
|
|
$
|
—
|
|
|
$
|
742,033
|
|
|
$
|
42,029
|
|
Level 3 assets represented
3.0%
and
2.2%
of the Company's total fair valued assets at
September 30, 2016
and
December 31, 2015
, respectively. Level 3 securities are primarily comprised of corporate securities, commercial mortgage-backed securities, collateralized loan and debt obligations, and weather derivatives. There were no material changes in the Company's valuation techniques for the
nine
months ended
September 30, 2016
.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
4.
|
Fair value measurement, cont'd.
|
Other assets and other liabilities measured at fair value and classified as Level 3 at
September 30, 2016
include assets of
$32.6 million
(December 31,
2015
-
$41.5 million
) and liabilities of
$27.9 million
(December 31,
2015
-
$42.0 million
) related to proprietary, non-exchange traded derivative-based risk management products used in the Company's weather risk management business, and hedging and trading activities related to these risks. In instances where market prices are not available, the Company may use industry or internally developed valuation techniques such as historical analysis and simulation modeling to determine fair value and are considered Level 3.
Observable and unobservable inputs to these valuation techniques vary by contract requirements and commodity type, are validated using market-based or independently sourced parameters where applicable and may typically include the following:
•
Observable inputs: contract price, notional, option strike, term to expiry, contractual limits,
temperature, rainfall, windspeed, wave height, snow fall, cyclone category;
•
Unobservable inputs: correlation, composite weather variable; and
•
Both observable and unobservable: forward commodity price.
The Company's weather curves are determined by taking the average payouts for each transaction within its portfolio utilizing de-trended historical weather measurements. The Company's commodity curves are determined using historical market data scaled to currently observed market prices. The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the below table on quantitative information.
If a trade has one or more significant valuation inputs that are unobservable, such trades are initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the initial valuation, the Company updates market observable inputs to reflect observable market changes. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data.
Changes in any or all of the unobservable inputs listed above may contribute positively or negatively to the overall portfolio fair value depending upon the underlying position. In general, movements in weather curves are the largest contributing factor that impacts fair value.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
4.
|
Fair value measurement, cont'd.
|
Below is a summary of quantitative information regarding the significant inputs used in determining the fair value of the net weather and energy related derivative assets and liabilities classified in Level 3 that are measured at fair value on a recurring basis at
September 30, 2016
and December 31,
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Fair Value
(Level 3)
|
|
Valuation
Techniques
|
|
Inputs
|
|
Range
|
|
|
|
|
Low
|
|
High
|
|
(Commodity curve in U.S. dollars in thousands)
|
Net weather and energy related derivative assets
|
$
|
4,628
|
|
|
Historical
Analysis and Simulation
|
|
Correlation
|
|
0
|
|
|
1
|
|
|
|
|
|
|
Temperature
|
|
-15F
|
|
|
115F
|
|
|
|
|
|
|
Composite weather variable
|
|
-25 deg.
|
|
|
45 deg.
|
|
|
|
|
|
|
Rainfall
|
|
0"
|
|
|
2"
|
|
|
|
|
|
|
Windspeed
|
|
0.01 m/s
|
|
|
25 m/s
|
|
|
|
|
|
|
Wave height
|
|
0 m
|
|
|
25 m
|
|
|
|
|
|
|
Commodity curve
|
|
$
|
(1
|
)
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Fair Value
(Level 3)
|
|
Valuation
Techniques
|
|
Inputs
|
|
Range
|
|
|
|
|
Low
|
|
High
|
|
(Commodity curve in U.S. dollars in thousands)
|
Net weather and energy related derivative liabilities
|
$
|
526
|
|
|
Historical
Analysis and Simulation
|
|
Correlation
|
|
0
|
|
|
1
|
|
|
|
|
|
|
Temperature
|
|
-15F
|
|
|
115F
|
|
|
|
|
|
|
Composite weather variable
|
|
-25 deg.
|
|
|
45 deg.
|
|
|
|
|
|
|
Rainfall
|
|
0"
|
|
|
2"
|
|
|
|
|
|
|
Windspeed
|
|
0.01 m/s
|
|
|
25 m/s
|
|
|
|
|
|
|
Snowfall
|
|
0"
|
|
|
18"
|
|
|
|
|
|
|
Cyclone (category)
|
|
0
|
|
|
5
|
|
|
|
|
|
|
Commodity curve
|
|
$
|
—
|
|
|
$
|
13
|
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
4.
|
Fair value measurement, cont'd.
|
The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the three months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Fixed maturity
investments
|
|
Other assets
|
|
Total assets
|
|
Other
liabilities
|
Level 3, beginning of period
|
$
|
109,025
|
|
|
$
|
34,357
|
|
|
$
|
143,382
|
|
|
$
|
(21,549
|
)
|
Total realized and unrealized gains included in earnings
|
1,585
|
|
|
—
|
|
|
1,585
|
|
|
—
|
|
Total realized and unrealized losses included in earnings
|
(117
|
)
|
|
—
|
|
|
(117
|
)
|
|
—
|
|
Total income included in other underwriting (loss) income
|
—
|
|
|
1,651
|
|
|
1,651
|
|
|
7,186
|
|
Total loss included in other underwriting (loss) income
|
—
|
|
|
(3,762
|
)
|
|
(3,762
|
)
|
|
(3,185
|
)
|
Change in unrealized gains included in other comprehensive income (loss)
|
60
|
|
|
—
|
|
|
60
|
|
|
—
|
|
Change in unrealized losses included in other comprehensive income (loss)
|
(46
|
)
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
Purchases
|
15,004
|
|
|
—
|
|
|
15,004
|
|
|
—
|
|
Issues
|
—
|
|
|
9,378
|
|
|
9,378
|
|
|
(14,035
|
)
|
Sales
|
(7,831
|
)
|
|
—
|
|
|
(7,831
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
(9,055
|
)
|
|
(9,055
|
)
|
|
3,642
|
|
Transfers into Level 3
|
62,867
|
|
|
—
|
|
|
62,867
|
|
|
—
|
|
Transfers out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Level 3, end of period
|
$
|
180,547
|
|
|
$
|
32,569
|
|
|
$
|
213,116
|
|
|
$
|
(27,941
|
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
Fixed maturity
investments
|
|
Other assets
|
|
Total assets
|
|
Other
liabilities
|
Level 3, beginning of period
|
$
|
4,707
|
|
|
$
|
23,691
|
|
|
$
|
28,398
|
|
|
$
|
(22,184
|
)
|
Total realized and unrealized losses included in earnings
|
(24
|
)
|
|
—
|
|
|
(24
|
)
|
|
—
|
|
Total income included in other underwriting (loss) income
|
—
|
|
|
1,589
|
|
|
1,589
|
|
|
14,745
|
|
Total loss included in other underwriting (loss) income
|
—
|
|
|
(11,794
|
)
|
|
(11,794
|
)
|
|
(2,552
|
)
|
Change in unrealized gains included in other comprehensive income (loss)
|
85
|
|
|
—
|
|
|
85
|
|
|
—
|
|
Change in unrealized losses included in other comprehensive income (loss)
|
(35
|
)
|
|
—
|
|
|
(35
|
)
|
|
—
|
|
Purchases
|
—
|
|
|
1,250
|
|
|
1,250
|
|
|
(737
|
)
|
Issues
|
—
|
|
|
5,441
|
|
|
5,441
|
|
|
(9,058
|
)
|
Sales
|
(237
|
)
|
|
—
|
|
|
(237
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
61
|
|
Transfers into Level 3
|
128,880
|
|
|
—
|
|
|
128,880
|
|
|
—
|
|
Transfers out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Level 3, end of period
|
$
|
133,376
|
|
|
$
|
20,177
|
|
|
$
|
153,553
|
|
|
$
|
(19,725
|
)
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
4.
|
Fair value measurement, cont'd.
|
The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the
nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Fixed maturity
investments
|
|
Other assets
|
|
Total assets
|
|
Other
liabilities
|
Level 3, beginning of period
|
$
|
112,453
|
|
|
$
|
41,503
|
|
|
$
|
153,956
|
|
|
$
|
(42,029
|
)
|
Total realized and unrealized gains included in earnings
|
3,901
|
|
|
—
|
|
|
3,901
|
|
|
—
|
|
Total realized and unrealized losses included in earnings
|
(2,464
|
)
|
|
—
|
|
|
(2,464
|
)
|
|
—
|
|
Total income included in other underwriting (loss) income
|
—
|
|
|
5,199
|
|
|
5,199
|
|
|
18,305
|
|
Total loss included in other underwriting (loss) income
|
—
|
|
|
(11,544
|
)
|
|
(11,544
|
)
|
|
(8,541
|
)
|
Change in unrealized gains included in other comprehensive income (loss)
|
384
|
|
|
—
|
|
|
384
|
|
|
—
|
|
Change in unrealized losses included in other comprehensive income (loss)
|
(121
|
)
|
|
—
|
|
|
(121
|
)
|
|
—
|
|
Purchases
|
16,678
|
|
|
—
|
|
|
16,678
|
|
|
—
|
|
Issues
|
—
|
|
|
22,964
|
|
|
22,964
|
|
|
(32,780
|
)
|
Sales
|
(24,100
|
)
|
|
—
|
|
|
(24,100
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
(25,553
|
)
|
|
(25,553
|
)
|
|
37,104
|
|
Transfers into Level 3
|
79,332
|
|
|
—
|
|
|
79,332
|
|
|
—
|
|
Transfers out of Level 3
|
(5,516
|
)
|
|
—
|
|
|
(5,516
|
)
|
|
—
|
|
Level 3, end of period
|
$
|
180,547
|
|
|
$
|
32,569
|
|
|
$
|
213,116
|
|
|
$
|
(27,941
|
)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
Fixed maturity
investments
|
|
Other assets
|
|
Total assets
|
|
Other
liabilities
|
Level 3, beginning of period
|
$
|
12,290
|
|
|
$
|
25,615
|
|
|
$
|
37,905
|
|
|
$
|
(35,366
|
)
|
Total realized and unrealized gains included in earnings
|
113
|
|
|
—
|
|
|
113
|
|
|
—
|
|
Total realized and unrealized losses included in earnings
|
(35
|
)
|
|
—
|
|
|
(35
|
)
|
|
—
|
|
Total income included in other underwriting (loss) income
|
—
|
|
|
7,184
|
|
|
7,184
|
|
|
35,610
|
|
Total loss included in other underwriting (loss) income
|
—
|
|
|
(24,788
|
)
|
|
(24,788
|
)
|
|
(9,772
|
)
|
Change in unrealized gains included in other comprehensive income (loss)
|
109
|
|
|
—
|
|
|
109
|
|
|
—
|
|
Change in unrealized losses included in other comprehensive income (loss)
|
(228
|
)
|
|
—
|
|
|
(228
|
)
|
|
—
|
|
Purchases
|
—
|
|
|
1,250
|
|
|
1,250
|
|
|
(737
|
)
|
Issues
|
—
|
|
|
17,774
|
|
|
17,774
|
|
|
(27,806
|
)
|
Sales
|
(547
|
)
|
|
—
|
|
|
(547
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
(6,858
|
)
|
|
(6,858
|
)
|
|
18,346
|
|
Transfers into Level 3
|
130,850
|
|
|
—
|
|
|
130,850
|
|
|
—
|
|
Transfers out of Level 3
|
(9,176
|
)
|
|
—
|
|
|
(9,176
|
)
|
|
—
|
|
Level 3, end of period
|
$
|
133,376
|
|
|
$
|
20,177
|
|
|
$
|
153,553
|
|
|
$
|
(19,725
|
)
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
5.
Earnings per share
The two-class method utilized by the Company is an earnings allocation formula that determines earnings per share for the holders of Endurance Holdings' ordinary shares (also referred to as "common shares") and participating common shares, which includes unvested restricted shares and restricted share units that receive cash dividends, according to dividends declared and participation rights in undistributed earnings. Net income available to Endurance Holdings common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company's common and participating common shares. Any remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. In periods of loss, no losses are allocated to participating common shareholders. Instead, all such losses are allocated solely to the common shareholders.
Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. The weighted average number of common shares excludes any dilutive effect of outstanding options and convertible securities such as unvested restricted shares and restricted share units.
Diluted earnings per common share are based on the weighted average number of common shares and assumes the exercise of all dilutive stock options and the vesting or conversion of all convertible securities such as unvested restricted shares using the two-class method described above.
The following table sets forth the computation of basic and diluted earnings per common share for the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net income available to common and participating common shareholders
|
$
|
130,070
|
|
|
$
|
43,635
|
|
|
$
|
313,069
|
|
|
$
|
219,944
|
|
Less amount allocated to participating common
shareholders
(1)
|
(2,607
|
)
|
|
(1,251
|
)
|
|
(6,662
|
)
|
|
(6,442
|
)
|
Net income allocated to common shareholders
|
$
|
127,463
|
|
|
$
|
42,384
|
|
|
$
|
306,407
|
|
|
$
|
213,502
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
66,185,375
|
|
|
57,923,044
|
|
|
65,920,276
|
|
|
48,453,368
|
|
Share equivalents:
|
|
|
|
|
|
|
|
Options
|
37,597
|
|
|
111,760
|
|
|
53,438
|
|
|
137,366
|
|
Restricted shares
|
18,976
|
|
|
11,344
|
|
|
8,699
|
|
|
1,367
|
|
Weighted average shares - diluted
|
66,241,948
|
|
|
58,046,148
|
|
|
65,982,413
|
|
|
48,592,101
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
1.93
|
|
|
$
|
0.73
|
|
|
$
|
4.65
|
|
|
$
|
4.41
|
|
Diluted earnings per common share
|
$
|
1.92
|
|
|
$
|
0.73
|
|
|
$
|
4.64
|
|
|
$
|
4.39
|
|
|
|
(1)
|
Represents earnings attributable to holders of unvested restricted shares and restricted share units issued under the Company's equity compensation plan that are considered participating. In periods of loss, no losses are allocated to participating common shareholders (unvested restricted shares and restricted share units).
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
5.
Earnings per share, cont'd.
Endurance Holdings declared a dividend of
$396.8750
per Series C preferred share on
August 17, 2016
(
2015
- Series A:
$0.484375
, Series B:
$0.468750
, Series C -
Nil
). The Series C preferred share dividend was paid on
September 15, 2016
to shareholders of record on
September 1, 2016
. Endurance Holdings also declared a dividend of
$0.38
per common share on
August 17, 2016
(
2015
-
$0.35
). The dividend was paid on
September 30, 2016
to shareholders of record on
September 16, 2016
.
On June 1, 2016, Endurance Holdings redeemed all
9,200,000
of its Series B preferred shares. The Series B preferred shares were redeemed at a redemption price of
$25.00
per share together with a dividend of
$0.395830
per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Dividends declared per Series A preferred share
|
$
|
—
|
|
|
$
|
0.484375
|
|
|
$
|
—
|
|
|
$
|
1.453125
|
|
Dividends declared per Series B preferred share
|
$
|
—
|
|
|
$
|
0.468750
|
|
|
$
|
0.864580
|
|
|
$
|
1.406250
|
|
Dividends declared per Series C preferred share
|
$
|
396.8750
|
|
|
$
|
—
|
|
|
$
|
1,283.2292
|
|
|
$
|
—
|
|
Dividends declared per common share
|
$
|
0.38
|
|
|
$
|
0.35
|
|
|
$
|
1.14
|
|
|
$
|
1.05
|
|
|
|
6.
|
Accumulated other comprehensive income (loss)
|
The following tables present the changes in accumulated other comprehensive income (loss) balances by component for the three months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2016
|
|
Losses on cash flow hedges
|
|
Unrealized gains (losses) on available for sale securities
|
|
Foreign currency translation adjustments
|
|
Total
|
Beginning balance
|
$
|
(1,634
|
)
|
|
$
|
103,957
|
|
|
$
|
(82,374
|
)
|
|
$
|
19,949
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
24,799
|
|
|
(13,114
|
)
|
|
11,685
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
(1)
|
22
|
|
|
(3,663
|
)
|
|
—
|
|
|
(3,641
|
)
|
Net current period other comprehensive income (loss)
|
22
|
|
|
21,136
|
|
|
(13,114
|
)
|
|
8,044
|
|
Ending balance
|
$
|
(1,612
|
)
|
|
$
|
125,093
|
|
|
$
|
(95,488
|
)
|
|
$
|
27,993
|
|
(1)
All amounts are net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2015
|
|
Losses on cash flow hedges
|
|
Unrealized gains (losses) on available for sale securities
|
|
Foreign currency translation adjustments
|
|
Total
|
Beginning balance
|
$
|
(1,722
|
)
|
|
43,610
|
|
|
$
|
(4,923
|
)
|
|
$
|
36,965
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(18,258
|
)
|
|
(15,625
|
)
|
|
(33,883
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
(1)
|
22
|
|
|
(11,648
|
)
|
|
—
|
|
|
(11,626
|
)
|
Net current period other comprehensive income (loss)
|
22
|
|
|
(29,906
|
)
|
|
(15,625
|
)
|
|
(45,509
|
)
|
Ending balance
|
$
|
(1,700
|
)
|
|
$
|
13,704
|
|
|
$
|
(20,548
|
)
|
|
$
|
(8,544
|
)
|
(1)
All amounts are net of tax.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
6.
|
Accumulated other comprehensive income (loss), cont'd.
|
The following tables present the changes in accumulated other comprehensive income (loss) balances by component for the
nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2016
|
|
Losses on cash flow hedges
|
|
Unrealized gains (losses) on available for sale securities
|
|
Foreign currency translation adjustments
|
|
Total
|
Beginning balance
|
$
|
(1,678
|
)
|
|
$
|
(12,638
|
)
|
|
$
|
(32,318
|
)
|
|
$
|
(46,634
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
116,722
|
|
|
(63,170
|
)
|
|
53,552
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
(1)
|
66
|
|
|
21,009
|
|
|
—
|
|
|
21,075
|
|
Net current period other comprehensive income (loss)
|
66
|
|
|
137,731
|
|
|
(63,170
|
)
|
|
74,627
|
|
Ending balance
|
$
|
(1,612
|
)
|
|
$
|
125,093
|
|
|
$
|
(95,488
|
)
|
|
$
|
27,993
|
|
(1)
All amounts are net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2015
|
|
Losses on cash flow hedges
|
|
Unrealized gains (losses)
on available for sale securities
|
|
Foreign currency translation adjustments
|
|
Total
|
Beginning balance
|
$
|
(1,766
|
)
|
|
$
|
86,100
|
|
|
$
|
(7,628
|
)
|
|
$
|
76,706
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(35,195
|
)
|
|
(12,920
|
)
|
|
(48,115
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
(1)
|
66
|
|
|
(37,201
|
)
|
|
—
|
|
|
(37,135
|
)
|
Net current period other comprehensive income (loss)
|
66
|
|
|
(72,396
|
)
|
|
(12,920
|
)
|
|
(85,250
|
)
|
Ending balance
|
$
|
(1,700
|
)
|
|
$
|
13,704
|
|
|
$
|
(20,548
|
)
|
|
$
|
(8,544
|
)
|
(1)
All amounts are net of tax.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
6.
|
Accumulated other comprehensive income (loss), cont'd.
|
The following tables present the significant items reclassified out of accumulated other comprehensive income (loss) during the three months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
Details about accumulated other comprehensive
income (loss) components
|
|
Amount reclassified
from accumulated other
comprehensive income (loss)
|
|
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
|
Losses on cash flow hedges - Debt
|
|
$
|
22
|
|
|
Interest expense
|
|
|
22
|
|
|
Total before income taxes
|
|
|
—
|
|
|
Income tax expense
|
|
|
$
|
22
|
|
|
Total net of income taxes
|
|
|
|
|
|
Unrealized gains on available for sale securities
|
|
$
|
(4,476
|
)
|
|
Net realized and unrealized gains
|
|
|
183
|
|
|
Net impairment losses recognized in earnings
|
|
|
(4,293
|
)
|
|
Total before income taxes
|
|
|
630
|
|
|
Income tax expense
|
|
|
$
|
(3,663
|
)
|
|
Total net of income taxes
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
Details about accumulated other comprehensive
income (loss) components
|
|
Amount reclassified
from accumulated other
comprehensive income (loss)
|
|
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
|
Losses on cash flow hedges - Debt
|
|
$
|
22
|
|
|
Interest expense
|
|
|
22
|
|
|
Total before income taxes
|
|
|
—
|
|
|
Income tax expense
|
|
|
$
|
22
|
|
|
Total net of income taxes
|
|
|
|
|
|
Unrealized gains on available for sale securities
|
|
$
|
(11,871
|
)
|
|
Net realized and unrealized gains
|
|
|
38
|
|
|
Net impairment losses recognized in earnings
|
|
|
(11,833
|
)
|
|
Total before income taxes
|
|
|
185
|
|
|
Income tax expense
|
|
|
$
|
(11,648
|
)
|
|
Total net of income taxes
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
6.
|
Accumulated other comprehensive income (loss), cont'd.
|
The following tables present the significant items reclassified out of accumulated other comprehensive income (loss) during the
nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
Details about accumulated other comprehensive
income (loss) components
|
|
Amount reclassified
from accumulated other
comprehensive income (loss)
|
|
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
|
Losses on cash flow hedges - Debt
|
|
$
|
66
|
|
|
Interest expense
|
|
|
66
|
|
|
Total before income taxes
|
|
|
—
|
|
|
Income tax expense
|
|
|
$
|
66
|
|
|
Total net of income taxes
|
|
|
|
|
|
Unrealized losses on available for sale securities
|
|
$
|
9,620
|
|
|
Net realized and unrealized losses
|
|
|
10,647
|
|
|
Net impairment losses recognized in earnings
|
|
|
20,267
|
|
|
Total before income taxes
|
|
|
742
|
|
|
Income tax expense
|
|
|
$
|
21,009
|
|
|
Total net of income taxes
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
Details about accumulated other comprehensive
income (loss) components
|
|
Amount reclassified
from accumulated other
comprehensive income (loss)
|
|
Affected line item in the Unaudited
Condensed Consolidated Statements of
Income and Comprehensive Income
|
Losses on cash flow hedges - Debt
|
|
$
|
66
|
|
|
Interest expense
|
|
|
66
|
|
|
Total before income taxes
|
|
|
—
|
|
|
Income tax expense
|
|
|
$
|
66
|
|
|
Total net of income taxes
|
|
|
|
|
|
Unrealized gains on available for sale securities
|
|
$
|
(39,230
|
)
|
|
Net realized and unrealized gains
|
|
|
1,111
|
|
|
Net impairment losses recognized in earnings
|
|
|
(38,119
|
)
|
|
Total before income taxes
|
|
|
918
|
|
|
Income tax expense
|
|
|
$
|
(37,201
|
)
|
|
Total net of income taxes
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
The Company regularly transacts in certain derivative-based weather risk management products primarily to address weather and energy risks on behalf of third parties. The markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Generally, the Company's current portfolio of such derivative contracts is of short duration and such contracts are predominantly seasonal in nature. The Company also invests a portion of its investments with third party investment managers with investment guidelines that permit the use of derivative instruments. The Company may enter derivative transactions directly or as part of strategies employed by its external investment managers.
The Company's derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value and gains and losses recognized in net realized and unrealized gains, net foreign exchange (gains) losses and other underwriting (loss) income in the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income.
The Company's derivatives are not designated as hedges under current accounting guidance.
The Company's objectives for holding these derivatives are as follows:
Interest Rate Futures, Swaps, Swaptions and Options
- to manage exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk through modification of the portfolio composition and duration.
Industry Loss Warranty ("ILW") Swaps
- to manage underwriting risk. The Company has entered into ILW swap contracts which provide reinsurance-like protection to the Company for specific loss events associated with certain lines of its business. The Company has also sold ILW protection, which provides reinsurance-like protection to third parties for specific loss events.
Foreign Exchange Forwards, Futures and Options
- as part of overall currency risk management and investment strategies.
Credit Default Swaps
- to manage market exposures. The Company may assume or economically hedge credit risk through credit default swaps to replicate or hedge investment positions. The original term of these credit default swaps is generally
five
years or less.
To-Be-Announced Mortgage-backed Securities ("TBAs")
- to enhance investment performance and as part of overall investment strategy. TBAs represent commitments to purchase or sell a future issuance of agency mortgage-backed securities. For the period between purchase of a TBA and issuance of the underlying securities, the Company’s position is accounted for as a derivative.
Energy and Weather Contracts
– to address weather and energy risks. The Company may purchase or sell contracts with financial settlements based on the performance of an index linked to a quantifiable weather element, such as temperature, precipitation, snowfall or windspeed, and structures with multiple risk triggers indexed to a quantifiable weather element and a weather sensitive commodity price, such as temperature and electrical power or natural gas. Generally, the Company's current portfolio of energy and weather derivative contracts is of comparably short duration and such contracts are predominantly seasonal in nature.
LIBOR Swap
– to establish future net cash flows in connection with the Trust Preferred Securities for the
five
-year period beginning March 30, 2012 as if these securities bore interest at a fixed rate of
4.905%
.
Loss Development Cover
– as part of the sale of Montpelier U.S. Insurance Company ("MUSIC") to Selective Insurance Group, Inc. ("Selective"), Montpelier Reinsurance Ltd. (now Endurance Bermuda) entered into a loss development cover with MUSIC which ensures that MUSIC's reserve for losses and loss expenses relating to retained business written on or prior to December 31, 2011 remains adequate. Under the loss development cover, any future adverse development associated with such retained reserves will be protected by Endurance Bermuda and any future favorable development associated with such retained reserves will benefit Endurance Bermuda.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
The fair values and the related notional values of derivatives at
September 30, 2016
and
December 31, 2015
are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Fair
Value
|
|
Notional
Principal
Amount
|
|
Fair
Value
|
|
Notional
Principal
Amount
|
Derivatives recorded in other assets
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
213
|
|
|
$
|
32,895
|
|
|
$
|
425
|
|
|
$
|
38,818
|
|
Credit default swaps
|
117
|
|
|
3,241
|
|
|
36
|
|
|
4,225
|
|
ILWs
|
2,336
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
TBAs
|
121,707
|
|
|
115,900
|
|
|
26,924
|
|
|
25,700
|
|
Energy and weather contracts
|
34,900
|
|
|
96,859
|
|
|
41,507
|
|
|
70,388
|
|
Total recorded in other assets
|
$
|
159,273
|
|
|
|
|
$
|
68,892
|
|
|
|
Derivatives recorded in other liabilities
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
118
|
|
|
$
|
41,736
|
|
|
$
|
372
|
|
|
$
|
30,400
|
|
Credit default swaps
|
31
|
|
|
2,059
|
|
|
276
|
|
|
7,800
|
|
Interest rate swaps
|
110
|
|
|
1,100
|
|
|
7
|
|
|
42,000
|
|
Interest rate futures
|
—
|
|
|
—
|
|
|
8
|
|
|
54,488
|
|
ILWs
|
733
|
|
|
14,209
|
|
|
259
|
|
|
19,500
|
|
LIBOR swap
|
114
|
|
|
100,000
|
|
|
233
|
|
|
100,000
|
|
TBAs
|
61,991
|
|
|
59,000
|
|
|
—
|
|
|
—
|
|
Loss development cover
|
3,978
|
|
|
24,426
|
|
|
2,904
|
|
|
22,322
|
|
Energy and weather contracts
|
30,883
|
|
|
153,344
|
|
|
42,029
|
|
|
148,325
|
|
Total recorded in other liabilities
|
$
|
97,958
|
|
|
|
|
$
|
46,088
|
|
|
|
Net derivative asset
|
$
|
61,315
|
|
|
|
|
$
|
22,804
|
|
|
|
At
September 30, 2016
, the Company's derivative assets of
$159.3 million
(
December 31, 2015
-
$68.9 million
) and liabilities of
$98.0 million
(
December 31, 2015
-
$46.1 million
) are subject to master netting agreements, which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. Interest rate futures are not subject to master netting agreements. At
September 30, 2016
and
December 31, 2015
, the Company's derivative instruments were recorded on a gross basis in the Condensed Consolidated Balance Sheets.
At
September 30, 2016
, the Company held
no
reverse repurchase agreements. At
December 31, 2015
, the Company held
$30.0 million
reverse repurchase agreements. These agreements were fully collateralized, were generally outstanding for a short period of time and were presented as part of cash and cash equivalents in the Condensed Consolidated Balance Sheets. The required collateral for these agreements was either cash or U.S. treasury securities at a minimum rate of
102%
of the principal amount. Upon maturity, the Company received the principal and interest income.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
The gains and losses on the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for derivatives for the
three and nine
months ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total (losses) gains included in net foreign exchange (gains) losses from foreign exchange forward contracts
|
$
|
(231
|
)
|
|
$
|
155
|
|
|
$
|
(732
|
)
|
|
$
|
1,281
|
|
|
|
|
|
|
|
|
|
Interest rate futures
|
—
|
|
|
(78
|
)
|
|
(227
|
)
|
|
17
|
|
Credit default swaps
|
70
|
|
|
(143
|
)
|
|
(12
|
)
|
|
(134
|
)
|
Interest rate swaps
|
(69
|
)
|
|
(705
|
)
|
|
(117
|
)
|
|
(940
|
)
|
Interest rate swaptions
|
—
|
|
|
28
|
|
|
(27
|
)
|
|
56
|
|
ILWs
|
(958
|
)
|
|
(652
|
)
|
|
(898
|
)
|
|
(652
|
)
|
LIBOR swap
|
232
|
|
|
(173
|
)
|
|
120
|
|
|
(173
|
)
|
TBAs
|
270
|
|
|
(82
|
)
|
|
1,232
|
|
|
531
|
|
Total (losses) gains included in net realized and unrealized gains
|
(455
|
)
|
|
(1,805
|
)
|
|
71
|
|
|
(1,295
|
)
|
|
|
|
|
|
|
|
|
Energy and weather contracts
|
1,486
|
|
|
1,988
|
|
|
2,808
|
|
|
8,030
|
|
Loss development cover
|
(618
|
)
|
|
(465
|
)
|
|
(2,104
|
)
|
|
(465
|
)
|
Total gains included in other underwriting (loss) income
|
868
|
|
|
1,523
|
|
|
704
|
|
|
7,565
|
|
|
|
|
|
|
|
|
|
Total gains (losses) from derivatives
|
$
|
182
|
|
|
$
|
(127
|
)
|
|
$
|
43
|
|
|
$
|
7,551
|
|
|
|
8.
|
Stock-based employee compensation and other stock plans
|
The Company has a stock-based employee compensation plan, which provides the Company with the ability to grant options to purchase the Company's ordinary shares, share appreciation rights, restricted shares, restricted share units, share bonuses and other equity incentive awards to key employees.
No
options were granted, expired or vested during the quarters ended
September 30, 2016
and
2015
.
No
options were exercised during the quarter ended
September 30, 2016
(
2015
-
480,000
). The total intrinsic value of options exercised during the quarter ended
September 30, 2015
was
$9.5 million
. The Company received proceeds of
$23.1 million
from the exercise of options during the quarter ended
September 30, 2015
. The Company issued new ordinary shares in connection with the exercise of the above options. For the quarter ended
September 30, 2016
, compensation costs recognized in earnings for all options totaled
$0.1 million
(
2015
-
$0.3 million
). At
September 30, 2016
, compensation costs not yet recognized related to unvested stock options was
$0.3 million
(
2015
-
$1.3 million
).
No
options were granted or expired during the
nine months ended
September 30, 2016
and
2015
. During the
nine months ended
September 30, 2016
,
160,000
(
2015
-
480,000
) options were exercised. During the
nine months ended
September 30, 2016
,
160,000
options vested (
2015
-
160,000
). The total intrinsic value of options exercised during the
nine months ended
September 30, 2016
was
$3.2 million
(
2015
-
$9.5 million
). The Company received proceeds of
$7.7 million
from the exercise of options during the
nine months ended
September 30, 2016
(
2015
-
$23.1 million
). The Company issued new ordinary shares in connection with the exercise of the above options. For the
nine
months ended
September 30, 2016
, compensation costs recognized in earnings for all options totaled
$0.7 million
(
2015
-
$1.3 million
).
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
8.
|
Stock-based employee compensation and other stock plans, cont'd.
|
During the quarter ended
September 30, 2016
, the Company granted an aggregate of
24,250
(
2015
–
856,629
) restricted shares and restricted share units. The restricted shares and restricted share units granted had weighted average grant date fair values of
$1.6 million
(
2015
-
$59.4 million
). During the quarter ended
September 30, 2016
, the aggregate fair value of restricted shares and restricted share units that vested was
nil
(
2015
-
$23.0 million
). For the quarter ended
September 30, 2016
, compensation costs recognized in earnings for all restricted shares and restricted share units were
$8.2 million
(
2015
-
$28.1 million
). At
September 30, 2016
, compensation costs not yet recognized related to unvested restricted shares and restricted share units was
$34.4 million
(
2015
-
$32.0 million
).
During the
nine months ended
September 30, 2016
, the Company granted an aggregate of
638,217
(
2015
–
1,360,981
) restricted shares and restricted share units. The restricted shares and restricted share units granted had weighted average grant date fair values of
$38.5 million
(
2015
-
$89.4 million
). During the
nine months ended
September 30, 2016
, the aggregate fair value of restricted shares and restricted share units that vested was
$41.2 million
(
2015
-
$44.7 million
). For the
nine months ended
September 30, 2016
, compensation costs recognized in earnings for all restricted shares and restricted share units were
$27.4 million
(
2015
-
$45.0 million
).
Employee Share Purchase Plan
The Company also has an Employee Share Purchase Plan ("ESPP") under which employees of Endurance Holdings and certain of its subsidiaries may purchase the Company's ordinary shares. For the
three and nine
months ended
September 30, 2016
, total expenses related to the Company's ESPP were approximately
$109,000
(
2015
-
$76,000
) and
$324,000
(
2015
-
$220,000
), respectively.
The determination of the Company's business segments is based on how the Company monitors the performance of its underwriting operations. The Company has two reportable business segments, Insurance and Reinsurance, which are comprised of the following lines of business:
Insurance segment lines of business
•
Agriculture
•
Casualty and other specialty
•
Professional lines
•
Property, marine/energy and aviation
Reinsurance segment lines of business
•
Catastrophe
•
Property
•
Casualty
•
Professional lines
•
Specialty
Management measures Insurance and Reinsurance segment results on the basis of the combined ratio, which is obtained by dividing the sum of the net losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by the segments are allocated directly. Remaining general and administrative expenses not incurred by the segments are classified as corporate expenses and are not allocated to the individual business segments. Ceded reinsurance and recoveries are recorded within the business segment to which they apply.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
9.
|
Segment reporting, cont'd.
|
The following table provides a summary of segment revenues and results for the three months ended
September 30, 2016
and the reserve for losses and loss expenses as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
Gross premiums written
|
$
|
568,277
|
|
|
$
|
192,410
|
|
|
$
|
760,687
|
|
|
Ceded premiums written
|
(365,573
|
)
|
|
(46,128
|
)
|
|
(411,701
|
)
|
|
Net premiums written
|
202,704
|
|
|
146,282
|
|
|
348,986
|
|
|
Net premiums earned
|
272,603
|
|
|
337,553
|
|
|
610,156
|
|
|
Other underwriting loss
|
—
|
|
|
(466
|
)
|
|
(466
|
)
|
|
|
272,603
|
|
|
337,087
|
|
|
609,690
|
|
|
Expenses
|
|
|
|
|
|
|
Net losses and loss expenses
|
202,717
|
|
|
128,745
|
|
|
331,462
|
|
|
Acquisition expenses
|
41,773
|
|
|
79,618
|
|
|
121,391
|
|
|
General and administrative expenses
|
40,658
|
|
|
27,080
|
|
|
67,738
|
|
|
|
285,148
|
|
|
235,443
|
|
|
520,591
|
|
|
Underwriting (loss) income
|
$
|
(12,545
|
)
|
|
$
|
101,644
|
|
|
89,099
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
62,236
|
|
|
Corporate expenses
|
|
|
|
|
(11,952
|
)
|
|
Net foreign exchange gains
|
|
|
|
|
18,576
|
|
|
Net realized and unrealized gains
|
|
|
|
|
13,405
|
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
(183
|
)
|
|
Amortization of intangibles
|
|
|
|
|
(21,154
|
)
|
|
Interest expense
|
|
|
|
|
(10,826
|
)
|
|
Income before income taxes
|
|
|
|
|
$
|
139,201
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
74.4
|
%
|
|
38.1
|
%
|
|
54.3
|
%
|
|
Acquisition expense ratio
|
15.3
|
%
|
|
23.6
|
%
|
|
19.9
|
%
|
|
General and administrative expense ratio
|
14.9
|
%
|
|
8.0
|
%
|
|
13.1
|
%
|
(1)
|
Combined ratio
|
104.6
|
%
|
|
69.7
|
%
|
|
87.3
|
%
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses
|
$
|
2,712,403
|
|
|
$
|
2,095,465
|
|
|
$
|
4,807,868
|
|
|
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
9.
|
Segment reporting, cont'd.
|
The following table provides a summary of segment revenues and results for the three months ended
September 30, 2015
and the reserve for losses and loss expenses as of
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
Gross premiums written
|
$
|
448,563
|
|
|
$
|
194,034
|
|
|
$
|
642,597
|
|
|
Ceded premiums written
|
(273,626
|
)
|
|
(32,281
|
)
|
|
(305,907
|
)
|
|
Net premiums written
|
174,937
|
|
|
161,753
|
|
|
336,690
|
|
|
Net premiums earned
|
234,143
|
|
|
322,860
|
|
|
557,003
|
|
|
Other underwriting income
|
—
|
|
|
227
|
|
|
227
|
|
|
|
234,143
|
|
|
323,087
|
|
|
557,230
|
|
|
Expenses
|
|
|
|
|
|
|
Net losses and loss expenses
|
139,603
|
|
|
124,390
|
|
|
263,993
|
|
|
Acquisition expenses
|
24,375
|
|
|
66,082
|
|
|
90,457
|
|
|
General and administrative expenses
|
31,880
|
|
|
28,913
|
|
|
60,793
|
|
|
|
195,858
|
|
|
219,385
|
|
|
415,243
|
|
|
Underwriting income
|
$
|
38,285
|
|
|
$
|
103,702
|
|
|
141,987
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
16,533
|
|
|
Corporate expenses
|
|
|
|
|
(74,308
|
)
|
|
Net foreign exchange losses
|
|
|
|
|
(8,621
|
)
|
|
Net realized and unrealized gains
|
|
|
|
|
5,029
|
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
(38
|
)
|
|
Amortization of intangibles
|
|
|
|
|
(11,318
|
)
|
|
Interest expense
|
|
|
|
|
(12,324
|
)
|
|
Income before income taxes
|
|
|
|
|
$
|
56,940
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
59.6
|
%
|
|
38.5
|
%
|
|
47.4
|
%
|
|
Acquisition expense ratio
|
10.4
|
%
|
|
20.5
|
%
|
|
16.2
|
%
|
|
General and administrative expense ratio
|
13.6
|
%
|
|
9.0
|
%
|
|
24.3
|
%
|
(1)
|
Combined ratio
|
83.6
|
%
|
|
68.0
|
%
|
|
87.9
|
%
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses
|
$
|
2,429,385
|
|
|
$
|
2,060,451
|
|
|
$
|
4,489,836
|
|
|
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
9.
|
Segment reporting, cont'd.
|
The following table provides gross and net premiums written by line of business for the three months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums
written
|
|
Net
premiums
written
|
|
Gross
premiums
written
|
|
Net
premiums
written
|
Business Segment
|
2016
|
|
2016
|
|
2015
|
|
2015
|
Insurance
|
|
|
|
|
|
|
|
Agriculture
|
$
|
151,483
|
|
|
$
|
49,062
|
|
|
$
|
156,145
|
|
|
$
|
29,634
|
|
Casualty and other specialty
|
168,644
|
|
|
68,211
|
|
|
128,509
|
|
|
64,490
|
|
Professional lines
|
97,432
|
|
|
30,328
|
|
|
80,069
|
|
|
37,479
|
|
Property, marine/energy and aviation
|
150,718
|
|
|
55,103
|
|
|
83,840
|
|
|
43,334
|
|
Total Insurance
|
568,277
|
|
|
202,704
|
|
|
448,563
|
|
|
174,937
|
|
Reinsurance
|
|
|
|
|
|
|
|
Catastrophe
|
51,040
|
|
|
32,696
|
|
|
40,660
|
|
|
14,814
|
|
Property
|
41,975
|
|
|
40,882
|
|
|
53,423
|
|
|
52,887
|
|
Casualty
|
35,438
|
|
|
35,772
|
|
|
42,802
|
|
|
42,802
|
|
Professional lines
|
33,289
|
|
|
31,883
|
|
|
31,705
|
|
|
31,705
|
|
Specialty
|
30,668
|
|
|
5,049
|
|
|
25,444
|
|
|
19,545
|
|
Total Reinsurance
|
192,410
|
|
|
146,282
|
|
|
194,034
|
|
|
161,753
|
|
Total
|
$
|
760,687
|
|
|
$
|
348,986
|
|
|
$
|
642,597
|
|
|
$
|
336,690
|
|
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
9.
|
Segment reporting, cont'd.
|
The following table provides a summary of the segment revenues and results for the
nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
Gross premiums written
|
$
|
1,997,100
|
|
|
$
|
1,512,194
|
|
|
$
|
3,509,294
|
|
|
Ceded premiums written
|
(1,183,850
|
)
|
|
(319,848
|
)
|
|
(1,503,698
|
)
|
|
Net premiums written
|
813,250
|
|
|
1,192,346
|
|
|
2,005,596
|
|
|
Net premiums earned
|
745,956
|
|
|
1,016,999
|
|
|
1,762,955
|
|
|
Other underwriting loss
|
—
|
|
|
(1,980
|
)
|
|
(1,980
|
)
|
|
|
745,956
|
|
|
1,015,019
|
|
|
1,760,975
|
|
|
Expenses
|
|
|
|
|
|
|
Net losses and loss expenses
|
499,104
|
|
|
451,798
|
|
|
950,902
|
|
|
Acquisition expenses
|
104,999
|
|
|
232,195
|
|
|
337,194
|
|
|
General and administrative expenses
|
108,912
|
|
|
86,130
|
|
|
195,042
|
|
|
|
713,015
|
|
|
770,123
|
|
|
1,483,138
|
|
|
Underwriting income
|
$
|
32,941
|
|
|
$
|
244,896
|
|
|
277,837
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
117,394
|
|
|
Corporate expenses
|
|
|
|
|
(35,553
|
)
|
|
Net foreign exchange gains
|
|
|
|
|
63,056
|
|
|
Net realized and unrealized gains
|
|
|
|
|
33,539
|
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
(10,647
|
)
|
|
Amortization of intangibles
|
|
|
|
|
(63,471
|
)
|
|
Interest expense
|
|
|
|
|
(33,053
|
)
|
|
Income before income taxes
|
|
|
|
|
$
|
349,102
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
66.9
|
%
|
|
44.4
|
%
|
|
53.9
|
%
|
|
Acquisition expense ratio
|
14.1
|
%
|
|
22.8
|
%
|
|
19.1
|
%
|
|
General and administrative expense ratio
|
14.6
|
%
|
|
8.5
|
%
|
|
13.1
|
%
|
(1)
|
Combined ratio
|
95.6
|
%
|
|
75.7
|
%
|
|
86.1
|
%
|
|
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
9.
|
Segment reporting, cont'd.
|
The following table provides a summary of the segment revenues and results for the
nine
months ended
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
Gross premiums written
|
$
|
1,653,647
|
|
|
$
|
1,151,566
|
|
|
$
|
2,805,213
|
|
|
Ceded premiums written
|
(984,372
|
)
|
|
(160,114
|
)
|
|
(1,144,486
|
)
|
|
Net premiums written
|
669,275
|
|
|
991,452
|
|
|
1,660,727
|
|
|
Net premiums earned
|
571,467
|
|
|
833,530
|
|
|
1,404,997
|
|
|
Other underwriting income
|
—
|
|
|
4,022
|
|
|
4,022
|
|
|
|
571,467
|
|
|
837,552
|
|
|
1,409,019
|
|
|
Expenses
|
|
|
|
|
|
|
Net losses and loss expenses
|
359,598
|
|
|
315,453
|
|
|
675,051
|
|
|
Acquisition expenses
|
57,960
|
|
|
199,561
|
|
|
257,521
|
|
|
General and administrative expenses
|
89,289
|
|
|
81,359
|
|
|
170,648
|
|
|
|
506,847
|
|
|
596,373
|
|
|
1,103,220
|
|
|
Underwriting income
|
$
|
64,620
|
|
|
$
|
241,179
|
|
|
305,799
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
90,646
|
|
|
Corporate expenses
|
|
|
|
|
(99,210
|
)
|
|
Net foreign exchange losses
|
|
|
|
|
(29,154
|
)
|
|
Net realized and unrealized gains
|
|
|
|
|
32,898
|
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
(1,111
|
)
|
|
Amortization of intangibles
|
|
|
|
|
(14,496
|
)
|
|
Interest expense
|
|
|
|
|
(30,445
|
)
|
|
Income before income taxes
|
|
|
|
|
$
|
254,927
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
63.0
|
%
|
|
37.8
|
%
|
|
48.1
|
%
|
|
Acquisition expense ratio
|
10.1
|
%
|
|
23.9
|
%
|
|
18.3
|
%
|
|
General and administrative expense ratio
|
15.6
|
%
|
|
9.8
|
%
|
|
19.2
|
%
|
(1)
|
Combined ratio
|
88.7
|
%
|
|
71.5
|
%
|
|
85.6
|
%
|
|
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
9.
|
Segment reporting, cont'd.
|
The following table provides gross and net premiums written by line of business for the
nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums
written
|
|
Net
premiums
written
|
|
Gross
premiums
written
|
|
Net
premiums
written
|
Business Segment
|
2016
|
|
2016
|
|
2015
|
|
2015
|
Insurance
|
|
|
|
|
|
|
|
Agriculture
|
$
|
714,621
|
|
|
$
|
254,727
|
|
|
$
|
785,073
|
|
|
$
|
254,771
|
|
Casualty and other specialty
|
484,980
|
|
|
209,673
|
|
|
375,247
|
|
|
174,850
|
|
Professional lines
|
297,526
|
|
|
124,866
|
|
|
231,565
|
|
|
105,153
|
|
Property, marine/energy and aviation
|
499,973
|
|
|
223,984
|
|
|
261,762
|
|
|
134,501
|
|
Total Insurance
|
1,997,100
|
|
|
813,250
|
|
|
1,653,647
|
|
|
669,275
|
|
Reinsurance
|
|
|
|
|
|
|
|
Catastrophe
|
488,865
|
|
|
319,245
|
|
|
304,900
|
|
|
190,579
|
|
Property
|
229,087
|
|
|
222,242
|
|
|
209,683
|
|
|
206,454
|
|
Casualty
|
216,421
|
|
|
215,412
|
|
|
149,032
|
|
|
149,032
|
|
Professional lines
|
217,476
|
|
|
215,134
|
|
|
209,803
|
|
|
209,803
|
|
Specialty
|
360,345
|
|
|
220,313
|
|
|
278,148
|
|
|
235,584
|
|
Total Reinsurance
|
1,512,194
|
|
|
1,192,346
|
|
|
1,151,566
|
|
|
991,452
|
|
Total
|
$
|
3,509,294
|
|
|
$
|
2,005,596
|
|
|
$
|
2,805,213
|
|
|
$
|
1,660,727
|
|
|
|
10.
|
Commitments and contingencies
|
Concentrations of credit risk.
The Company's reinsurance recoverables on paid and unpaid losses at
September 30, 2016
and
December 31, 2015
amounted to
$1,436.3 million
and
$1,196.0 million
, respectively. At
September 30, 2016
, substantially all reinsurance recoverables on paid and unpaid losses were due from the U.S. government or from reinsurers rated A- or better by A.M. Best Company, Inc. or Standard & Poor's Corporation. At
September 30, 2016
and
December 31, 2015
, the Company held collateral of
$479.8 million
and
$321.5 million
, respectively, related to its ceded reinsurance agreements.
Major production sources.
The following table shows the percentage of gross premiums written generated through the Company's largest brokers for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
Broker
|
|
2016
|
|
2015
|
Marsh & McLennan Companies, Inc.
|
|
20.6
|
%
|
|
24.9
|
%
|
Aon Benfield
|
|
14.4
|
%
|
|
15.8
|
%
|
Willis Companies
|
|
9.5
|
%
|
|
12.8
|
%
|
Total of largest brokers
|
|
44.5
|
%
|
|
53.5
|
%
|
Letters of credit.
As of
September 30, 2016
, the Company had issued letters of credit of
$278.7 million
(
December 31, 2015
–
$341.6 million
) under its credit facilities and letter of credit reimbursement agreements in favor of certain ceding companies to collateralize obligations.
Investment commitments.
As of
September 30, 2016
and
December 31, 2015
, the Company had pledged cash and cash equivalents and fixed maturity investments of
$111.2 million
and
$108.9 million
, respectively, in favor of certain ceding companies to collateralize obligations. As of
September 30, 2016
and
December 31, 2015
, the Company had also pledged
$319.3 million
and
$383.3 million
of its cash and fixed maturity investments as required to meet collateral obligations for
$278.7 million
and
$341.6 million
, respectively, in letters of credit outstanding under its credit facilities and letter of credit reimbursement agreements. In addition, as of
September 30, 2016
and
December 31, 2015
, cash and fixed maturity investments with fair values of
$211.1 million
and
$208.3 million
were on deposit with U.S. state regulators, respectively.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
10.
|
Commitments and contingencies, cont'd.
|
The Company is subject to certain commitments with respect to other investments at
September 30, 2016
and
December 31, 2015
. See Note 3, Investments.
Investment assets held in trust.
Blue Water Re and Blue Water Re II do not operate with a financial strength rating and, instead, fully collateralize their reinsurance obligations through cash and cash equivalents held in trust funds established by Blue Water Re and Blue Water Re II (the "Blue Water Trusts") for the benefit of ceding companies. As of
September 30, 2016
, the fair value of the assets held in the Blue Water Trusts was
$405.2 million
(
December 31, 2015
-
$438.9 million
), which met the minimum value required on that date.
As of
September 30, 2016
, Blue Capital Re had pledged
$180.7 million
(
December 31, 2015
-
$195.3 million
) of its cash and cash equivalents to trust accounts established for the benefit of Blue Water Re.
Blue Capital Re ILS fully collateralizes its insurance-linked security obligations through cash and cash equivalents held in trust funds established by Blue Capital Re ILS (the "Blue Capital Re ILS Trusts") for the benefit of third parties. As of
September 30, 2016
, the fair value of the assets held in the Blue Capital Re ILS Trusts was
$3.3 million
(
December 31, 2015
-
$5.2 million
), which met the minimum value required on that date.
During 2015, Endurance Bermuda established a multi-beneficiary reinsurance trust (the "Endurance Reinsurance Trust") domiciled in Delaware. The Endurance Reinsurance Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants. As of
September 30, 2016
, the fair value of the investments held in the Endurance Reinsurance Trust exceeded
$806.6 million
(
December 31, 2015
-
$94.1 million
), the minimum value required on that date.
During 2015, Endurance Bermuda also established a second multi-beneficiary reinsurance trust domiciled in Delaware as a means of providing statutory credit to Endurance Bermuda's U.S. cedants in connection with a reduction in collateral requirements in certain states (the "Reduced Collateral Trust"). As of
September 30, 2016
, the fair value of the assets held in the Reduced Collateral Trust exceeded
$21.4 million
(
December 31, 2015
-
$10.8 million
), the minimum value required on that date.
Endurance Bermuda is party to a reinsurance trust (the "MUSIC Trust"). The MUSIC Trust was established as a means of providing statutory credit to MUSIC in support of the business retained in connection with the 2011 sale by Montpelier of MUSIC. As of
September 30, 2016
, the fair value of the assets held in the MUSIC Trust was
$22.1 million
(
December 31, 2015
-
$21.3 million
).
Endurance Bermuda is party to a Lloyd's Deposit Trust Deed (the "Lloyd's Capital Trust") in order to meet Endurance Corporate Capital Limited ("ECCL")'s ongoing funds at Lloyd's ("FAL") requirements. The minimum value of cash and investments held by the Lloyd’s Capital Trust is subject to approval by Lloyd's and is based on ECCL's Solvency Capital Requirement, which is used to determine the required amount of FAL. As of
September 30, 2016
, the fair value of cash and investments held in the Lloyd's Capital Trust was
$278.6 million
(
December 31, 2015
-
$276.8 million
), which met the minimum value required on that date.
Premiums received by Syndicate 5151 are required to be received into the Lloyd's Premiums Trust Funds (the "Premiums Trust Funds"). Under the Premiums Trust Funds' deeds, assets may only be used for the payment of claims and valid expenses for a stated period of time. As of
September 30, 2016
, the fair value of all assets held in the Premiums Trust Funds was
$177.2 million
(
December 31, 2015
-
$231.9 million
).
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
10.
|
Commitments and contingencies, cont'd.
|
The Company's investment assets held in trust appear on the Company's Condensed Consolidated Balance Sheets as cash and cash equivalents, fixed maturity investments and accrued investment income, as appropriate.
Lloyd's New Central Fund.
The Lloyd's New Central Fund is available to satisfy claims if a member of Lloyd's is unable to meet its obligations to policyholders. The Lloyd's New Central Fund is funded by an annual levy imposed on members, which is determined annually by Lloyd's as a percentage of each member's gross written premiums (
0.35%
with respect to 2016). In addition, the Council of Lloyd's has power to call on members to make an additional contribution to the Lloyd's New Central Fund of up to
3.0%
of their underwriting capacity each year should it decide that such additional contributions are necessary. The Company currently estimates that its 2016 obligation to the Lloyd's New Central Fund will be approximately
$1.2 million
and accrues for this obligation ratably throughout the year on a quarterly basis.
Lloyd's also imposes other charges on its members and the syndicates on which they participate, including an annual subscription charge (
0.45%
of gross written premiums with respect to 2016) and an overseas business charge, levied as a percentage of gross international premiums (defined as business outside the U.K. and the Channel Islands), with the percentage depending on the type of business written. Lloyd's also has power to impose additional charges under Lloyd's Powers of Charging Byelaw. The Company currently estimates that its 2016 obligation to Lloyd's for such charges will be approximately
$1.6 million
and accrues for this obligation ratably throughout the year on a quarterly basis.
BCRH Credit Agreement.
Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCRH
364
-day unsecured credit agreement (the "BCRH Credit Agreement"), which permitted BCRH to borrow up to
$20.0 million
on a revolving basis for working capital and general corporate purposes. The Company was entitled to receive an annual guarantee fee from BCRH equal to
0.125%
of the facility's total capacity (the "BCRH Guarantee Agreement"). The BCRH Credit Agreement and the BCRH Guarantee Agreement expired on April 29, 2016.
As of
September 30, 2016
, BCRH had
no
outstanding borrowings under the BCRH Credit Agreement (
December 31, 2015
-
$13.0 million
). With respect to BCRH's outstanding borrowings at December 31, 2015,
$4.0 million
was repaid on February 2, 2016 and was subject to an annual interest rate of
1.33%
,
$5.0 million
was repaid on February 22, 2016 and was subject to an annual interest rate of
1.48%
, and
$4.0 million
was repaid on March 11, 2016 and was subject to an annual interest rate of
1.51%
.
On May 6, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCRH (the "BCRH Credit Facility"). The BCRH Credit Facility provides BCRH with an unsecured
$20.0 million
revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCRH Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus
150
basis points. The BCRH Credit Facility contains covenants that limit BCRH's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If BCRH fails to comply with any of these covenants, the Company could terminate the BCRH Credit Facility and exercise remedies against BCRH. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCRH, the Company has the right to terminate the BCRH Credit Facility. As of
September 30, 2016
, BCRH had
no
outstanding borrowings under the BCRH Credit Facility.
BCGR Credit Agreement.
Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCGR
364
-day unsecured credit agreement (the "BCGR Credit Agreement"), which permitted BCGR to borrow up to
$20.0 million
on a revolving basis for working capital and general corporate purposes. The Company was entitled to receive an annual guarantee fee from BCGR equal to
0.125%
of the facility's total capacity (the "BCGR Guarantee Agreement"). The BCGR Credit Agreement and the BCGR Guarantee Agreement expired on May 12, 2016.
As of
September 30, 2016
, BCGR had
no
outstanding borrowings under the BCGR Credit Agreement (
December 31, 2015
-
$6.0 million
). With respect to BCGR's outstanding borrowing at December 31, 2015,
$3.0 million
was repaid on February 1, 2016 and was subject to an annual interest rate of
1.54%
, and
$3.0 million
was repaid on February 12, 2016 and was subject to an annual interest rate of
1.51%
.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
10.
|
Commitments and contingencies, cont'd.
|
On May 6, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCGR (the "BCGR Credit Facility"). The BCGR Credit Facility provides BCGR with an unsecured
$20.0 million
revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCGR Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus
150
basis points. The BCGR Credit Facility contains covenants that limit BCGR's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If BCGR fails to comply with any of these covenants, the Company could terminate the BCGR Credit Facility and exercise remedies against BCGR. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCGR, the Company has the right to terminate the BCGR Credit Facility. As of
September 30, 2016
, BCGR had
no
outstanding borrowings under the BCGR Credit Facility.
Investment repurchase agreements
. At
September 30, 2016
, the Company's investment repurchase agreement obligations of
$121.0 million
were fully collateralized. The following table presents the fair value of collateral pledged under repurchase agreements by investment category. The remaining contractual maturity of the repurchase agreements is less than
30
days.
|
|
|
|
|
|
|
|
September 30, 2016
|
Collateral pledged under repurchase agreements
|
|
|
U.S. government and agencies securities
|
|
$
|
25,876
|
|
Residential mortgage-backed securities
|
|
98,427
|
|
|
|
$
|
124,303
|
|
Gross amount of recognized liabilities for repurchase agreements
|
|
$
|
120,997
|
|
Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transaction. In the event of a decline in the fair value of the pledged collateral under these agreements, the Company may be required to transfer cash or additional securities as pledged collateral under these agreements. Upon termination of the transactions, the Company and its counterparties are obligated to return the amounts borrowed and the securities transferred, respectively.
Reinsurance commitments
. In the ordinary course of business, the Company periodically enters into reinsurance agreements that include terms that could require the Company to collateralize certain of its obligations.
Employment agreements.
The Company has entered into employment agreements with certain officers that provide for equity incentive 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
September 30, 2016
are as follows:
|
|
|
|
|
|
Twelve months ended September 30,
|
|
Amount
|
2017
|
|
$
|
15,810
|
|
2018
|
|
16,194
|
|
2019
|
|
15,644
|
|
2020
|
|
14,874
|
|
2021
|
|
13,132
|
|
2022 and thereafter
|
|
17,425
|
|
|
|
$
|
93,079
|
|
Total net lease expense under operating leases for the
nine
months ended
September 30, 2016
was
$8.7 million
(
2015
–
$10.5 million
).
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
|
|
10.
|
Commitments and contingencies, cont'd.
|
Legal proceedings.
The Company is party to various legal proceedings generally arising in the normal course of its business. While any proceeding contains an element of uncertainty, the Company does not believe that the eventual outcome of any litigation or arbitration proceeding to which it is presently a party could have a material adverse effect on its financial condition or business. Pursuant to the Company's insurance and reinsurance agreements, disputes are generally required to be settled by arbitration.
11.
Debt and financing arrangements
Credit Facility
On March 23, 2016, the Company and certain designated subsidiaries of the Company entered into a
$450.0 million
five
-year letter of credit facility with JPMorgan Chase Bank, N.A. ("JPMorgan") as administrative agent (the "Credit Facility"). Upon entering into the Credit Facility, the Company terminated its existing
$700.0 million
credit agreement, dated April 19, 2012, with JPMorgan as administrative agent. As of
September 30, 2016
, there were letters of credit outstanding under the Credit Facility of
$255.3 million
(
December 31, 2015
–
$329.9 million
). The Credit Facility does not provide for revolving or term loans.
The Credit Facility is collateralized on a several basis by each entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas as collateral agent. So long as there is no default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by
$100.0 million
, but no participating lender is obligated to increase its commitments under the Credit Facility.
The Company is required to pay a fee of
0.40%
per annum on the daily stated amount of outstanding letters of credit issued under the Credit Facility. In addition, the Credit Facility requires the Company to pay to the lenders a commitment fee in the amount of
0.125%
per annum on the average daily amount of the unused commitments of the lenders. The Credit Facility permits a lender, if requested and in its discretion, to issue a letter of credit pursuant to which it fronts for the other lenders. For such letters of credit, such fronting lenders may receive certain fronting fees from the Company.
The Credit Facility requires the Company's compliance with certain customary restrictive covenants, including a financial covenant that the Company maintain a leverage ratio of no greater than
0.35
:1.00 at any time. In addition, each of the Company's regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times.
The Credit Facility also contains customary event of default provisions, including failure to pay any unpaid drawing under a letter of credit under the Credit Facility or interest thereon and failure to pay any fee under the Credit Facility, insolvency events of the Company or any of its subsidiaries (other than certain immaterial subsidiaries), a change in control of the Company, a breach of the representations or covenants in the Credit Facility or the security documents relating thereto and certain defaults by the Company or its subsidiaries under other indebtedness. In the case of an event of default that occurs as a result of an insolvency event of the Company or one of its designated subsidiary borrowers, the commitments of the lenders will automatically terminate and the repayment of outstanding obligations will be automatically accelerated. Upon the occurrence of any other event of default under the Credit Facility, the lenders can terminate their commitments under the Credit Facility, require repayment of any outstanding obligations under the Credit Facility, give notice of non-extension of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any collateral held by the lenders (or any agent on their behalf) under the Credit Facility.
12.
Subsequent events
Merger with Sompo Holdings, Inc.
On October 5, 2016, the Company entered into an agreement and plan of merger (the "Merger Agreement") for the acquisition of
100%
of the outstanding ordinary shares of the Company by Sompo Holdings, Inc. ("SOMPO") for
$93.00
per share in cash (the "Merger"). The Merger has been approved by both companies' Board of Directors. The Merger is expected to close as soon as practicable following the satisfaction of customary closing conditions including, but not limited to, approval by the Company's shareholders and regulatory approvals. There can be no assurance that the Merger will occur.
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
for ratios, share and per share amounts)
12.
Subsequent events, cont'd.
Under the terms of the Merger Agreement, the aggregate consideration for the Merger will be approximately
$6,304.0 million
in cash. The purchase will be financed by SOMPO with existing sources of liquidity and supplementary facilities without a financing contingency.
If the Merger is terminated under certain circumstances, the Company is obligated to pay SOMPO a cash termination fee of
$204.9 million
together with SOMPO's expenses relating to the Merger up to
$15.8 million
.
The Company incurred
$1.0 million
of corporate expenses associated with the Merger during the three months ended
September 30, 2016
and is contractually obligated to pay investment banking fees upon closing of the Merger. The Company expects to incur additional costs and expenses associated with the Merger during the fourth quarter of
2016
and the first quarter of 2017.
Hurricane Matthew
On October 7 and 8, 2016, Hurricane Matthew affected the southeastern coast of the United States, ultimately making landfall in South Carolina. To date, reported claims as a result of this storm have been limited. While losses emanating from the storm cannot be accurately estimated at this time, the Company may need to establish appropriate loss reserves related to Hurricane Matthew in the fourth quarter of 2016, which may have a negative impact on its results of operations.