UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2011, or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from             to            

Commission file number 1-31599

ENDURANCE SPECIALTY HOLDINGS LTD.

(Exact name of registrant as specified in its charter)

Bermuda	98-0392908
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Wellesley House

90 Pitts Bay Road

Pembroke HM 08, Bermuda

(Address of principal executive offices, including postal code)

Registrant’s telephone number, including area code: (441) 278-0400

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of Each Class	Name of Each Exchange on Which Registered
Ordinary Shares, par value $1.00 per share	New York Stock Exchange
Preferred Shares, Series A, par value $1.00 per share	New York Stock Exchange
Preferred Shares, Series B, par value $1.00 per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.

    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No    ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes  ¨    No  x

The aggregate market value of the ordinary shares held by non-affiliates of the registrant, as of June 30, 2011, was $1,317,714,099.

As of February 17, 2012, 43,092,492 ordinary shares were outstanding.

Certain portions of the registrant’s definitive proxy statement relating to its 2012 Annual General Meeting of Shareholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

	September 30,		September 30,
		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		32
Item 1B.	Unresolved Staff Comments		49
Item 2.	Properties		49
Item 3.	Legal Proceedings		49
Item 4.	Mine Safety Disclosures		49
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		49
Item 6.	Selected Financial Data		53
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		56
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		94
Item 8.	Financial Statements and Supplementary Data		98
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		149
Item 9A.	Controls and Procedures		149
Item 9B.	Other Information		149
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		150
Item 11.	Executive Compensation		150
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		150
Item 13.	Certain Relationships and Related Transactions, and Director Independence		150
Item 14.	Principal Accountant Fees and Services		150
PART IV
Item 15.	Exhibits and Financial Statement Schedules		151

1

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a “safe harbor” for forward-looking statements. These forward-looking statements reflect our current views with respect to future events and financial performance. Such statements include forward-looking statements with respect to us specifically and the insurance and reinsurance business generally, investments, capital markets and the general economic environments in which we operate. Statements which include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “seek,” “will,” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise.

All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:

• the effects of competitors’ pricing policies, and of changes in laws and regulations on competition, industry consolidation and development of competing financial products;

• greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices have anticipated;

• greater frequency or severity of loss activity, as a result of changing climate conditions;

• changes in market conditions in the agriculture industry, which may vary depending upon demand for agricultural products, weather, commodity prices, natural disasters, technological advances in agricultural practices, changes in U.S. and foreign legislation and policies related to agricultural products and producers;

• termination of or changes in the terms of the U.S. multiple peril crop insurance program and termination or changes to the U.S. farm bill, including modifications to the Standard Reinsurance Agreement put in place by the Risk Management Agency of the U.S. Department of Agriculture;

• decreased demand for property and casualty insurance or reinsurance or increased competition due to an increase in capacity of property and casualty insurers and reinsurers;

• changes in the availability, cost or quality of reinsurance or retrocessional coverage;

• the inability to renew business previously underwritten or acquired;

• the inability to obtain or maintain financial strength or claims-paying ratings by one or more of our subsidiaries;

• our ability to effectively integrate acquired operations and to continue to expand our business;

• uncertainties in our reserving process, including the potential for adverse development of our loss reserves or failure of our loss limitation methods;

• the ability of the counterparty institutions with which we conduct business to continue to meet their obligations to us;

• the failure or delay of the Florida Citizens Property Insurance Corporation, the Florida Hurricane Catastrophe Fund or private market participants in Florida to promptly pay claims, particularly following a large windstorm or of multiple smaller storms;

• our continued ability to comply with applicable financial standards and restrictive covenants, the breach of which could trigger significant collateral or prepayment obligations;

• Endurance Specialty Holdings Ltd. (“Endurance Holdings”) or Endurance Specialty Insurance Ltd. (“Endurance Bermuda”) becomes subject to income taxes in jurisdictions outside of Bermuda;

• changes in tax regulations or laws applicable to us, our subsidiaries, brokers or customers;

• state, federal and foreign regulations that impede our ability to charge adequate rates and efficiently allocate capital;

• changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including the establishment of the Federal Insurance Office and other regulatory changes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the United States and the implementation of Solvency II by the European Commission;

• reduced acceptance of our existing or new products and services;

• loss of business provided by any one of a few brokers on whom we depend for a large portion of our revenue, and our exposure to the credit risk of our brokers;

• actions by our competitors, many of which are larger or have greater financial resources than we do;

2

• assessments by states for high risk or otherwise uninsured individuals;

• the impact of acts of terrorism and acts of war;

• the effects of terrorist related insurance legislation and laws;

• loss of key personnel;

• political stability of Bermuda;

• changes in the political environment of certain countries in which we operate or underwrite business;

• changes in accounting regulation, policies or practices;

• our investment performance;

• the valuation of our invested assets and the determination of impairments of those assets, if any;

• the breach of our investment guidelines or the inability of those guidelines to mitigate investment risk;

• the possible further downgrade of U.S. or foreign government securities by credit rating agencies, and the resulting effect on the value of U.S. or foreign government and other securities in our investment portfolio as well as the uncertainty in the market generally;

• the need for additional capital in the future which may not be available or only available on unfavorable terms;

• the ability to maintain the availability of our systems and safeguard the security of our data in the event of a disaster or other unanticipated event; and

• changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates, and other factors.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Annual Report on Form 10-K, including the risk factors set forth in Item 1A. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

PART I

Item 1. Business

OVERVIEW

Endurance Holdings is a holding company domiciled in Bermuda. Through our operating subsidiaries based in Bermuda, the United States and the United Kingdom, we focus on underwriting specialty lines of personal and commercial property and casualty insurance and reinsurance on a global basis. We define specialty lines as those lines of insurance and reinsurance that require dedicated, specialized underwriting skills and resources in order to be profitably underwritten. Our portfolio of specialty lines of business is organized into two business segments – Insurance and Reinsurance.

We began operations on December 17, 2001 after Endurance Bermuda completed a private placement of $1.2 billion of its equity securities. Endurance Holdings was incorporated in Bermuda in June 2002. On March 5, 2003, Endurance Holdings completed the initial public offering of its ordinary shares. Endurance Holdings’ seven wholly-owned operating subsidiaries as of December 31, 2011 are as follows:

• Endurance Bermuda, domiciled in Bermuda with branch offices in Zurich and Singapore;

• Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware;

• Endurance Worldwide Insurance Limited (“Endurance U.K.”), domiciled in England;

• Endurance American Insurance Company (“Endurance American”), domiciled in Delaware;

• Endurance American Specialty Insurance Company (“Endurance American Specialty”), domiciled in Delaware;

• Endurance Risk Solutions Assurance Co. (“Endurance Risk Solutions”) domiciled in Delaware; and

• American Agri-Business Insurance Company, domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together “ARMtech”).

Endurance Holdings and its wholly-owned subsidiaries are collectively referred to in this discussion as “we” or the “Company”. Endurance Holdings’ ordinary shares are traded on the New York Stock Exchange under the symbol “ENH”.

3

BUSINESS STRATEGY

Our goal is to leverage our competitive strengths and successfully execute our strategy in order to generate a superior long-term return on capital.

The key elements of our strategy are:

• Maintain a Portfolio of Profitable Specialty Lines. We participate in specific specialty lines of insurance and reinsurance that we believe have the potential to offer the highest risk-adjusted return on capital and in which we believe we can establish a competitive advantage through our specialized teams of expert underwriters. We leverage our ability to participate in multiple lines of business to deploy capital and resources to the most attractive business lines at the most opportune times. The Company strategically balances its participation between insurance and reinsurance policies and contracts as well as balances exposures across product lines and geographic locations.

• Utilize Monoline Level of Expertise in Each Line of Business. We have teams of highly experienced professionals to manage each of our specific lines of business. Each team is led by underwriting personnel who are specialists in their unique business line.

• Apply Extensive Technical Analysis to Our Underwriting. We manage our portfolio of risks through the utilization of catastrophe modeling and dynamic financial analysis techniques that provide a quantitative basis for the management of risk aggregation and correlation. We require significant amounts of data in our underwriting process and proactively monitor market trends to look for competitive threats to the lines of business in which we operate as well as to analyze potential new lines that may provide attractive opportunities. We use information gathered to update and adjust the assumptions underlying our risk management models as appropriate.

• Maintain Strong Risk Management Practices. We believe that a strong risk management culture is key to maximizing risk adjusted returns on capital and to manage volatility and other risks that could threaten the Company’s solvency. Our enterprise risk management techniques include sophisticated modeling technology and a detailed internal control structure that gives us a competitive advantage in managing our underwriting, investment and operational risks across the Company. The Company employs a number of practices and committees at both the Board of Directors and management levels that foster communication across groups, to enhance the coordination of risk management strategies and to identify current issues and emerging risks.

• Focus on Underlying Profitability of Business Underwritten. We underwrite our business with a focus on the underlying profitability that the business brings to Endurance and are committed to expanding or contracting our businesses based upon the opportunities presented in the markets in which we participate.

• Utilization of Reinsurance Protection to Enhance Risk Management. When we are insuring correlated risks such as natural perils, we purchase catastrophe reinsurance at a level consistent with the size of the individual book of business being underwritten. In addition to being a critical tool for managing loss risk accumulations, reinsurance is also used to ensure our insurance businesses are of sufficient size to be considered a lead market for their products. In our Reinsurance segment, we continue to strategically review and underwrite our business on a net basis, managing our reinsurance portfolio risk through underwriting analysis and portfolio diversification. However, we may strategically purchase reinsurance protection across our portfolio to balance our book of business against the risk of a severe catastrophe event or the occurrence of multiple significant catastrophe events.

• Maintain a Portfolio of Investments to Generate Net Investment Income and Book Value Growth. We manage our investment portfolio within a risk adjusted, expected return framework. Our investment management activities focus on ensuring that the Company has adequate liquidity to satisfy the needs of its customers, regulators, rating agencies and shareholders while adding value through the disciplined management of investment risk to earn superior risk adjusted returns. Flexibility exists within this framework to adjust asset allocation in order to benefit from market opportunities to maximize our risk-adjusted returns.

• Proactively Manage Our Capital Base. Our underwriting, actuarial, finance and investment professionals work together to achieve a balance in the risks we undertake. We actively manage our capital by allocating resources to underwriting and investment opportunities which we believe will offer the highest risk-adjusted return on capital. The primary focus of our capital management activities is to optimize our risk adjusted return on equity while ensuring the Company maintains sufficient levels of risk based capital and financial flexibility to satisfy the needs of our customers, regulators, rating agencies and shareholders. Over the long-term, we will return excess capital to our shareholders rather than use excess capital to underwrite business that no longer meets our underwriting requirements.

4

BUSINESS SEGMENTS

The Company currently has two business segments – Insurance and Reinsurance. Financial data relating to our two segments is included in Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our Audited Consolidated Financial Statements and related notes presented under Item 8 – “Financial Statements and Supplementary Data”.

Our two business segments and the related gross and net premiums written for the years ended December 31, 2011, 2010 and 2009 are as follows:

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2011				2010				2009
	Gross		Net		Gross		Net		Gross		Net
	Premiums		Premiums		Premiums		Premiums		Premiums		Premiums
Business Segments	Written		Written		Written		Written		Written		Written
	(U.S. dollars in thousands)
Insurance	$	1,469,798	$	1,005,490	$	1,112,192	$	829,864	$	1,152,150	$	740,310
Reinsurance		997,316		974,331		941,044		933,880		869,300		865,740
Total	$	2,467,114	$	1,979,821	$	2,053,236	$	1,763,744	$	2,021,450	$	1,606,050

Insurance

Our Insurance segment is comprised of six lines of business: agriculture, professional lines, casualty, property, healthcare liability, and surety and other specialty lines. Gross and net premiums written for the lines of business in the Insurance segment for the years ended December 31, 2011, 2010 and 2009 are as follows:

		September 30,		September 30,		September 30,			September 30,			September 30,		September 30,
	2011				2010						2009
	Gross		Net		Gross			Net			Gross		Net
	Premiums		Premiums		Premiums			Premiums			Premiums		Premiums
Lines of Business	Written		Written		Written			Written			Written		Written
	(U.S. dollars in thousands)
Agriculture	$	901,746	$	586,659	$	567,461		$	404,767		$	572,096	$	324,480
Professional lines		169,319		137,962		170,146			148,717			193,799		167,091
Casualty		205,950		137,373		167,549			107,801			152,580		91,071
Property		109,312		64,930		122,110			88,299			124,621		68,011
Healthcare liability		82,519		77,609		87,593			82,893			82,955		78,284
Surety and other specialty		952		957		(2,667	)		(2,613	)		26,099		11,373
Total	$	1,469,798	$	1,005,490	$	1,112,192		$	829,864		$	1,152,150	$	740,310

A description of each of these lines of business follows:

Agriculture. Our agriculture insurance business focuses on traditional multi-peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products, all offered through independent agents in the United States.

Professional Lines. Our professional lines insurance business includes directors’ and officers’ liability, errors and omissions, employment practices liability, environmental liability and pension trust liability insurance and includes both non-profit and for-profit entities representing a wide range of industry groups.

Casualty. Our casualty insurance line of business provides third party liability insurance for a wide range of industry groups. Our excess casualty clients are typically Fortune 1000 companies with sophisticated risk management practices who generally retain large portions of their own risk and purchase large insurance limits. In addition, we write casualty insurance that targets middle market companies at lower attachment points for the real estate, manufacturing, chemicals, financial, utilities, telecommunications, construction and other industries.

Property. Our property insurance line of business is comprised of insured properties with sufficiently large values to require multiple insurers and reinsurers to accommodate their insurance capacity needs. The properties insured are generally of a commercial nature and are spread across a variety of industries, such as real estate, retail, manufacturing, chemicals, financial services, utilities, telecommunications, construction, civil engineering and municipalities/institutions. As of February 2009, we ceased offering property insurance coverage from our London office.

Healthcare Liability. Our healthcare liability line of business is focused on excess hospital medical professional liability insurance. Our Bermuda operation focuses on institutional healthcare providers such as large, stand-alone hospitals, multi-hospital systems, university teaching hospitals and integrated specialty hospitals. Our U.S.-based operations offer excess coverage to small to medium sized stand-alone hospitals and other healthcare organizations.

Surety and Other Specialty. We provide contract and commercial surety insurance on both a proportional and excess of loss basis. This business line also includes workers’ compensation insurance, which the Company ceased writing as of February 2009. Our workers’ compensation insurance line was primarily focused on niche markets in the U.S., particularly the California workers’ compensation insurance market.

5

Reinsurance

Our Reinsurance segment is comprised of five lines of business: catastrophe, casualty, property, aerospace and marine and surety and other specialty. Gross and net premiums written for the lines of business in the Reinsurance segment for the years ended December 31, 2011, 2010 and 2009 are as follows:

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2011				2010				2009
	Gross		Net		Gross		Net		Gross		Net
	Premiums		Premiums		Premiums		Premiums		Premiums		Premiums
Lines of Business	Written		Written		Written		Written		Written		Written
	(U.S. dollars in thousands)
Catastrophe	$	346,021	$	329,081	$	309,886	$	305,617	$	303,404	$	302,218
Casualty		277,495		276,697		294,030		293,222		255,142		254,897
Property		266,562		266,562		224,544		224,544		215,085		215,085
Aerospace and Marine		54,591		52,335		48,761		46,696		44,696		42,563
Surety and Other Specialty		52,647		49,656		63,823		63,801		50,973		50,977
Total	$	997,316	$	974,331	$	941,044	$	933,880	$	869,300	$	865,740

A description of these lines of business follows:

Catastrophe. Our catastrophe reinsurance line of business reinsures catastrophic perils for ceding companies on a treaty basis for primarily property and workers’ compensation business. The principal perils reinsured in our catastrophe reinsurance business include natural perils such as hurricanes, typhoons, earthquakes, floods, tornados, hail and fire and certain man-made perils such as industrial events and terrorism.

Casualty. Our casualty reinsurance line of business reinsures third party liability exposures from ceding companies on a treaty basis such as automobile liability, professional liability, directors’ and officers’ liability, umbrella liability and workers’ compensation.

Property. Property reinsurance reinsures individual property insurance policies issued by our ceding company clients including both personal lines and commercial exposures (principally covering buildings, structures, equipment, contents and time element coverages on a treaty basis). Loss exposures in this segment include the perils of fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. We underwrite our property reinsurance line of business on both a proportional and excess of loss basis.

Aerospace and Marine. Our aerospace line of business is comprised primarily of the reinsurance of aviation and space risks. The aviation business includes hull, aircraft liability and aircraft products coverages and the space business includes satellite launch and in-orbit coverage.

Our marine business consists of the reinsurance of bluewater hull, brownwater hull and cargo risks and is underwritten on a proportional and non-proportional basis.

Surety and Other Specialty. We provide surety reinsurance for contract and commercial surety insurers, as well as for fidelity insurers, on both a proportional and excess of loss basis. This business line also includes agriculture reinsurance comprised of risks associated with the production of food and fiber on a global basis; traditional treaty, proportional and aggregate stop loss reinsurance for primary insurance companies writing multi-peril crop insurance, crop hail; and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposure to crop yield or price. Our remaining business in this line represents a variety of contracts, such as personal accident and terrorism, which are underwritten utilizing the expertise of our senior underwriting staff.

Please see Item 8 – “Financial Statements and Supplementary Data” and in our Audited Consolidated Financial Statements and related notes presented under Note 9 – “Segment Reporting” for additional information about our business segments and the geographic distribution of our gross premiums written for the last three fiscal years.

6

DISTRIBUTION

The majority of our business is obtained directly by the Company or through the use of intermediaries, including independent agents and insurance and reinsurance brokers around the world. The brokerage distribution channel provides us with access to an efficient, variable cost, and global distribution system without the significant time and expense which would be incurred in creating wholly-owned distribution networks for certain lines of business.

For the year ended December 31, 2011, Marsh & McLennan Companies, Inc. was the largest distributor in our Insurance segment, and Aon Benfield was the largest broker distributor in our Reinsurance segment. A breakdown of our distribution by broker and by business segment for the years ended December 31, 2011, 2010 and 2009 is provided in the tables below:

Insurance

		September 30,			September 30,			September 30,
	Percentage of Net Premiums Written
Broker	2011			2010			2009
Marsh & McLennan Companies, Inc.		7.5	%		10.1	%		10.8	%
Aon Benfield		3.8	%		6.2	%		7.1	%
Willis companies		2.0	%		3.1	%		3.4	%
Independent agents		58.3	%		49.3	%		44.0	%
All others		28.4	%		31.3	%		34.7	%
Total		100.0	%		100.0	%		100.0	%

Reinsurance

		September 30,			September 30,			September 30,
	Percentage of Net Premiums Written
Broker	2011			2010			2009
Aon Benfield		33.0	%		34.7	%		32.2	%
Marsh & McLennan Companies, Inc.		25.0	%		29.3	%		27.6	%
Willis companies		23.7	%		21.2	%		25.4	%
All others		18.3	%		14.8	%		14.8	%
Total		100.0	%		100.0	%		100.0	%

CLAIMS MANAGEMENT

Under the direction of our Chief Claims Officer, claims are managed by our experienced, technical claims teams working closely with each of our operating subsidiaries. Our claims staff reviews initial loss reports, administers claims databases, generates appropriate responses to claims reports, identifies and handles coverage issues, determines whether further investigation is required and where appropriate, retains outside claims counsel, establishes case reserves, approves claims for payment, manages salvage and subrogation and notifies reinsurers. In addition, our claims staff conducts significant audits of our insurance company clients throughout the year, evaluating claims handling abilities, reserve philosophies, loss notification processes and overall quality of our clients’ performance.

Upon receipt, claims notices are recorded by the claims staff within our underwriting, financial and claims systems. When the Company is notified of insured losses or discovers potential losses as part of its claims audits, claims personnel record a case reserve as appropriate for the estimated amount of the exposure at that time. The estimate reflects the judgment of our claims personnel based on general reserving practices, the experience and knowledge of such personnel regarding the nature of the specific claim and, where appropriate, advice of counsel. Reserves are also established to provide for the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process.

7

RESERVE FOR LOSSES AND LOSS EXPENSES

We are required by applicable insurance laws and regulations and accounting principles generally accepted in the United States (“U.S. GAAP”) to establish reserves for losses and loss expenses that arise from our business. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for insured or reinsured claims which have occurred at or before the balance sheet date, whether already known to us or not yet reported. It is our policy to establish these losses and loss expense reserves after evaluating all information known to us as of the date they are reported.

We use statistical and actuarial methods to reasonably estimate ultimate expected losses and loss expenses. The period of time from the reporting of a loss to us and the settlement of our liability may be several years. During this period, additional facts and trends may be revealed. As these factors become apparent, reserves will be adjusted, sometimes requiring an increase in our overall reserves, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves.

Reserves for losses and loss expenses are based in part upon the estimation of losses resulting from catastrophic events. Estimation of losses from catastrophic events is inherently difficult because of the infrequency and severity of large catastrophes. Therefore, we utilize commercially available models, as well as historical reinsurance industry property catastrophe claims experience to supplement our own historical claims experience, for purposes of evaluating future trends and providing an estimate of ultimate claims costs.

To assist us in establishing appropriate reserves for losses and loss expenses, we analyze a significant amount of insurance industry information with respect to the pricing environment and loss settlement patterns. In combination with our individual pricing analyses, this industry information is used to guide our loss and loss expense estimates. These estimates are reviewed regularly, and adjustments, if any, are recorded in earnings in the periods in which they are determined.

While management believes it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance and reinsurance operations, and there can be no assurance that our future losses and loss expenses will not exceed our current total reserves. For a description of the Company’s current reserves, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reserve for Losses and Loss Expenses” and Note 5 – “Reserve for losses and loss expenses” in the Notes to the Consolidated Financial Statements of the Company.

ENTERPRISE RISK MANAGEMENT

We have developed a strong risk management culture within the Company through the establishment of various processes and controls focused on the Company’s risk exposures. Our enterprise risk management (“ERM”) activities are critical to the organization’s senior management, business units and Board of Directors. The goals of our ERM framework that drive our corporate strategy are as follows:

• identify and manage the risks that threaten the Company and its solvency;

• optimize the Company’s risk based capital position;

• maximize the Company’s risk adjusted returns on capital;

• manage underwriting, investment and operational volatility; and

• clearly communicate our approach to our employees and external constituencies.

In order to meet our ERM goals, the Company has established risk tolerances applicable to all areas of our business. It is our corporate objective to limit the risk of a significant loss on an economic basis from a one-in-one-hundred year series of catastrophic events to no more than 25% of our shareholders’ equity. We define “economic basis” as premiums plus net investment income less incurred losses and loss expenses, acquisition expenses and general and administrative expenses.

On a group basis, we monitor our:

• capital position relative to our internal requirements and the requirements of our regulators and rating agencies; and

• liquidity by stressing cash outflow scenarios relative to available cash and cash equivalents and other forms of liquidity.

In addition, we have developed processes, models and a detailed internal control structure to specifically address our risk exposures. The Company’s primary risk exposure areas are as follows: underwriting risk, including certain key underwriting risks associated with the pricing and exposure evaluation process; catastrophe correlation/aggregation risk; the risk embedded in the loss reserve estimation process; investment risk; and operational risk. The following sections more specifically address our method and procedures for addressing and managing our underwriting, catastrophe, loss reserving, investment and operational risks.

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Underwriting Risk Management

Internal underwriting controls are established by our Chief Executive Officer, President and Chief Underwriting Officer. Underwriting authority is delegated to the managers of our lines of business in each business segment and to underwriters in accordance with corporate risk tolerances, prudent practice and underwriting capabilities. Detailed letters of underwriting authority are issued to each of our underwriters. These underwriting authority letters reference our operating guidelines and a description of the analytic process to be followed. The underwriting authority letters additionally include referral requirements by lines of business, terms, conditions, risk exposures, transactional situations, and limits and premium capacity. Our return on capital guidelines are attached to each letter as an exhibit and are stated in terms of maximum combined ratio targets, excluding our general and administrative expenses, and minimum return on risk based capital by line of business.

Our return on capital guidelines are regularly reviewed by our Chief Executive Officer, President, Chief Underwriting Officer and our Chief Risk Officer to reflect changes in market conditions, interest rates, capital requirements and market-expected returns. In addition, oversight of underwriting and risk management is provided by our Board of Directors and its Underwriting and Risk Committees. For a further discussion on the role of our Board of Directors in the Company’s risk management, see “Role of the Board of Directors in Risk Management” below.

We have a disciplined approach to underwriting and risk management that relies heavily upon the collective underwriting expertise of our management and staff. This expertise is in turn guided by the following underwriting principles:

• we will underwrite and accept only those risks we know and understand;

• we will perform our own independent pricing or risk review on all risks we accept; and

• we will accept only those risks that are expected to earn a return on capital commensurate with the risk they present.

Before we review any natural catastrophe exposed insurance or reinsurance proposal, we consider the appropriateness of the client, including the quality of its management and its risk management strategy. In addition, we require each proposal to include significant information on the nature of the perils to be included and detailed aggregate information as to the location or locations of the risks covered. We further request information on the client’s loss history for the perils being insured or reinsured, together with relevant underwriting considerations. If a proposal meets the preceding underwriting criteria, we then evaluate the proposal in terms of its risk/reward profile to assess the adequacy of the proposed pricing and its potential impact on our overall return on capital as well as our corporate risk objectives.

We have fully integrated our internal actuarial staff into the underwriting and decision making process. We use in-depth actuarial and risk analyses to evaluate contracts prior to authorization. In addition to internal actuaries and risk professionals, we make use of outside consultants as necessary to develop appropriate analyses for pricing.

Separate from our natural catastrophe exposed businesses, we underwrite and accept casualty and specialty insurance and reinsurance business. We apply the same standards with respect to actuarial and risk analysis to these businesses using commercial data and models licensed from various professional service firms. As with our natural catastrophe exposed businesses, we seek to identify those casualty and specialty exposures that are most likely to be simultaneously influenced by significant events. These exposures are then jointly tracked to ensure that we do not develop an excessive accumulation of exposure to that particular type of event.

In addition to the above technical and analytical practices, our underwriters use a variety of tools, including specific contract terms, to manage our exposure to loss. These include occurrence limits, aggregate limits, reinstatement provisions and loss ratio caps. Additionally, our underwriters use appropriate exclusions, terms and conditions to further eliminate particular risks or exposures that our underwriting team deems to be outside of the intent of the coverage we are willing to offer. Our Bermuda underwriting location provides us with a particular advantage for certain lines of business because there are no regulatory limitations upon our use of coverage restrictions in insurance policies.

In our crop insurance business, we have invested in an experienced team of crop, commodity and economic analysts who have developed proprietary tools to manage risk, pricing and exposure in this business. These proprietary tools are constructed from databases that involve a comprehensive set of historical profit and loss experience data developed at a crop, state, county and farm level of detail. We further analyze this data based on current and forecasted crop growing conditions, agriculture commodity prices, and market conditions in an effort to produce attractive returns.

In certain cases, the risks assumed by the Company are partially reinsured with third party reinsurers. Reinsurance ceded varies by segment and line of business based on a number of factors, including market conditions. The benefits of ceding risks include reducing exposure on individual risks, protecting against catastrophic risks, maintaining acceptable capital ratios and enabling the writing of additional business. Reinsurance ceded does not legally discharge the Company from its liabilities to the original policyholder in respect of the risk being reinsured. For more information on the Company’s reinsurance ceded, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Ceded Reinsurance” and Note 6 – “Reinsurance” in the Notes to the Consolidated Financial Statements of the Company.

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Catastrophe Risk Management

To achieve our catastrophe risk management objectives, we utilize a variety of proprietary and commercially available tools to quantify and monitor the various risks we accept as a company.

Our catastrophe modeling tools, which include both proprietary and licensed software, use exposure data provided by our insureds and ceding company clients to simulate catastrophic losses. We take an active role in the evaluation of commercial catastrophe models, providing feedback to the modeling companies to improve the efficiencies of their models. We also supplement the model output in certain territories with the results of our proprietary models and lessons learned from actual catastrophe events. We use modeling not just for the underwriting of individual transactions but also to optimize the total return and risk of our underwriting portfolio. We have high standards for the quality and levels of detailed exposure data provided by our clients and have an expressed preference for data at the zip code or postal code level or finer. Data provided at more summary levels, such as counties or CRESTA zones, is conservatively modeled and surcharged for increased uncertainty. We require significant amounts of data from our clients and decline business in which we feel the data provided is insufficient to make an appropriate analysis. Our commitment to detailed exposure data has precluded significant involvement as a retrocessionaire in the current market.

Data output from the software described above is incorporated in our proprietary models. Our proprietary systems include those for modeling risks associated with property catastrophe, healthcare liability, aerospace and marine, agriculture, property and workers’ compensation business, various casualty and specialty pricing models as well as our proprietary portfolio risk management and capital allocation models. These systems allow us to monitor our pricing and risk on a contract by contract basis in each of our segments and business lines.

Data output from both our licensed and proprietary software models is used to estimate the amount of premium that is required to pay the long-term expected losses under the proposed contracts. The data output is also used to estimate correlation between both new business and our existing portfolio. The degree of correlation is used to estimate the incremental capital required to support our participation on each proposed risk, allowing us to calculate a return on consumed capital. Finally, the data output is used to monitor and control our cumulative exposure to individual perils across all of our businesses.

Our pricing of catastrophe reinsurance contracts is based on a combination of modeled loss estimates, actual ceding company loss history, surcharges for potential unmodeled exposures, fixed and variable expense estimates and profit requirements. The profit requirements are based on incremental capital usage estimates described above and on our required return on consumed capital.

Loss Reserving Risk Management

Establishing reserves for losses and loss expenses, in particular reserves for the Company’s long-tail lines of business, constitutes a significant risk for the Company. Loss reserves do not represent an exact calculation of liability, but instead are estimates of what the Company expects the ultimate settlement and administration of claims will cost. To the extent the Company determines that actual losses and loss expenses exceed the loss reserves recorded in our financial statements, the Company will be required to increase its reserve for losses and loss expenses which in turn could cause a material reduction in the Company’s profitability and capital.

The Company manages the risk inherent in estimating the Company’s reserves for losses and loss expenses in a variety of ways. First, the Company underwrites a balanced and diversified portfolio of business, which reduces the Company’s susceptibility to reserving errors that may be associated with any one line or type of business. In 2011, the Company’s largest single line of business represented 36.6% of the gross premiums written by the Company. Second, where loss development uncertainty exists, the Company makes select use of the purchase of reinsurance to reduce the Company’s exposure to such loss development uncertainty, in particular in our insurance lines of business. Third, the Company incorporates uncertainty in loss trends into its underwriting pricing process. Finally, in its reinsurance business, the Company conducts active, regular audits of its ceding company clients with the intent of identifying quickly and thoroughly exposures assumed by the Company.

The Company’s reserving process also serves to mitigate the risk associated with the Company’s loss and loss expense reserve estimates. The Company seeks to base its loss reserve estimates upon actuarial and statistical projections derived from the most recently available data, as well as current information on future trends in claims severity and frequency, judicial theories of liability and other factors. The Company continually refines both its loss reserve estimates and the means by which its loss reserve estimates are derived, incorporating an ongoing process of developing loss experience, reported claims and claims settlements.

Investment Risk Management

Investment risk encompasses the risk of loss in our investment portfolio potentially caused by the adverse impact on our invested assets from fluctuations in interest rates, equity prices, credit spreads, foreign currency rates and other market changes.

The Company manages its investment risks through both a system of limits and a strategy to optimize the interaction of risks and opportunities. To ensure diversification of the Company’s investment portfolio and avoid aggregation of risks, limits on asset types, economic sector exposure, industry exposure and individual security exposure are placed on our investment portfolio, and monitored on an ongoing basis. The Company manages its interest rate risk through an asset liability management strategy that

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involves the selection of investments with appropriate characteristics, such as duration, yield, currency and liquidity that are tailored to the anticipated cash outflow characteristics of our liabilities and the anticipated interest rate environment. The Company manages foreign currency risk by seeking to match the Company’s liabilities under insurance and reinsurance policies that are payable in foreign currencies with assets, such as including cash and investments, that are denominated in such currencies. In order to limit the Company’s exposure to credit risk, the Company’s investment policy is to invest primarily in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. The Company’s investment policy sets limits for individual credit exposures based on credit rating. The Company manages equity risk by limiting the overall size of investment in equities.

The Company uses a number of capital-at-risk models, which include volatility-scenario based measures and value-at-risk (“VaR”) and credit impairment calculations to evaluate its investment portfolio risk. Our capital-at-risk models also include the measures of risk capital applied by Standard & Poor’s (“S&P”) and A.M. Best Company (“A.M. Best”) in their risk based capital assessments of the Company. Volatility scenario-based measures are used in order to stress test the portfolio for expected changes in specific market scenarios. VaR is a probabilistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. Portfolio risk, as measured by VaR, is affected by four primary risk factors: asset concentration, asset volatility, asset correlation and systematic risk. The Company adjusts its investment risk scenarios for a variety of extremes as well as expected outcomes. Management continuously evaluates the applicability and relevance of the models used and makes adjustments as necessary to reflect actual market conditions and performance over time.

Operational Risk Management

Operational risk represents the risk of loss as a result of inadequate or failed internal processes, system failures, human error or external events. Operational risks include, for example, employee or third party fraud, business interruptions, inaccurate processing of transactions, information technology failures, the loss of key employees without appropriate successors, and non-compliance with reporting obligations.

The Company seeks to mitigate operational risks through the application of strong process controls throughout our business. Key process controls include underwriting authority letters, underwriting referral protocols, claims procedures guidelines, financial reporting controls and procedures, information technology procedures, the disaster recovery plan and the business continuity plan. The Company’s internal audit department and operational audit personnel rigorously test the Company’s various process controls on a regular basis.

The use by the Company of the services of unaffiliated third parties exposes the Company to heightened operational risks, including the risk of information technology and physical security breaches, fraud, non-compliance with laws and regulations or internal guidelines and inadequate service. The Company mitigates the operational risk posed by the use of third party vendors by verifying, among other items, a potential third party vendor’s financial stability, ability to provide ongoing service, business continuity planning and its business reputation. The Company also allocates appropriate resources to monitor any significant third party relationships.

Role of the Board of Directors in Risk Management

The Company’s Board of Directors administers its risk oversight of the Company through quarterly meetings of its Risk Committee with members of senior management, including representatives from the Actuarial, Claims, Finance, Internal Audit, Investment, Legal and Underwriting functions within the organization. The Risk Committee’s members review with senior management the Company’s enterprise risk management framework and related policies, processes and procedures.

The Risk Committee members review with management the methods utilized by the Company to identify and quantify risks associated with the Company’s business and operations and the Company’s established risk tolerances and evaluate the Company’s professional development plans for key risk management functions. In particular, the Risk Committee members monitor the Company’s key risks, risk based capital position relative to internal standards and the requirements of the Company’s regulators and rating agencies and the Company’s stressed liquidity position based upon a series of adverse cash flow scenarios and periodically approves the level of risk assumed by the Company in its underwriting, investment and operational activities.

INVESTMENTS

We follow an investment strategy designed to preserve book value growth and generate appropriate risk adjusted returns while providing sufficient liquidity to meet the needs of the Company. The portfolio is designed to diversify risks, including interest rate, credit and structure risks. Our investment portfolio is managed by our Chief Investment Officer and a team of investment professionals. Our investment team is experienced in direct portfolio management, asset allocation, managing external investment manager relationships, risk management and auditing and accounting. Our investment team uses specialized analytical tools to evaluate risk and potential investments to facilitate a risk managed, opportunity oriented approach to investing consistent with the requirements of the Company’s investment policy. We utilize external portfolio managers to oversee most of the day-to-day activities of our investment portfolio, and our investment professionals actively monitor our investment managers’ performance within the established investment policy of the Company. During 2009, we began managing a portion of our investment portfolio internally. Internally managed assets were 7.4% of total invested assets at December 31, 2011 (2010—6.2%).

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Our investment policy establishes authority for our investment activities and specifies risk tolerances and minimum criteria on the overall credit quality and liquidity characteristics of the portfolio. This includes limitations on the size of certain holdings as well as restrictions on purchasing certain types of securities or investing in certain industries. Our investment managers may be instructed to invest some of the investment portfolio in currencies other than U.S. dollars based upon the business we have written, the currency in which our loss reserves are denominated or regulatory requirements.

Our investment policy incorporates a traditional policy limit approach to each type of risk, thus setting a maximum amount of capital that may be exposed at any one time to particular types of securities and investment vehicles. We develop and maintain an investment risk profile and risk budget, which is reviewed by the Investment Committee of the Company’s Board of Directors and includes estimates of the maximum and expected levels of risk relative to the Company’s shareholders’ equity that will be taken over a specified period. In determining our investment decisions, we consider the impact of various catastrophic events on our invested assets, particularly those to which our insurance and reinsurance portfolio may also be exposed, in order to protect our financial position. The investment risk profile is reviewed by the Investment Committee and is revised based on market conditions and developing needs of the Company. In addition, as part of our risk management processes, we maintain a watch list of securities that management considers to be at risk due to industry and or company specific issues or securities potentially subject to future impairments. These securities are subjected to further internal analysis to evaluate their underlying structures, credit characteristics and overall industry and security specific fundamentals until they are sold, mature or it is deemed that further review is no longer necessary.

For additional information on the Company’s investment portfolio, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investment Portfolio” and Note 3 – “Investments” in the Notes to the Consolidated Financial Statements of the Company.

RATINGS

Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. Endurance Holdings and certain of its operating subsidiaries maintain a financial strength rating at Moody’s of A2, with a stable outlook, an A.M. Best rating of “A” (Excellent), with a stable outlook, and an S&P rating of “A” (Strong) with a stable outlook. All three ratings agencies conducted reviews of Endurance Holdings during 2011.

The objective of S&P’s, A.M. Best’s and Moody’s rating systems is to provide an opinion of an insurer’s or reinsurer’s financial strength and ability to meet ongoing obligations to its policyholders and debt holders. These ratings reflect S&P’s, A.M. Best’s and Moody’s opinions of our capitalization, performance and management, and are not a recommendation to buy, sell or hold the Company’s securities.

S&P maintains a letter rating system ranging from “AAA” (Extremely Strong) to “R” (Under Regulatory Supervision). Within these categories, “AAA” (Extremely Strong) is the highest, followed by “AA+”, “AA” and “AA-” (Very Strong) and “A+”, “A” and “A-” (Strong). Publications of S&P indicate that the “A+”, “A” and “A-” ratings are assigned to those companies that, in S&P’s opinion, have demonstrated strong financial security characteristics, but are somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings. These ratings may be changed, suspended, or withdrawn at the discretion of S&P. The rating “A” (Strong) by S&P is the sixth highest of twenty-one rating levels.

A.M. Best maintains a letter scale rating system ranging from “A++” (Superior) to “F” (In Liquidation), and includes 16 separate ratings categories. Within these categories, “A++” (Superior) and “A+” (Superior) are the highest, followed by “A” (Excellent) and “A-” (Excellent). Publications of A.M. Best indicate that the “A” and “A-” ratings are assigned to those companies that, in A.M. Best’s opinion, have demonstrated an excellent ability to meet their obligations to policyholders. These ratings are subject to periodic review by, and may be revised at the sole discretion of, A.M. Best. The rating “A” (Excellent) by A.M. Best is the third highest of 16 rating levels.

Moody’s maintains a letter rating system ranging from “Aaa” to “C.” Within these categories, “Aaa” is the highest, followed by “Aa” and “A.” Within each of these categories, ratings are further broken down into “Aa1,” “Aa2” and “Aa3.” Ratings may be changed, suspended, or withdrawn at the discretion of Moody’s. The rating “A2” by Moody’s is the sixth highest of twenty-one rating levels.

COMPETITION

The insurance and reinsurance industries are mature and highly competitive. Insurance and reinsurance companies compete on the basis of many factors, including premium charges, general reputation and perceived financial strength, the terms and conditions of the products offered, ratings assigned by independent rating agencies, speed of claims payments, reputation and experience in the particular risk to be underwritten, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered and various other factors. These factors operate at the individual market participant level and in the aggregate across the insurance and reinsurance industry more generally. In addition, background economic conditions and variations in the insurance and reinsurance buying practices of insureds and ceding companies, by participant and in the aggregate, contribute to cyclical movements in rates, terms and conditions and may impact industry aggregate financial results.

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We compete in the Bermuda, U.S., London and international insurance and reinsurance markets directly with numerous other parties, including established global insurance and reinsurance companies, start-up insurance and reinsurance entities, as well as potential capital markets and securitization structures aimed at managing catastrophe and other risks. Many of these entities have significantly larger amounts of capital and more employees than we maintain and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage.

EMPLOYEES

As of December 31, 2011, we had 844 full-time employees. We believe that our employee relations are satisfactory. None of our employees are subject to collective bargaining agreements.

REGULATORY MATTERS

General

The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. Reinsurers are generally subject to less direct regulation than primary insurers.

Bermuda

The Insurance Act 1978 of Bermuda and related regulations, as amended (the “Insurance Act”), regulates the insurance business of Endurance Bermuda and provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (“BMA”) under the Insurance Act. Endurance Bermuda is registered as a Class 4 insurer by the BMA. As a holding company, Endurance Holdings is not subject to Bermuda insurance regulations. Insurance, as well as reinsurance, is regulated under the Insurance Act. The BMA, in deciding whether to grant registration, has broad discretion to act as it thinks fit in the public interest. The continued registration of an applicant as an insurer is subject to it complying with the terms of its registration and such other conditions as the BMA may impose from time to time. The day-to-day supervision of insurers is the responsibility of the BMA.

The BMA utilizes a risk based approach when it comes to licensing and supervising insurance companies in Bermuda. As part of the BMA’s risk based system, an assessment of the inherent risks within each particular class of insurer is utilized in the first instance to determine the limitations and specific requirements which may be imposed. Thereafter, the BMA keeps its analysis of relative risk within individual institutions under review on an ongoing basis, including through the scrutiny of regular audited statutory financial statements, and, as appropriate, meeting with senior management during onsite visits. The BMA has also adopted guidance notes (the “Guidance Notes”) in order to ensure those operating in Bermuda have a good understanding of the nature of the requirements of, and the BMA’s approach in implementing, the Insurance Act.

The Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements on Bermuda insurance companies and grants the BMA powers to supervise, investigate, require information and the production of documents and intervene in the affairs of insurance companies. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.

Classification of Insurers

The Insurance Act distinguishes between insurers carrying on long-term business and insurers carrying on general business. There are six classifications of insurers carrying on general business, with Class 4 insurers subject to the strictest regulation. Endurance Bermuda, which is incorporated to carry on general insurance and reinsurance business, is registered as a Class 4 insurer in Bermuda and is regulated as such under the Insurance Act. Endurance Bermuda is not licensed to carry on long-term business.

Cancellation of Insurer’s Registration

An insurer’s registration may be canceled by the Supervisor of Insurance of the BMA on certain grounds specified in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act or if, in the opinion of the BMA after consultation with the Insurance Advisory Committee, the insurer has not been carrying on business in accordance with sound insurance principles.

Principal Representative

An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. For the purpose of the Insurance Act, Endurance Bermuda’s principal office is its executive offices in Pembroke, Bermuda. Michael J. McGuire has been appointed by the Board of Directors as Endurance Bermuda’s principal representative and has been approved by the BMA. Without a reason acceptable to the BMA, an insurer may not terminate the appointment of its principal

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representative, and the principal representative may not cease to act as such, unless 30 days’ notice in writing to BMA is given of the intention to do so. A principal representative shall forthwith notify the BMA, in such a manner as it may direct, (a) on his reaching a view that there is a likelihood of the insurer for which he acts becoming insolvent, for instance the failure by the insurer to comply substantially with a condition imposed upon the insurer by the BMA relating to a solvency margin or liquidity or other ratio would be a reportable “event”; (b) on its coming to his knowledge, or his having reason to believe, that an event to which the applicable section of the Insurance Act applies has occurred, under the Amendment Act these events now include (i) circumstances where a Class 4 insurer undergoes a material change to the nature of the business it underwrites; and (ii) a significant loss which is likely to render the insurer unable to comply with its enhanced capital requirement. Within 14 days of such notification, the principal representative shall furnish the BMA with a report in writing setting out all the particulars of the case that are available to him.

Independent Approved Auditor

Every registered insurer must appoint an independent auditor who will audit and report annually on the statutory financial statements and the statutory financial return of the insurer, both of which, in the case of Endurance Bermuda, are required to be filed annually with the BMA. Endurance Bermuda’s independent auditor must be approved by the BMA and may be the same person or firm that audits Endurance Holdings’ consolidated financial statements and reports for presentation to its shareholders.

Loss Reserve Specialist

As a registered Class 4 insurer, Endurance Bermuda is required to submit an opinion of its approved loss reserve specialist with its statutory financial return in respect of its losses and loss expenses provisions. The loss reserve specialist, who will normally be a qualified property and casualty actuary, must be approved by the BMA. Michael E. Angelina, Chief Actuary and Chief Risk Officer for the Company, has been appointed by our Board of Directors and has been approved by the BMA to act as Endurance Bermuda’s loss reserve specialist.

Statutory and GAAP Financial Statements

An insurer must prepare and file annual statutory financial statements with the BMA within four months from the end of the financial year to which they relate. The Insurance Act prescribes rules for the preparation and substance of these statutory financial statements (which include, in statutory form, a balance sheet, an income statement, a statement of capital and surplus and notes thereto). The insurer is required to give detailed information and analyses regarding premiums, claims, reinsurance and investments.

The new accounts regime applicable to Class 4 insurers includes (i) a distinct methodology and new format to be applied when preparing and reporting the statutory balance sheet and statutory income statements for Class 4 insurers and (ii) accompanying explanatory notes to be added and instructions affecting each statutory statement. The most significant aspect of the amended Regulations in relation to the statutory balance sheet of Class 4 insurers is the reporting obligation to detail, on a line-by-line basis, specific asset and liability classes, as well as the requirement to identify and distinguish between what is or is not attributable to affiliates of the Class 4 insurer.

Class 4 insurers are required to prepare and file with the BMA audited annual financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) (which applies in Bermuda, U.K., U.S., or such other GAAP as the BMA may recognize) or International Financial Reporting Standards (“IFRS”). The audited financial statements are to be submitted within four months from the end of the financial year to which they relate or, if the Class 4 insurer makes an application to the BMA, such longer period as may be allowed by the BMA but no longer than seven months from the end of the financial year to which they relate. The BMA publishes on its website each such Class 4 insurer’s GAAP or IFRS audited financial statements.

In addition to the audited GAAP or IFRS financial statements, Class 4 insurers are required to file with the BMA statutory financial statements which are not prepared in accordance with U.S. GAAP and are distinct from the financial statements prepared for presentation to the insurer’s shareholders under the Companies Act, which financial statements, in the case of the Company, will be prepared in accordance with U.S. GAAP. As a general business insurer, Endurance Bermuda is required to submit the annual statutory financial statements as part of the annual statutory financial return. The statutory financial statements and the statutory financial return do not form part of the public records maintained by the BMA.

Annual Statutory Financial Return

Endurance Bermuda is required to file with the BMA a statutory financial return no later than four months after its financial year end (unless specifically extended upon application to the BMA). The statutory financial return for a Class 4 insurer includes, among other matters, a report of the approved independent auditor on the statutory financial statements of the insurer, solvency certificates, the statutory financial statements, the opinion of the loss reserve specialist and a schedule of reinsurance ceded. The solvency certificates must be signed by the principal representative and at least two directors of the insurer certifying that the minimum solvency margin, as well as the minimum liquidity ratio, has been met and whether the insurer complied with the conditions attached to its certificate of registration. The independent auditor is required to state whether, in its opinion, it was reasonable for the

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directors to make these certifications and whether the declaration of the statutory ratios complies with the requirements of the Insurance Act. If an insurer’s accounts have been audited for any purpose other than compliance with the Insurance Act, a statement to that effect must be filed with the statutory financial return.

Enhanced Capital Requirement (“ECR”), Minimum Solvency Margin (“MSM”) and Restrictions on Dividends and Distributions

The BMA has promulgated the Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement) Rules 2008, as amended (the “Rules”) which, among other things, mandate that a Class 4 insurer’s ECR be calculated by either (a) the model set out in Schedule I to the Rules, or (b) an internal capital model that the BMA has approved for use for this purpose.

Bermuda’s risk-based regulatory capital adequacy and solvency margin regime termed the Bermuda Solvency Capital Requirement (“BSCR”) provides a risk-based capital model as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. The BSCR employs a standard mathematical model that correlates the risk underwritten by Bermuda insurers to the capital that is dedicated to their business. The framework that has been developed, applies a standard measurement format to the risk associated with an insurer’s assets, liabilities and premiums, including a formula to take account of the catastrophe risk exposure and operating risks.

In order to minimise the risk of a shortfall in capital arising from an unexpected adverse deviation, the BMA seeks that insurers operate at or above a threshold capital level (termed the Target Capital Level (“TCL”)), which exceeds the BSCR or approved internal model minimum amounts.

The Rules provide prudential standards in relation to the ECR and Capital and Solvency Return (“CSR”). The ECR is determined using the BSCR or an approved internal model, provided that at all times the ECR must be an amount equal to, or exceeding the MSM. The CSR is the return setting out the insurers risk management practices and other information used by the insurer to calculate its approved internal model ECR.

Bermuda’s new capital requirements require Class 4 insurers to hold available statutory capital and surplus equal to or exceeding ECR and set TCL at 120% of ECR. The BMA also has a degree of discretion enabling it to impose ECR on insurers in particular cases, for instance where an insurer falls below the TCL. In those cases, the new risk-based capital model should be supplemented by a requirement for the affected insurers to conduct certain stress and scenario testing in order to assess their potential vulnerability to defined extreme events. Where the results of scenario and stress testing indicated potential capital vulnerability, the BMA would be able to require a higher solvency ‘cushion’ by increasing the 120% TCL figure. In circumstances where an insurer has failed to comply with an ECR given by the BMA in respect of that insurer, such insurer is prohibited from declaring or paying any dividends until the failure is rectified and the insurer is obliged to (i) provide the BMA, within fourteen days of the failure, with a written report as to why the failure occurred and remedial steps to be taken; and (ii) within forty-five days of the failure to provide the BMA with unaudited interim financial statements. In addition, the unaudited interim financial statements must be accompanied by the opinion of the loss reserve specialist, a general business solvency certificate in respect of the unaudited financials and a CSR reflecting an ECR prepared using post-failure data.

Underlying the risk-based solvency capital regime described above is the MSM test set out in the Insurance Returns and Solvency Amendment Regulations 1980 (as amended). While it must calculate its ECR annually by reference to either the BSCR or an approved internal model, a Class 4 insurer such as Endurance Bermuda must also ensure that, at all times, its ECR is at least equal to the MSM for a Class 4 insurer in respect of its general business, which is the greater of:

• $100,000,000;

• 50% of net premiums written (being gross premiums written less any reinsurance premiums ceded (not exceeding 25% of gross premiums written)); and

• 15% of net loss and loss expense provisions and other general business insurance reserves.

The BMA has also introduced a three tiered capital system for Class 4 insurers designed to assess the quality of capital resources that an insurer has available to meet its capital requirements. The tiered capital system classifies all capital instruments into one of three tiers based on their “loss absorbency” characteristics with the highest quality capital classified as Tier 1 Capital and lesser quality capital classified as either Tier 2 Capital or Tier 3 Capital. Only Tier 1 and Tier 2 Capital may be used to support an insurer’s MSM. Certain percentages of each of Tier 1, 2 and 3 Capital maybe used to satisfy an insurer’s ECR. Any combination of Tier 1, 2 or 3 Capital may be used to meet the TCL.

The Rules introduced a regime that requires Class 4 insurers to perform an assessment of their own risk and solvency requirements, referred to as a Commercial Insurer’s Solvency Self Assessment (“CISSA”). The CISSA will allow the BMA to obtain an insurer’s view of the capital resources required to achieve its business objectives and to assess the company’s governance, risk management and controls surrounding this process. The Rules also introduced a Catastrophe Risk Return which must be filed with the BMA, which assesses and insurer’s reliance on vender models in assessing catastrophe exposure.

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In addition, under the Insurance Act, Class 4 insurers are prohibited from declaring or paying any dividends of more than 25% of its total statutory capital and surplus, as shown on its previous financial year statutory balance sheet, unless at least seven days before payment of the dividends it files with the BMA an affidavit that it will continue to meet its required solvency margins. Endurance Bermuda as a Class 4 insurer must obtain the BMA’s prior approval before reducing its total statutory capital, as shown on its previous financial year statutory balance sheet, by 15% or more.

Furthermore, under the Companies Act, each of Endurance Holdings and Endurance Bermuda may only declare or pay a dividend or make a distribution from contributed surplus, if Endurance Holdings or Endurance Bermuda, as the case may be, has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would not be less than its liabilities.

Minimum Liquidity Ratio

The Insurance Act provides a minimum liquidity ratio for general business insurers, like Endurance Bermuda. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include, but are not limited to, cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable and funds held by ceding reinsurers. There are certain categories of assets which, unless specifically permitted by the BMA, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined), letters of credit and guarantees.

Supervision, Investigation and Intervention

The BMA may appoint an inspector with extensive powers to investigate the affairs of Endurance Bermuda if the BMA believes that such an investigation is in the best interests of its policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to the BMA, the BMA may direct Endurance Bermuda to produce documents or information relating to matters connected with its business. In addition, the BMA has the power to require the production of documents from any person who appears to be in possession of such documents. Further, the BMA has the power, in respect of a person registered under the Insurance Act, to appoint a professional person to prepare a report on any aspect of any matter about which the BMA has required or could require information. If it appears to the BMA to be desirable in the interests of the clients of a person registered under the Insurance Act, the BMA may also exercise these powers in relation to any company which is or has at any relevant time been (a) a parent company, subsidiary company or related company of that registered person, (b) a subsidiary company of a parent company of that registered person, (c) a parent company of a subsidiary company of that registered person or (d) a company in the case of which a shareholder controller of that registered person, either alone or with any associate or associates, holds 50 percent or more of the shares or is entitled to exercise, or control the exercise, of more than 50 percent of the voting power at a general meeting.

The BMA may also make rules prescribing prudential standards in relation to ECR, capital and solvency returns, insurance reserves and eligible capital which Endurance Bermuda must comply with. Endurance Bermuda may make an application to be exempted from the rules.

If it appears to the BMA that there is a risk of Endurance Bermuda becoming insolvent, or that Endurance Bermuda is in breach of the Insurance Act or any conditions imposed upon its registration, the BMA may, among other things, direct Endurance Bermuda (i) not to effect further contracts of insurance, or any contract of insurance of a specified description; (ii) to limit the aggregate of the premiums to be written by it during a specified period beginning not earlier than 28 days after the direction is given; (iii) not to vary any contract of insurance in force when the direction is given, if the effect of the variation would be to increase the liabilities of the insurer; (iv) not to make any investment of a specified class; (v) before the expiration of a specified period (or such longer period as the BMA may allow) to realize any existing investment of a specified class; (vi) not to declare or pay any dividends or any other distributions, or to restrict the making of such payments to such extent as the BMA thinks fit; (vii) not to enter into any specified transaction with any specified person or persons of a specified class; (viii) to provide such written particulars relating to the financial circumstances of the insurer as the BMA thinks fit; and (ix) to obtain the opinion of a loss reserve specialist with respect to general business, or an actuarial opinion with respect to long-term business, and to submit it to the BMA within a specified time.

Disclosure of Information

In addition to powers under the Insurance Act to investigate the affairs of an insurer, the BMA may require certain information from an insurer (or certain other persons) to be produced to them. Further, the BMA has been given powers to assist other regulatory authorities, including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies

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in Bermuda but subject to restrictions. For example, the BMA must be satisfied that the assistance being requested is in connection with the discharge of regulatory responsibilities of the foreign regulatory authority. Further, the BMA must consider whether cooperation is in the public interest. The grounds for disclosure are limited and the Insurance Act provides sanctions for breach of the statutory duty of confidentiality.

Under the Companies Act, the Bermuda Minister of Finance (the “Minister”) has been given powers to assist a foreign regulatory authority which has requested assistance in connection with enquiries being carried out by it in the performance of its regulatory functions. The Minister’s powers include requiring a person to furnish him with information, to produce documents to him, to attend and answer questions and to give assistance in connection with enquiries. The Minister must be satisfied that the assistance requested by the foreign regulatory authority is for the purpose of its regulatory functions and that the request is in relation to information in Bermuda which a person has in his possession or under his control. The Minister must consider, among other things, whether it is in the public interest to give the information sought.

The Insurance Code of Conduct

The BMA has implemented the Insurance Code of Conduct (the “Bermuda Insurance Code”), which came into effect on July 1, 2010. The BMA established July 1, 2011 as the date of compliance for all insurers.

The Bermuda Insurance Code is divided into six categories, including:

(1) Proportionality Principle;

(2) Corporate Governance;

(3) Risk Management;

(4) Governance Mechanism;

(5) Outsourcing; and

(6) Market Discipline and Disclosure.

These categories contain the duties, requirements and compliance standards to be adhered to by all insurers. It stipulates that in order to achieve compliance with the Bermuda Insurance Code, insurers are to develop and apply policies and procedures capable of assessment by the BMA. Endurance Bermuda is required to file annually a statutory declaration confirming its compliance with the Bermuda Insurance Code.

Group Supervision

Emerging international norms in the regulation of global insurance and reinsurance groups are trending increasingly towards the imposition of group-wide supervisory regimes by one principal “home” regulator over all the legal entities in the group, no matter where incorporated. Amendments to the Insurance Act in 2010 introduced such a regime into Bermuda insurance regulation.

The Insurance Act now contains provisions regarding group supervision, the authority to exclude specified entities from group supervision, the power for the BMA to withdraw as group supervisor, the functions of the BMA as group supervisor and the power of the BMA to make rules regarding group supervision.

The BMA has issued the Insurance (Group Supervision) Rules 2011 (the “Group Supervision Rules”) and the Insurance (Prudential Standards) (Insurance Group Solvency Requirement) Rules 2011 (the “Group Solvency Rules”), each effective January 16, 2012, save for certain provisions which come into operation on later dates. The Group Supervision Rules set out the rules in respect of the assessment of the financial situation and solvency of an insurance group, the system of governance and risk management of the insurance group; and supervisory reporting and disclosures of the insurance group. The Group Solvency Rules set out the rules in respect of the capital and solvency return and enhanced capital requirements for an insurance group.

The BMA also intends to publish an insurance code of conduct in relation to group supervision. Endurance Bermuda has been notified by the BMA that the Company is subject to group supervision by the BMA, and that Endurance Bermuda is the designated insurer in respect of the Company for purposes of the Insurance Act.

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Notifications to the BMA

The amendments to the Insurance Act in 2010 saw the modification of notification requirements for change of shareholder controllers. Where an insurer’s shares or its parent company’s shares are traded on any stock exchange recognized by the BMA, then any shareholder must notify the BMA within 45 days of becoming a 10 percent, 20 percent, 33 percent, or 50 percent shareholder controller of such insurer. The notice has to be given within 45 days of the shareholder becoming aware of the relevant facts. These provisions are applicable to us and our shareholders although we are unlikely to ever trigger the shareholder controller provisions in respect of U.S. shareholders due to the limitation on voting provisions in Endurance Bermuda’s bye-laws.

Also an insurer must give written notice to the BMA that a person has become, or ceased to be, a controller of that insurer, a controller being a managing director, chief executive or other person in accordance with whose directions or instructions the directors of Endurance Bermuda are accustomed to act, including any person who holds, or is entitled to exercise, 10% or more of the voting shares or voting power or is able to exercise a significant influence over the management of Endurance Bermuda.

Endurance Bermuda is also required to notify the BMA in writing in the event any person has become or ceased to be an officer of Endurance Bermuda. For these purposes, an “officer” is defined as being a director, chief executive or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters. Failure to give a required notice is an offence under the Insurance Act.

An insurer, or designated insurer, in respect of the group of which it is a member, must notify the BMA in writing that it proposes to take measures that are likely to be of material significance for the discharge, in relation to the insurer or the insurance group, of the BMA’s functions under the Insurance Act. Measures that are likely to be of material significance include:

• Acquisition or transfer of insurance business being part of a scheme falling within section 25 of the Insurance Act or section 99 of the Companies Act;

• amalgamation with or acquisition of another firm; and

• a material change in the insurer’s business plan not otherwise reported to the BMA.

In respect of the foregoing, the BMA is obliged to service a notice of objection to the material change unless it is satisfied that:

• the interest of policyholders and potential policyholders of the insurer or the insurance group would not in any manner be threatened by the material change; and

• without prejudice to the first bulletin point above, that, having regard to the material change the requirements of Insurance Act would continue to be complied with, or, if any of those requirements are not complied with, that the insurer concerned is likely to undertake adequate remedial action.

Failure to give such notice constitutes an offence under the Insurance Act. It is possible to appeal a notice of objection served by the BMA.

Bermuda Guidance Notes

The BMA has issued Guidance Notes on the application of the Insurance Act in respect of the duties, requirements and standards to be complied with by persons registered under the Insurance Act or otherwise regulated under it and the procedures and sound principles to be observed by such persons and by auditors, principal representatives and loss reserve specialists. The BMA continues to issue Guidance Notes through its web site at www.bma.bm. These provide guidance on, among other things, the roles of the principal representative, approved auditor, and approved actuary and corporate governance for Bermuda insurers. The BMA has stated that the Guidance Notes should be understood as reflecting the minimum standard that the BMA expects insurers such as Endurance Bermuda and other relevant parties to observe at all times.

Certain Other Bermuda Law Considerations

Endurance Holdings and Endurance Bermuda each are required to comply with the provisions of the Companies Act regulating the payment of dividends and making of distributions from contributed surplus. Endurance Holdings and Endurance Bermuda are prohibited from declaring or paying a dividend, or making a distribution out of contributed surplus, if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities.

Although Endurance Bermuda is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the BMA. Pursuant to its non-resident status, Endurance Bermuda may engage in transactions in currencies other than Bermuda dollars and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to United States residents who are holders of its ordinary shares.

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Under Bermuda law, exempted companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As “exempted” companies, Endurance Holdings and Endurance Bermuda may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister, participate in certain business transactions, including: (1) the acquisition or holding of land in Bermuda (except that held by way of lease or tenancy agreement which is required for its business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for its officers and employees and held with the consent of the Minister, for a term not exceeding 21 years); (2) the taking of mortgages on land in Bermuda to secure an amount in excess of $50,000; (3) to acquire any bonds or debentures secured on any land in Bermuda except bonds or debentures issued by the Government of Bermuda or a public authority or (4) the carrying on of business of any kind for which it is not licensed in Bermuda, except in certain limited circumstances such as doing business with another exempted undertaking in furtherance of Endurance Holdings’ business or Endurance Bermuda’s business (as the case may be) carried on outside Bermuda. Endurance Bermuda is a licensed insurer in Bermuda, and so may carry on activities from Bermuda that are related to and in support of its insurance business.

Securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003, and Exchange Control Act 1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, specific permission is required from the BMA, pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA, in its policy dated June 1, 2005, provides that where any equity securities, which would include our ordinary shares, of a Bermuda company are listed on an appointed stock exchange (the New York Stock Exchange is deemed to be an appointed stock exchange under Bermuda law), general permission is given for the issue and subsequent transfer of any securities of a company from and/or to a non-resident, for as long as any equity securities of the company remain so listed. The ordinary shares of Endurance Holdings are listed on the New York Stock Exchange.

Notwithstanding the above general permission, the BMA has granted us permission to, subject to our ordinary or voting shares being listed on an appointed stock exchange, issue, grant, create, sell and transfer any of our shares, stock, bonds, notes (other than promissory notes), debentures, debenture stock, units under a unit trust scheme, shares in an oil royalty, options, warrants, coupons, rights and depository receipts, collectively, the “Securities”, to and among persons who are either resident or non-resident of Bermuda for exchange control purposes, whether or not the Securities (excluding, for the avoidance of doubt, our ordinary or voting shares) are listed on an appointed stock exchange.

The Minister, under Bermuda’s Exempted Undertakings Tax Protection Act 1966, as amended, has given us a written assurance that if any legislation is enacted in Bermuda that would impose tax on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of our operations or our shares, debentures or other obligations until March 31, 2035. It is possible that after March 31, 2035 we may be subject to Bermuda taxes.

Under Bermuda law, non-Bermudians (other than spouses of Bermudians or Permanent Resident Card (“PRC”) Holders) may not engage in any gainful occupation in Bermuda without a work permit issued by the Department of Immigration. Work permits may be granted or extended by the Bermuda Government upon showing that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian or PRC Holder) is available who meets the minimum standard requirements for the advertised position. In April 2001, the Bermuda Government announced a policy that places six-year term limits on individuals’ work, with certain exemptions for key employees.

U.K. Regulation

General

On December 1, 2001, the Financial Services Authority (“FSA”) assumed its full powers and responsibilities as the single statutory regulator responsible for regulating the financial services industry in respect of the carrying on of regulated activities (including deposit taking, insurance, investment management and most other financial services business by way of business in the U.K.), with the purpose of maintaining confidence in the U.K. financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime. It is a criminal offense for any person to carry on a regulated activity in the U.K. unless that person is authorized by the FSA and has been granted permission to carry on that regulated activity or falls under an exemption.

Insurance business (which includes reinsurance business) is authorized and supervised by the FSA. Insurance business in the United Kingdom is divided between two main categories: long-term insurance (which is primarily investment-related) and general insurance. It is not possible for an insurance company to be authorized in both long-term and general insurance business. These two categories are both divided into “classes” (for example: permanent health and pension fund management are two classes of long-term insurance; damage to property and motor vehicle liability are two classes of general insurance). Under the Financial Services and Markets Act 2000 (the “FSMA”), effecting or carrying out contracts of insurance, within a class of general or long-term insurance, by way of business in the United Kingdom, constitutes a regulated activity requiring individual authorization. An authorized insurance company must have permission for each class of insurance business it intends to write.

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Endurance U.K. has received authorization from the FSA to effect and carry out in the United Kingdom contracts of insurance in all classes of general business (limited in the case of credit and surety to reinsurance only) except legal expenses and assistance business. On January 14, 2005, as a result of the implementation by the United Kingdom Government of the Insurance Mediation Directive (2002/92/EC) various additional activities, which had previously been unregulated, fell within the scope of FSA regulation.

Endurance U.K. has accordingly received authorization from the FSA to conduct the following additional regulated activities: arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments. In both cases, those activities are restricted to non-investment insurance contracts. Endurance U.K. is also authorized to accept deposits (limited to accepting deposits in the course of carrying on insurance business for which it holds permission).

As an authorized insurer in the United Kingdom, Endurance U.K. would be able to operate throughout the E.U., subject to certain regulatory requirements of the FSA and in some cases, certain local regulatory requirements. An insurance company with FSA authorization to write insurance business in the United Kingdom can seek consent from the FSA to allow it to provide cross-border services in other member states of the E.U. As an alternative, FSA consent may be obtained to establish a branch office within another member state.

As an FSA authorized insurer, the insurance and reinsurance businesses of Endurance U.K. are subject to close supervision by the FSA. The FSA has implemented specific requirements for senior management arrangements, systems and controls of insurance and reinsurance companies under its jurisdiction, which place a strong emphasis on risk identification and management in relation to the prudential regulation of insurance and reinsurance business in the United Kingdom.

In December 2004, the FSA prompted a market initiative in the United Kingdom insurance industry to resolve perceived problems resulting from contract uncertainty, which may exist where the full terms and conditions of a contract of insurance or reinsurance are not established at or before the time when the contract comes into force. The FSA’s stated preferred outcome was that a market solution should be produced which met the regulator’s main concerns, which were that policyholders should know precisely what protection they have bought; and that insurers, reinsurers and brokers should have a clearer view, at the time of inception of a contract of the relevant legal, fiduciary, operational and underwriting risks to which they are subject. Contract certainty has since continued to be a supervisory priority and most of the insurance industry in the U.K. signed up to a Code of Practice to help avoid disputes arising from contract uncertainty. The FSA has stated that in cases where it believes that firms have fallen behind the rest of the market in reducing the number of contracts that do not meet the market’s contract certainty standards, it would consider regulatory action to address this, though no enforcement action has been taken in this regard to date. This action might include increases in required regulatory capital or the commencement of enforcement action.

In December 2007, the FSA published its new Insurance Conduct of Business sourcebook (“ICOBS”) which sets out the standards of the requirements for general insurance firms on how they deal with their customers. The new general insurance regime came into effect on January 6, 2008.

Supervision

The FSA carries out the prudential supervision of insurance companies through a variety of methods, including the collection of information from statistical returns, review of accountants’ reports, visits to insurance companies and regular formal interviews.

The FSA has adopted a risk-based approach to the supervision of insurance companies. Under this approach the FSA performs a formal risk assessment of insurance companies or groups carrying on business in the U.K. periodically, which varies in length according to the risk profile of the insurer. The FSA performs the risk assessment by analyzing information which it receives during the normal course of its supervision, such as regular prudential returns on the financial position of the insurance company, or which it acquires through a series of meetings with senior management of the insurance company. After each risk assessment, the FSA will inform the insurer of its views on the insurer’s risk profile. This will include details of any remedial action that the FSA requires and the likely consequences if this action is not taken.

Solvency Requirements

The FSA’s General Prudential Sourcebook and Prudential Sourcebook for Insurers (together, the “Prudential Sourcebooks”) require that insurance companies maintain a margin of solvency at all times in respect of any general insurance undertaken by the insurance company, the calculation of which in any particular case depends on the type and amount of insurance business a company writes. The method of calculation of the solvency margin is set out in the Prudential Sourcebooks, and for these purposes, all insurer’s assets and liabilities are subject to specific valuation rules which are set out in the Prudential Sourcebooks. Failure to maintain the required solvency margin is one of the grounds on which wide powers of intervention conferred upon the FSA may be exercised. For financial years ending on or after January 1, 2004, the calculation of the required margin of solvency has been amended as a result of

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the implementation of the E.U. Solvency I Directives. In respect of liability business accepted, 150% of the actual premiums written and claims incurred must be included in the calculation, which has had the effect of increasing the required minimum margin of solvency of Endurance U.K. Endurance U.K. continuously monitors its solvency capital position and maintains capital in excess of the required minimum margin of solvency. Each insurance company writing various classes of business is also required by the Prudential Sourcebooks to maintain equalization provisions calculated in accordance with the provisions of the Prudential Sourcebook for Insurers.

Insurers are required to calculate an Enhanced Capital Requirement in addition to their required minimum solvency margin and to report it to the FSA (though the Enhanced Capital Requirement is not part of the formal capital requirements under the Prudential Sourcebooks). This represents a more risk-based calculation than the statutory solvency margin requirements derived from the E.U. Directives. There is also a requirement for insurers to maintain financial resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they come due. In order to carry out the assessment as to the necessary financial resources that are required, an insurer is required to identify the major sources of risk to its ability to meet its liabilities as they come due, and to carry out stress and scenario tests to identify an appropriate range of realistic adverse scenarios in which the risk crystallizes and to estimate the financial resources needed in each of the circumstances and events identified. In addition, the FSA gives individual capital guidance (“ICG”) regularly to insurers and reinsurers following receipt of individual capital assessments, prepared by firms themselves. The FSA’s guidance may be that a company should hold more or less than its then current level of regulatory capital, or that the company’s regulatory capital should remain unaltered. Endurance U.K. has submitted an individual capital assessment solvency calculation to the FSA and has agreed with the FSA the bases and methodology for this calculation. This calculation is used along with other tools by the FSA to help establish the ICG. Endurance U.K. is currently calculating the Enhanced Capital Requirement for December 31, 2011. Should Endurance U.K. not meet this test, additional capital may be required.

In addition, an insurer (other than a pure reinsurer) that is part of a group, is required to perform and submit to the FSA a solvency margin calculation return in respect of its ultimate parent undertaking, in accordance with the FSA’s rules. This return is not part of an insurer’s own solvency return and hence will not be publicly available. Although there is no requirement for the parent undertaking solvency calculation to show a positive result, the FSA may take action where it considers that the solvency of the insurance company is or may be jeopardized due to the group solvency position. Further, an insurer is required to report in its annual returns to the FSA all material related party transactions (e.g., intra group reinsurance, whose value is more than 5% of the insurer’s general insurance business amount).

The European Commission, jointly with Member States, is carrying out a fundamental review of the regulatory capital and supervisory regime of the insurance industry (the Solvency II project). Its objective is to establish a solvency system that is better matched to the true risks of insurers enabling supervisors to protect policyholders’ interests as effectively as possible and in accordance with common principles across the EU. Endurance U.K. is monitoring the ongoing consultation and legislative steps following adoption of the Solvency II Framework Directive in May 2009 (which will be amended by a further “Omnibus Directive” proposed by the European Commission in January, 2011) (together the “Solvency II Directive”). The legislation implementing the final version of the Solvency II Directive is likely to take effect in the U.K. and the other E.U. member states on January 1, 2014, and will replace the current solvency requirements described above. The FSA is undertaking a program of preparatory work and supervisory visits to insurers, in order to identify the actions which it considers that insurers should now undertake in anticipation of the implementation of the Solvency II Directive and to review insurers’ internal models for calculating all or part of the new solvency capital requirements. Endurance UK is fully co-operating with the FSA in this respect.

Restrictions on Dividend Payments

U.K. company law prohibits Endurance U.K. from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the United Kingdom insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the FSA strictly controls the maintenance of each insurance company’s solvency margin within its jurisdiction. The FSA’s rules require Endurance U.K. to notify the FSA of any proposed or actual payment of a dividend. Any such payment or proposal could result in regulatory intervention. In addition, the FSA requires authorized insurance companies to notify the FSA in advance of any significant dividend payment.

Reporting Requirements

U.K. insurance companies must prepare their financial statements under the Companies Act of 1985 (as amended), which requires the filing with Companies House of audited financial statements and related reports. In addition, U.K. insurance companies are required to file with the FSA regulatory returns, which include a revenue account, a profit and loss account and a balance sheet in prescribed forms. Under the Interim Prudential Sourcebook for Insurers, audited regulatory returns must be filed with the FSA within two months and 15 days (or three months where the delivery of the return is made electronically).

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Supervision of Management

The FSA closely supervises the management of insurance companies through the approved persons regime, by which any appointment of persons to perform certain specified “controlled functions” within a regulated entity, must be approved by the FSA.

Change of Control

The Financial Services and Markets Act (the “FSMA”) regulates the acquisition of control of any U.K. insurance company authorized under the FSMA. Any company or individual that (together with any person acting in concert with it or him) directly or indirectly acquires 10% or more of the shares in a U.K. authorized insurance company or its parent company, or is entitled to exercise or control the exercise of 10% or more of the voting power in such authorized insurance company or its parent company, would be considered to have acquired control for the purposes of the relevant legislation, as would a person who had significant influence over the management of such authorized insurance company or its parent company by virtue of his shareholding or voting power in either. A purchaser of 10% or more of the ordinary shares would therefore be considered to have acquired control of Endurance U.K.

Under the FSMA (as amended by the E.U. Acquisitions Directive), any person proposing to acquire control over a U.K. authorized insurance company must give prior notification to the FSA of his intention to do so together with certain prescribed information. The FSA then has 60 working days to make a decision following its acknowledgement of the application. The duration of this period may be stopped by the FSA once, to request further information, for a maximum of 20 days (30 days for non-EU applicants). Although the FSA may make further information requests, this does not “stop the clock”, meaning that the FSA has a maximum of 82 working days to consider an application from an EU applicant (92 for a non-EU applicant). The FSA may only object to a particular acquisition on the basis of certain specified “assessment criteria” relating to the reputation and financial soundness of the acquirer, the reputation and experience of those who will direct the regulated business, compliance with prudential requirement and any suspicion of money laundering or terrorist financing. In addition to these requirements, the U.K. insurer itself is obliged to notify the FSA if it is aware of the proposed acquisition, and may be subject to regulatory enforcement action if it fails to do so.

Intervention and Enforcement

The FSA has extensive powers to intervene in the affairs of an authorized person, culminating in the ultimate sanction of the removal of authorization to carry on a regulated activity. FSMA imposes on the FSA statutory obligations to monitor compliance with the requirements imposed by FSMA, and to enforce the provisions of FSMA related rules made by the FSA. The FSA has power, among other things, to enforce and take disciplinary measures in respect of breaches of both the Prudential Sourcebooks and breaches of the conduct of business rules generally applicable to authorized persons. The FSA also has the power to prosecute criminal offences arising under FSMA, and to prosecute insider dealing under Part V of the Criminal Justice Act of 1993, and breaches of money laundering regulations. The FSA’s stated policy is to pursue criminal prosecution in all appropriate cases.

Passporting

European Union directives allow Endurance U.K. to conduct business in European Union states other than the United Kingdom in compliance with the scope of permission granted these companies by the FSA without the necessity of additional licensing or authorization in other European Union jurisdictions. This ability to operate in other jurisdictions of the European Union on the basis of home state authorization and supervision is sometimes referred to as passporting. Insurers may operate outside their home member state either on a services basis or on an establishment basis. Operating on a services basis means that the Company conducts permitted businesses in the host state without having a physical presence there, while operating on an establishment basis means the Company has a branch or physical presence in the host state.

In both cases, a company remains subject to regulation by its home regulator, and not by local regulatory authorities, although the Company nonetheless may have to comply with certain local rules reserved to the “host state” (the state into which the services are being provided or in which the branch is being established). In addition to European Union member states, Norway, Iceland and Liechtenstein (members of the broader European Economic Area) are jurisdictions in which this passporting framework applies.

Elimination of the FSA

The U.K. Government is currently consulting on proposals to reform the U.K. regulatory structure. This means that, as of the end of 2012, the FSA will cease to exist in its current form and three new regulatory bodies will be established in its place. Endurance U.K. will be supervised by both the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) going forward. The FCA will be responsible for regulating the day-to-day conduct of insurance firms and the PRA will have responsibility for monitoring compliance with prudential requirements. It is proposed that the FCA will have a more interventionalist approach to regulation and will be focused on consumer outcomes.

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U.S. Regulation

The Company’s U.S. operating subsidiaries are domiciled in the State of Delaware, with the exception of American Agri-Business Insurance Company, which is domiciled in the State of Texas.

Much of state insurance regulation follows model statutes or regulations developed or amended by the National Association of Insurance Commissioners (“NAIC”) which is comprised of the insurance commissioners of each U.S. jurisdiction. The NAIC re-examines and amends existing model laws and regulations (including holding company regulations) in addition to determining whether new ones are needed.

NAIC model laws and regulations are merely recommended laws and regulations relating to the regulation of insurance in the U.S. that become effective only when enacted into law or promulgated as a regulation in a state. Some models have been enacted in very few states and some models have been enacted in all states in some form or another.

Insurance Holding Company Regulation of Endurance Holdings

Endurance Holdings and Endurance U.S. Holdings Corp., as parent companies of the Company’s U.S. operating companies, are subject to the insurance holding company laws of the States of Delaware and Texas, the states in which the Company’s U.S. operating subsidiaries are organized and domiciled. These laws generally require, among other things, the insurance holding company and each insurance company directly or indirectly owned by the holding company to register with the insurance departments of their respective domiciliary states and to furnish annually financial and other information about the operations of companies within the holding company system. Generally, all material transactions among companies in the holding company system involving the Company’s U.S. operating subsidiaries, including sales, loans, reinsurance agreements, service agreements, dividend payments and certain transactions within the insurance holding company system must be fair and, if material or of a specified category, require prior notice and approval or non-disapproval by the insurance regulator of the state in which the involved U.S. operating subsidiary is domiciled.

The NAIC, as part of its solvency modernization initiative, has engaged in a concerted effort to strengthen the ability of U.S. state insurance regulators to monitor U.S. insurance holding company groups. The NAIC’s solvency modernization initiative, among other things, aims to expand the authority and focus of state insurance regulators to encompass U.S. insurance holding company systems at the group level. The holding company reform efforts at the NAIC culminated in December 2010 in the adoption of significant amendments to the NAIC’s Insurance Holding Company System Regulatory Act (the “Model Act”) and its Insurance Holding Company System Model Regulation (the “Model Regulation”). Among other things, the revised Model Act and Model Regulation explicitly address “enterprise” risk – the risk that an activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse affect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole – and require annual reporting of potential enterprise risk as well as access to information to allow the state insurance regulator to assess such risk. In addition, the NAIC Model Act amendments include a requirement to the effect that any person divesting control over an insurer must provide 30 days’ notice to the regulator and the insurer (with an exception for cases where a Form A is being filed). The amendments direct the domestic state insurance regulator to determine those instances in which a divesting person will be required to file for and obtain approval of the transaction.

In June 2011, Texas became one of the first states to adopt the principal components of the amended Model Act. The related amendments to the Texas insurance holding company act depart somewhat from the Model Act in including a phase-in of the enterprise risk annual reporting requirement based on the volume of total direct or assumed annual premiums written by the insurer during the preceding 12-month period. Ultimate controlling persons of insurers with direct written and assumed premiums of more than $1 billion but less than $5 billion during the preceding 12-month period must file their first enterprise risk report with the first annual registration statement that becomes due after January 1, 2014. If the insurance regulator in Delaware adopts the revised Model Act and Model Regulation, the scope of insurance holding company regulation that the Company’s holding company system is currently subject to will be significantly expanded.

Changes of Control

Before a person can acquire control of a U.S. domestic insurer (or reinsurer), prior written approval must be obtained from the insurance commissioner of the state where the insurer (or reinsurer) is domiciled, or the acquiror must make a disclaimer of control filing with the insurance department of such state and obtain approval thereon. Prior to granting approval of an application to acquire control of a domestic insurer (or reinsurer), the domiciliary state insurance commissioner will consider such factors as the financial strength of the proposed acquiror, the integrity and management of the acquiror’s Board of Directors and executive officers, the acquiror’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state insurance statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent or more of the voting securities of the domestic insurer. Because a person acquiring ten percent or more of Endurance

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Holdings’ ordinary shares would indirectly acquire the same percentage of common stock of Endurance Holdings’ U.S. operating subsidiaries, the U.S. insurance change of control laws will likely apply to such a transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Endurance Holdings, including through transactions, and in particular unsolicited transactions, that some or all of the shareholders of Endurance Holdings might consider to be desirable.

The Model Act amendments adopted by Texas alter the method by which a person can “disclaim” control over an insurer where a presumption of control exists. Historically under the NAIC Model Act, a disclaimer of control was considered effective when filed; no affirmative approval from the state insurance regulator was required, and the regulator could disapprove a disclaimer only upon a notice and hearing. Under the amendments to the Model Act adopted in Texas, a disclaimer is deemed effective after 60 days unless disallowed prior to that time, and disallowance does not require a notice or hearing. The Texas amendments expressly provide, however, that the Texas Commissioner of Insurance (the “Texas Commissioner”) may disallow a disclaimer at any time if the Texas Commissioner determines that the disclaimer is incomplete or inaccurate or is no longer accurate.

Under the 2011 amendments to the Texas insurance holding company act, a “divesting person” must have the “divestiture” approved by the Texas Commissioner. Unlike the NAIC Model Act amendments, which require the confidential notice of proposed divestiture at least 30 days prior to the cessation of control, the Texas amendments require a divesting person to file a notice of its proposed divestiture with the Texas Commissioner at least 60 days before the cessation of control. In considering whether to approve or deny the divestiture, the Texas Commissioner shall consider whether it may jeopardize financial stability of the insurer or prejudice the interest of the insurer’s policyholders or other claimants.

State Insurance Regulation of the Company’s U.S. Operating Subsidiaries

State insurance authorities have broad regulatory powers with respect to various aspects of the business of the Company’s U.S. operating subsidiaries including: licensing to transact business, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards (including risk-based capital standards), establishing credit for reinsurance requirements, approval of policy forms and dates, and regulating investments, dividends and transactions between an insurer and its affiliates. With respect to direct insurance business, states may also regulate rates and forms used by insurers admitted to transact business within a given state jurisdiction and the marketplace conduct of such insurers. With respect to reinsurance, other than bulk reinsurance arrangements, the terms and conditions of reinsurance agreements between unaffiliated parties generally are not subject to regulation by any U.S. state insurance department with respect to rates or policy terms.

State insurance laws and regulations require each of the Company’s U.S. operating subsidiaries to file financial statements with insurance departments everywhere it is licensed, authorized or accredited to conduct insurance business; and the operations of the Company’s U.S. operating subsidiaries are subject to examination by those departments at any time. The Company’s U.S. operating subsidiaries prepare statutory financial statements in accordance with statutory accounting practices and procedures prescribed or permitted by these departments. State insurance departments also conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled or authorized to transact business in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. State and federal insurance and securities regulatory authorities and other state law enforcement agencies and attorneys general also occasionally make inquiries and conduct examinations or investigations regarding the compliance of our companies, as well as other companies in our industry, with insurance, securities and other laws.

In general, such state regulation is for the protection of policyholders rather than shareholders. Under Delaware and Texas insurance laws, the Company’s U.S. operating subsidiaries may only pay dividends to their respective parent companies out of earned surplus. In Delaware and Texas, earned surplus is defined as an amount equal to the unassigned funds of an insurer as set forth in the most recent annual statement of the insurer submitted to the applicable state insurance regulator, including all or part of the surplus arising from unrealized capital gains or revaluation of assets.

In addition, the ability of the Company’s U.S. operating subsidiaries to declare or pay any dividend, together with all dividends declared or distributed by it within the preceding twelve months, exceeds the greater of:

1. ten percent of its policyholders surplus as of the 31st day of December of the preceding year; or

2. the statutory net income, not including realized capital gains for the 12-month period ending, for the preceding calendar year (the 31st day of December next preceding)

will be subject to the prior approval of the applicable domestic state insurance regulator. Any dividend paid by any one of the Company’s U.S. operating subsidiaries must first be paid to its parent company. If the parent company is also an insurer, as is the case with Endurance American, Endurance American Specialty and Endurance Risk Solutions, the parent company or companies must also meet their own dividend eligibility requirements set forth above in order to pass along any dividends received from subsidiary insurance companies.

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The dividend limitations imposed by Delaware and Texas insurance laws are based on the statutory financial results of the Company’s U.S. operating subsidiaries determined by using statutory accounting practices which differ in certain respects from accounting principles used in financial statements prepared in conformity with U.S. GAAP. The significant differences relate to deferred acquisition expenses, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes. At December 31, 2011, of the Company’s U.S. operating subsidiaries, only ARMtech had earned surplus, and therefore, only ARMtech could declare or distribute dividends in 2011 without prior regulatory approval.

The U.S. federal government’s oversight of the insurance industry was expanded under the Dodd-Frank Wall Street Reform and Consumer Act (the “Dodd-Frank Act”). Prior to the enactment of the Dodd-Frank Act in July 2010, the U.S. federal government’s regulation of the insurance industry was essentially limited to certain insurance products, such as flood insurance, multi-peril crop insurance and reinsurance of losses from terrorism. As part of the overall federal financial regulatory reform package contained in the Dodd-Frank Act, Congress has legislated reforms in the reinsurance and surplus lines sectors.

Under reinsurance credit rules established under the Dodd-Frank Act, a U.S. ceding insurer need not satisfy the reinsurance credit rules of any nondomestic state if the following two conditions are met: 1) the ceding insurer’s domestic state is NAIC-accredited, and 2) the ceding insurer’s domestic state recognizes credit for reinsurance for its ceded risk.

The Dodd-Frank Act also created a Federal Insurance Office (“FIO”) in the U.S. Department of the Treasury. The FIO will have the authority to gather information, to advise the treasury secretary on key issues such as terrorism risk coverage and insurance accounting rules, and to send reports to Congress. The FIO director will serve as a nonvoting member of the Financial Stability Oversight Council. In addition, the FIO will have the ability to recommend to the Financial Stability Oversight Council the designation of an insurer as “systemically significant” and therefore subject to regulation by the Federal Reserve as a bank holding company.

In limited circumstances, the FIO can declare a state insurance law or regulation “preempted;” but this can be done only after extensive consultation with state insurance regulators, the Federal Office of Trade Representative and key insurance industry players (in trade associations representing insurers and intermediaries).

Risk-Based Capital Regulations

The insurance laws of Delaware and Texas require that insurers report their risk-based capital (“RBC”) based on a formula calculated by applying factors to various asset, premium and reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The state insurance departments of Delaware and Texas use the formula only as an early warning regulatory tool to identify possibly inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. Insurance laws impose broad confidentiality requirements on those engaged in the insurance business (including insurers, agents, brokers and others) and on the state insurance departments as to the use and publication of RBC data. The insurance departments of Delaware and Texas have explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels.

Statutory Accounting Practices

Statutory accounting practices, or “SAP,” are a basis of accounting developed to assist U.S. insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

U.S. GAAP concerns an insurer’s solvency, but it also concerns other financial measurements, such as income and cash flows. Accordingly, U.S. GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with U.S. GAAP as opposed to SAP.

Statutory accounting practices established by the NAIC and adopted, in part, by the Delaware and Texas insurance regulators, determine, among other things, the amount of statutory surplus and statutory net income of Endurance Holdings’ U.S. insurance company subsidiaries and thus determine, in part, the amount of funds they have available to pay dividends to their respective parent companies.

Operations of Endurance U.K. and Endurance Bermuda

Endurance U.K. and Endurance Bermuda are not admitted to do business in any state in the United States. Insurance laws of each state of the United States and of many other countries restrict or prohibit the sale of insurance and reinsurance within their jurisdictions by non-admitted alien insurers and reinsurers such as Endurance U.K. and Endurance Bermuda.

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In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the United States governing “credit for reinsurance” which are imposed on their ceding companies. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the reinsurer files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for unearned premiums (which are that portion of written premiums which applies to the remaining portion of the policy period) and loss reserves and loss expense reserves ceded to the reinsurer. As stated above, Endurance U.K. and Endurance Bermuda are not licensed, accredited or approved in any state in the United States. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be offset to the extent that the reinsurer provides a letter of credit or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed or non-accredited reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.

We do not believe that Endurance U.K. and Endurance Bermuda are in violation of insurance laws of any jurisdiction in the United States. There can be no assurance however, that inquiries or challenges to Endurance U.K.’s or Endurance Bermuda’s insurance or reinsurance activities will not be raised in the future.

Switzerland

In 2008, Endurance Bermuda established a branch in Zurich, Switzerland named Endurance Specialty Insurance Ltd. Pembroke (Bermuda) Zurich Branch. Swiss law does not impose additional regulation upon a Swiss branch of a foreign reinsurer.

Singapore

In 2008, Endurance Specialty Insurance Ltd. Singapore Branch received regulatory approval from the Monetary Authority of Singapore to operate as a branch insurer of Endurance Bermuda in Singapore to transact general reinsurance domestically and internationally. The branch is regulated by the Monetary Authority of Singapore pursuant to the Insurance Act. Endurance Specialty Insurance Ltd. Singapore Branch is also registered by the Accounting and Corporate Regulatory Authority (“ACRA”) as a foreign company in Singapore and is regulated by ACRA pursuant to the Companies Act. Endurance Specialty Insurance Ltd. Singapore Branch has received approval under a tax incentive scheme set out in the Income Tax Act (and the relevant regulations) which provides for a concessionary corporate tax rate of 10% to be applied on its income from all its offshore general reinsurance business for a period of 10 years from April 2010 to March 2020. For the year ended December 31, 2011, capital of $33.5 million was provided to the Singapore Branch. Total capital injections from inception to December 31, 2011 were $63.4 million.

MATERIAL TAX CONSIDERATIONS

Certain Bermuda Tax Considerations

Currently, there is no Bermuda income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by us or our shareholders, other than shareholders ordinarily resident in Bermuda, if any. Currently, there is no Bermuda withholding or other tax on principal, interest or dividends paid to holders of the ordinary shares or Preferred Shares, other than holders ordinarily resident in Bermuda, if any. There can be no assurance that we or our shareholders will not be subject to any such tax in the future.

Endurance Bermuda has received written assurance dated May 16, 2011 and Endurance Holdings has received written assurance dated May 17, 2011 from the Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, that if there is enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of that tax would not be applicable to Endurance Bermuda or Endurance Holdings or to any of their respective operations, shares, debentures or obligations until March 31, 2035; provided, that the assurance is subject to the condition that it will not be construed to prevent the application of such tax to people ordinarily resident in Bermuda, or to prevent the application of any taxes payable by Endurance Bermuda or Endurance Holdings in respect of real property or leasehold interests in Bermuda held by them. It is possible that after March 31, 2035 we may be subject to Bermuda taxes.

Certain United Kingdom Tax Considerations

Endurance U.K. is a company incorporated under the laws of England and is resident in the United Kingdom for United Kingdom corporation tax purposes. Endurance U.K. is subject to United Kingdom corporation tax on its worldwide profits, subject to the availability of applicable exemptions. The current rate of United Kingdom corporation tax on profits of whatever description is 26%, reducing by 1% annually to a rate of 23% as of April 1, 2014. Currently, no United Kingdom withholding tax applies to dividends paid by Endurance U.K. United Kingdom withholding tax may apply to certain payments of interest by Endurance U.K. up to a rate of 20%.

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Certain United States Federal Income Tax Considerations

The following discussion is a summary of certain U.S. federal income tax considerations relating to Endurance Holdings and its operating subsidiaries in Bermuda, the United States and the United Kingdom and the ownership of our ordinary shares and Preferred Shares.

This summary is based upon the Code, the regulations promulgated thereunder, rulings and other administrative pronouncements issued by the IRS, judicial decisions, the tax convention between the United States and Bermuda (the “Bermuda Tax Convention”) and the tax treaty between the United States and the United Kingdom (the “U.K. Treaty”), all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would assert, or that a court would not sustain a position contrary to any of the tax consequences described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this Annual Report on Form 10-K. This summary is for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of such investor’s investment or tax circumstances, or to investors subject to special tax rules, such as tax-exempt organizations, dealers in securities, banks, insurance companies, persons that hold ordinary shares or Preferred Shares that are a hedge or that are hedged against interest rate or insurance risks or that are part of a straddle or conversion transaction, or persons whose functional currency is not the U.S. dollar. This summary assumes that an investor will hold our ordinary shares and Preferred Shares as capital assets, which generally means as property held for investment. Investors should consult their tax advisors concerning the consequences, in their particular circumstances, of the ownership of ordinary shares and Preferred Shares under U.S. federal, state, local and other tax laws.

For U.S. federal income tax purposes and for purposes of the following discussion, a “U.S. Person” means (i) an individual citizen or resident of the United States, (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, or a partnership, or other entity treated as a partnership for U.S federal income tax purposes, in each case created or organized in the United States or under the laws of the United States or of any of its political subdivisions, (iii) an estate the income of which is subject to U.S. federal income tax without regard to its source or (iv) a trust if either (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. Persons have the authority to control all substantial decisions of the trust or (b) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes. A “Non-U.S. Person” is a nonresident alien individual, or a corporation, estate or trust that is not a U.S. person.

If a partnership owns ordinary shares or Preferred Shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership that owns ordinary shares or Preferred Shares, you should consult your tax advisor.

United States Taxation of Endurance Holdings and its Operating Subsidiaries

Our intent has been and continues to be to operate Endurance Holdings and its non-U.S. subsidiaries in such a manner that they will not be considered to be conducting business within the United States for purposes of U.S. federal income taxation. Whether business is being conducted in the United States is an inherently factual determination. Because the Code, regulations and court decisions fail to identify definitively activities that constitute being engaged in a trade or business in the United States, there can be no assurance that the IRS will not contend successfully that Endurance Holdings, Endurance Bermuda and/or Endurance U.K. are or will be engaged in a trade or business in the United States. A foreign corporation deemed to be so engaged would be subject to U.S. federal income tax (at a current maximum rate of 35%), as well as a 30% branch profits tax in certain circumstances, on its income which is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a foreign corporation is entitled to deductions and credits only if it timely files a U.S. federal income tax return. Endurance Holdings, Endurance Bermuda and Endurance U.K. have in the past and intend to continue to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that they are subject to U.S. federal income tax.

If Endurance Bermuda is entitled to the benefits under the Bermuda Tax Convention, it will not be subject to U.S. federal income tax on any income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the United States. Whether business is being conducted in the United States through a permanent establishment is an inherently factual determination. Endurance Bermuda intends to conduct its activities so as not to have a permanent establishment in the United States, although there can be no assurance that it will achieve this result. An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Tax Convention if (i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the United States or Bermuda or U.S. citizens and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities of, persons who are neither residents of either the United States or Bermuda nor U.S. citizens.

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Foreign insurance companies that conduct an insurance business within the United States must maintain a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If Endurance Bermuda is considered to be engaged in the conduct of an insurance business in the United States and it is not entitled to the benefits of the Bermuda Tax Convention, either because it fails to satisfy one of the limitations on Bermuda Tax Convention benefits described above or because Endurance Bermuda is considered to have a U.S. permanent establishment, a significant portion of Endurance Bermuda’s premium and investment income could be subject to U.S. federal income tax. In addition, while the Bermuda Tax Convention clearly applies to premium income, it is not clear whether it applies to other income, such as investment income. Consequently, if Endurance Bermuda is considered to be engaged in the conduct of an insurance business in the United States and is entitled to the benefits of the Bermuda Tax Convention, but the Bermuda Tax Convention is interpreted so as not to apply to investment income, a significant portion of Endurance Bermuda’s investment income could be subject to U.S. federal income tax even if Endurance Bermuda does not maintain a permanent establishment in the United States.

Under the U.K. Treaty, Endurance U.K., if entitled to the benefits of the U.K. Treaty, will not be subject to U.S. federal income tax on any income found to be effectively connected with a U.S. trade or business unless that trade or business is conducted through a permanent establishment in the United States. Endurance U.K. intends to continue to conduct its activities in a manner so that it does not have a permanent establishment in the United States, although we cannot predict whether we will achieve this result. Endurance U.K. will be entitled to the benefits of the U.K. Treaty if (i) during at least half of the days in the relevant taxable period, at least 50% of Endurance U.K.’s stock is beneficially owned, directly or indirectly, by citizens or residents of the United States and the United Kingdom, and less than 50% of Endurance U.K.’s gross income for the relevant taxable period is paid or accrued, directly or indirectly, to persons who are not U.S. or U.K. residents in the form of payments that are deductible for purposes of U.K. taxation or (ii) with respect to specific items of income, profit or gain derived from the United States, if such income, profit or gain is considered to be derived in connection with, or incidental to, Endurance U.K.’s business conducted in the United Kingdom.

Foreign corporations not engaged in a trade or business in the United States are nonetheless subject to U.S. withholding tax at a rate of 30% of the gross amount of certain “fixed or determinable annual or periodical gains, profits and income” derived from sources within the United States (such as dividends and certain interest on investments), subject to reduction by applicable treaties.

The United States also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rate of tax applicable to premiums paid to Endurance Bermuda is 4% for non-life insurance premiums and 1% for reinsurance premiums. The excise tax will not apply to premiums paid to Endurance U.K. if Endurance U.K. is entitled to the benefits of the U.K. Treaty, and certain other requirements are met.

Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are Delaware corporations and ARMtech is a Texas corporation. Each will be subject to taxation in the United States at regular corporate rates. Dividends paid by Endurance U.S. Holdings Corp. to Endurance Bermuda will be subject to U.S. withholding tax at the rate of 30%.

United States Taxation of Holders of Ordinary Shares and Preferred Shares

Shareholders Who Are U.S. Persons

Dividends. Distributions with respect to ordinary shares and Preferred Shares (including the payment of additional amounts, in the case of the Preferred Shares) will be treated as ordinary dividend income to the extent of Endurance Holdings’ current or accumulated earnings and profits as determined for U.S. federal income tax purposes, subject to the discussion below relating to the potential application of the “controlled foreign corporation” (“CFC”), “related person insurance income” (“RPII”) and “passive foreign investment company” (“PFIC”) rules. These dividends should constitute “qualified dividend income” as defined in Section 1(h)(11)(B) of the Code and, thus, should be entitled to the 15% preferential federal income tax rate applicable to “qualified dividends” received before January 1, 2013 by certain shareholders (such as individuals), provided that certain holding period requirements are satisfied and certain other conditions are met, and provided further that we are not considered a passive foreign investment company. This preferential tax rate is subject to increase for dividends paid after such date.

Dividends with respect to Endurance Holdings’ ordinary shares and Preferred Shares will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code. The amount of any distribution that exceeds Endurance Holdings’ current and accumulated earnings and profits first will be treated as a tax free return of capital; reducing a holder’s tax basis in the ordinary shares or Preferred Shares with regard to which the distribution was made and any amount in excess of such tax basis will be treated as gain from the sale or exchange of such holder’s shares.

Classification of Endurance Holdings, Endurance U.K. or Endurance Bermuda as a CFC. Each “10% U.S. Shareholder” of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year, and who owns shares in the CFC directly or indirectly through foreign entities, in such corporation on the last day, in such year, in which such corporation is a CFC must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s “subpart F income,” even if

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the subpart F income is not distributed. A foreign corporation is considered a CFC if “10% U.S. Shareholders” own (directly, indirectly through foreign entities or constructively pursuant to the application of certain constructive ownership rules) more than 50% of the total combined voting power of all classes of voting stock of such foreign corporation, or the total value of all stock of such corporation.

For purposes of taking into account insurance income, a CFC also includes a foreign corporation in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned (directly, indirectly through foreign entities or constructively pursuant to the application of certain constructive ownership rules) by 10% U.S. Shareholders, on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance contracts exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks.

A 10% U.S. Shareholder is a U.S. Person who owns at least 10% of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. The Preferred Shares should not be considered voting stock for purposes of determining whether a U.S. Person would be a “10% U.S. Shareholder” unless and until there exists a Nonpayment Event which triggers the Preferred Shareholders’ right to elect two additional directors to the Board of Directors of Endurance Holdings. In such case, the Preferred Shares should be treated as voting stock for as long as such right continues. Due to the anticipated dispersion of Endurance Holdings’ share ownership among holders, its bye-law provisions that impose limitations on the concentration of voting power of any shares that are entitled to vote and authorize the board of directors of Endurance Holdings to repurchase such shares under certain circumstances and other factors, no U.S. Person that owns shares in Endurance Holdings directly or indirectly through foreign entities should be subject to treatment as a 10% U.S. Shareholder of a CFC. There can be no assurance, however, that the IRS will not challenge the effectiveness of these bye-law provisions for purposes of preventing 10% U.S. Shareholder status and that a court will not sustain such challenge.

RPII Companies. The CFC rules also apply to certain insurance companies that earn “related person insurance income” (“RPII”). If the RPII rules were to apply to Endurance U.K. or Endurance Bermuda, a U.S. Person who owns ordinary shares or Preferred Shares of Endurance Holdings, directly or indirectly through foreign entities on the last day of the company’s taxable year would be required to include in its gross income for U.S. federal income tax purposes its pro rata share of Endurance U.K.’s or Endurance Bermuda’s RPII for the entire taxable year, regardless of whether such RPII is distributed. For purposes of the RPII rules, Endurance U.K. or Endurance Bermuda will be treated as a CFC if “RPII Shareholders” collectively own directly, indirectly through foreign entities or by application of the constructive ownership rules 25% or more of the stock of Endurance U.K. or Endurance Bermuda by vote or value. RPII is defined as any “insurance income” attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a “RPII Shareholder” of the foreign corporation or a “related person” to such RPII Shareholder. In general, and subject to certain limitations, “insurance income” is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance company.

A “RPII Shareholder” is any U.S. Person who owns, directly or indirectly through foreign entities, any amount (rather than stock possessing 10% or more of the total combined voting power) of Endurance U.K.’s or Endurance Bermuda’s stock, and “related person” means someone who controls or is controlled by the RPII Shareholder or someone who is controlled by the same person or persons which control the RPII Shareholder. “Control” is measured by either more than 50% in value or more than 50% in voting power of stock, applying constructive ownership principles. A corporation’s pension plan is ordinarily not a “related person” with respect to the corporation unless the pension plan owns, directly or indirectly through the application of constructive ownership rules, more than 50%, measured by vote or value, of the stock of the corporation.

RPII Exceptions. The special RPII rules do not apply if (i) direct or indirect insureds and persons related to such insureds, whether or not U.S. Persons, own, directly or indirectly, less than 20% of the voting power and less than 20% of the value of the stock of Endurance U.K. or Endurance Bermuda, as applicable (the “20% Ownership Exception”), (ii) RPII, determined on a gross basis, is less than 20% of Endurance U.K.’s or Endurance Bermuda’s gross insurance income for the taxable year, as applicable (the “20% Gross Income Exception”), (iii) Endurance U.K. or Endurance Bermuda elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business and to waive all treaty benefits with respect to RPII and meets certain other requirements or (iv) Endurance U.K. or Endurance Bermuda elects to be treated as a U.S. corporation. Endurance Bermuda and Endurance U.K. intend to operate in a manner that is intended to ensure that each qualifies for the 20% Gross Income Exception. It is possible that neither Endurance Bermuda nor Endurance U.K. will be successful in qualifying under this exception.

If none of these exceptions applies, each U.S. Person who directly or indirectly through foreign entities owns shares in Endurance Holdings (and therefore, indirectly in Endurance U.K. and Endurance Bermuda) on the last day of Endurance Holdings’ taxable year, will be required to include in its gross income for U.S. federal income tax purposes its share of RPII of Endurance U.K. and/or Endurance Bermuda, as applicable, for the entire taxable year. This inclusion will be determined as if such RPII were distributed proportionately only to such U.S. Persons holding shares in Endurance Holdings at that date. The inclusion will be limited to the current-year earnings and profits of Endurance U.K. or Endurance Bermuda, as applicable, reduced by the shareholder’s pro rata share, if any, of certain prior year deficits in earnings and profits.

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Basis Adjustments. A RPII Shareholder’s tax basis in its Endurance Holdings ordinary shares or Preferred Shares, as the case may be, will be increased by the amount of any RPII or other subpart F income that the shareholder includes in income. Any distributions made by Endurance Holdings out of previously taxed RPII or other subpart F income will be exempt from further tax in the hands of the RPII Shareholder. The RPII Shareholder’s tax basis in its Endurance Holdings shares will be reduced by the amount of any distributions that are excluded from income under this rule.

Uncertainty as to Application of RPII. Regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes might ultimately be made or whether any such changes, as well as any interpretation or application of the RPII rules by the IRS, the courts or otherwise, might have retroactive effect. Accordingly, the meaning of the RPII provisions and their application to Endurance U.K. and Endurance Bermuda is uncertain. These provisions include the grant of authority to the U.S. Treasury to prescribe “such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise.” In addition, there can be no assurance that the IRS will not challenge any determinations by Endurance U.K. or Endurance Bermuda as to the amount, if any, of RPII that should be includible in income or that the amounts of the RPII inclusions will not be subject to adjustment based upon subsequent IRS examination. Prospective investors should consult their tax advisors as to the effects of these uncertainties.

Information Reporting. Under certain circumstances, U.S. Persons owning stock in a foreign corporation are required to file IRS Form 5471 with their U.S. federal income tax returns. Generally, information reporting on IRS Form 5471 is required with respect to (i) a person who is treated as a RPII Shareholder, (ii) a 10% U.S. Shareholder of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned the stock on the last of that year and (iii) under certain circumstances, a U.S. Person who acquires stock in a foreign corporation, and as a result thereof owns 10% or more of the voting power or value of such foreign corporation, whether or not such foreign corporation is a CFC. For any taxable year in which Endurance Holdings determines that gross RPII constitutes 20% or more of Endurance U.K.’s or Endurance Bermuda’s gross insurance income and the 20% Ownership Exception does not apply, Endurance Holdings intends to mail to all U.S. Persons registered as holders of its ordinary shares and Preferred Shares IRS Form 5471, completed with information from Endurance Holdings, for attachment to the U.S. federal income tax returns of such shareholders. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in the circumstances described above. Failure to file IRS Form 5471 may result in penalties.

Tax-Exempt Shareholders. Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII that is includible in income by the tax-exempt entity as unrelated business taxable income.

Dispositions of Ordinary Shares and Preferred Shares. Subject to the discussion below relating to the redemption of Preferred Shares or the potential application of Code Section 1248 or the “PFIC” rules, any gain or loss realized by a U.S. Person on the sale or other disposition of ordinary shares or Preferred Shares will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the amount realized upon such sale or exchange and such person’s tax basis in the shares. If the holding period for these shares exceeds one year at the time of the disposition, any gain will be subject to tax at a current maximum marginal tax rate of 15% for individuals (subject to increase in 2013 without any Congressional action) and 35% for corporations. Moreover, gain, if any, generally will be U.S. source gain and generally will constitute “passive income” for foreign tax credit limitation purposes.

Code Section 1248 provides that if a U.S. Person sells or exchanges stock in a foreign corporation and such person owned directly, indirectly through certain foreign entities or constructively 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as ordinary income to the extent of the CFC’s earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. For these purposes, the Preferred Shares should not be considered as having voting power unless and until there exists a Nonpayment Event which triggers the right of holders of Preferred Shares to elect two additional directors to the board of directors of Endurance Holdings. In such case, the Preferred Shares should be treated as voting stock for as long as such right continues.

Code Section 1248 also applies to the sale or exchange of shares in a foreign corporation if the foreign corporation would be treated as a CFC for RPII purposes and would be taxed as an insurance company if it were a domestic corporation, regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20% Gross Income Exception or the 20% Ownership Exception applies. Regulations do not specifically address whether or how Code Section 1248 would apply to dispositions of shares of stock in a foreign corporation that is not a CFC and does not directly engage in the insurance business, but has a subsidiary that is a CFC and that would be taxed as an insurance company if it were a domestic corporation. Endurance Holdings believes, however, that the application of Code Section 1248 under the RPII rules should not apply to the disposition of ordinary shares or Preferred Shares because Endurance Holdings is not directly engaged in the insurance business. There can be no assurance, however, that the IRS will

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not interpret the regulations in a contrary manner or that the U.S. Treasury Department will not amend the regulations to provide that these rules will apply to dispositions of our ordinary shares and Preferred Shares. Prospective investors should consult their tax advisors regarding the effects of these rules on a disposition of our shares.

Redemption of Preferred Shares. Subject to the discussion herein relating to the application of the RPII and PFIC rules, under Section 302 of the Code, a redemption of the Preferred Shares will be treated as a dividend to the extent of Endurance Holdings’ current and accumulated earnings and profits, unless such redemption satisfies the tests set forth under Section 302(b) of the Code, which would treat the redemption as a sale or exchange subject to taxation as described above under “Dispositions of Ordinary Shares and Preferred Shares.” A redemption will be treated as a sale or exchange if: (i) it is “substantially disproportionate,” (ii) constitutes a “complete termination of the holder’s stock interest” in us, or (iii) is “not essentially equivalent to a dividend”, each within the meaning of Section 302(b) of the Code. In determining whether any of these tests are satisfied, shares considered to be owned by a U.S. Person by reason of certain constructive ownership rules set forth in the Code, as well as shares actually owned, must generally be taken into account. Because the determination as to whether any of the alternative tests of Section 302(b) of the Code is satisfied with respect to a particular holder of the Preferred Shares will depend on the facts and circumstances as of the time the determination is made, U.S. shareholders should consult their tax advisors, at such time, to determine their tax treatment in light of their particular circumstances.

Passive Foreign Investment Companies. In general, a foreign corporation will be a PFIC during a given year if (i) 75% or more of its gross income constitutes “passive income” or (ii) 50% or more of its assets produce passive income.

For purposes of the PFIC determination, passive income generally includes interest, dividends, annuities and other investment income. The PFIC statutory provisions, however, contain an express exception for income derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business.

This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Endurance Holdings expects for purposes of the PFIC rules that each of Endurance U.K. and Endurance Bermuda will be predominantly engaged in an insurance business and is unlikely to have financial reserves in excess of the reasonable needs of its insurance business. Accordingly, neither expects to be treated as a PFIC for U.S. federal income tax purposes. There can be no assurances, however, that this will be the case. The PFIC statutory provisions contain a look-through rule stating that, for purposes of determining whether a foreign corporation is a PFIC, such foreign corporation shall be treated as if it received directly its proportionate share of the income and as if it held its proportionate share of the assets of any other corporation in which it owns at least 25% by value of the shares. While no explicit guidance is provided by the statutory language, under this look-through rule Endurance Holdings should be deemed to own the assets and to have received the income of its insurance subsidiaries directly for purposes of determining whether it qualifies for the insurance exception. Consequently, Endurance Holdings does not expect to be treated as a PFIC for U.S. federal income tax purposes. This interpretation of the look-through rule is consistent with the legislative intention generally to exclude bona fide insurance companies from the application of PFIC provision. Nevertheless, there are currently no Treasury regulations regarding the application of the PFIC provisions to an insurance company, and new Treasury regulations or pronouncements interpreting or clarifying these rules may be forthcoming. In addition, the determination of PFIC status is fundamentally factual in nature, depends on the application of complex U.S. federal income tax rules that are subject to differing interpretations, and generally cannot be determined until the close of the taxable year in question. Therefore, there can be no assurance that the IRS will not challenge this position or that a court will not sustain such challenge. Prospective investors should consult their tax advisor as to the effects of the PFIC rules.

If Endurance Holdings were characterized as a PFIC during a given year, U.S. Persons owning ordinary shares or Preferred Shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an “excess distribution” with respect to, their shares, unless such shareholders made a “qualified electing fund election” or “mark-to-market” election. It is uncertain that Endurance Holdings would be able to provide its shareholders with the information necessary for a U.S. Person to make the elections. In general, a shareholder receives an “excess distribution” if the amount of the distribution is more than 125% of the average distribution with respect to the shares during the three preceding taxable years (or shorter period during which the taxpayer held the shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the shares was taxed in equal portions at the highest applicable tax rate on ordinary income throughout the shareholder’s period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such period.

Other. Except as discussed below with respect to backup withholding, dividends paid by Endurance Holdings will not be subject to U.S. withholding tax.

Information Reporting and Backup Withholding. Information returns may be filed with the IRS in connection with payments of dividends with respect to our ordinary shares or Preferred Shares and the proceeds from a sale or other disposition of the shares unless the shareholder establishes an exemption from the information reporting rules. A U.S. Person holding our ordinary shares or Preferred Shares that does not establish such an exemption may be subject to U.S. backup withholding tax on these payments if the

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holder fails to provide its taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to a U.S. Person will be allowed as a credit against the U.S. Person’s U.S. federal income tax liability and may entitle such person to a refund, provided that the required information is furnished to the IRS.

Shareholders Who Are Non-U.S. Persons

Dividends, Sales, Exchanges and Other Disposition. In general (and subject to the discussion below under “Information Reporting and Backup Withholding”), a Non-U.S. Person will not be subject to U.S. federal income or withholding tax with respect to payments of dividends on, or gain upon the disposition of, our ordinary shares or Preferred Shares unless (i) the dividends or gain is effectively connected with the conduct by the Non-U.S. Person of a trade or business in the United States or (ii) in the case of gain upon the disposition of shares, the Non-U.S. Person is an individual who is present in the United States for 183 days or more in the taxable year and certain other conditions are met. Nonresident alien individuals will not be subject to U.S. estate tax with respect to our ordinary shares or Preferred Shares.

Dividends or gain that is effectively connected with the conduct by a Non-U.S. Person of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that a shareholder maintains in the United States) generally will be subject to regular U.S. federal income tax in the same manner as if it were realized by a U.S. Person. In addition, if such Non-US. Person is a non-U.S. corporation, such dividends or gain may be subject to a branch profits tax at a rate of 30% (or such lower rate as is provided by an applicable income tax treaty).

Information Reporting and Backup Withholding. If our ordinary shares or Preferred Shares are held by a Non-U.S. Person through a non-U.S. (and non-U.S. related) broker or financial institution, information reporting and backup withholding generally would not be required. Information reporting, and possibly backup withholding, may apply if the shares are held by a Non-U.S. Person through a U.S. (or U.S. related) broker or financial institution and the Non-U.S. Person fails to provide appropriate information. Non-U.S. Persons should consult their tax advisors concerning the application of the information reporting and backup withholding rules.

AVAILABLE INFORMATION

General information about us, including our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters for the Audit, Compensation, Investment, Nominating and Corporate Governance, Risk and Underwriting Committees of our Board of Directors, can be found on our website at www.endurance.bm. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the United States Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (including Endurance) and the address of that site is www.sec.gov. Any of the above referenced documents can also be obtained in print, free of charge, by contacting the Secretary at Endurance Specialty Holdings Ltd., Wellesley House, 90 Pitts Bay Road, Pembroke HM08, Bermuda. Information on our website is not incorporated into this Form 10-K or our other securities filings and is not a part of these filings.

Item 1A. Risk Factors

Before investing in any of our securities, you should carefully consider the following risk factors and all other information set forth in this Annual Report on Form 10-K. These risks could materially affect our business, results of operations or financial condition and could cause the trading price of our securities to decline. You could lose all or part of your investment. The headings used in this section are solely to aid the reader as to general categories of risks related to investing in the Company. Many of the risk factors listed apply to more than one category or to the Company generally. Accordingly, the headings used in this section should not be construed as limiting in any manner the general applicability of any of the risk factors included in this section.

UNDERWRITING RISKS

As a property, agriculture and catastrophe insurer and reinsurer, we are particularly vulnerable to losses from catastrophes.

Our property, agriculture and catastrophe insurance and reinsurance lines expose us to claims arising out of catastrophes. Catastrophes can be caused by various unpredictable events, including earthquakes, hurricanes, hailstorms, droughts, severe weather, floods, fires, tornadoes, volcano eruptions, explosions and other natural or man-made disasters. Many scientists believe that the earth’s atmospheric and oceanic temperatures are increasing and that, in recent years, changing climate conditions have increased the unpredictability, severity and frequency of natural disasters in certain parts of the world.

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The global geographic distribution of our business subjects us to catastrophe exposure for natural events occurring in a number of areas throughout the world, including, but not limited to, windstorms in the United Kingdom and continental Europe, hurricanes in Florida, the Gulf Coast and the Atlantic coast regions of the United States, typhoons and earthquakes in Japan, New Zealand, Australia and other parts of Southeast Asia, earthquakes in California and the Pacific Northwest and New Madrid region of the United States and drought, hail, tornado and flooding in the Midwestern United States. From time to time, we may have greater exposures in one or more of these geographic areas than our overall share of the worldwide market might suggest. Accordingly, when and if catastrophes occur in these areas, we may experience relatively more severe negative results from such events than our competitors. In particular, the Company has historically had a relatively large percentage of its coverage exposures concentrated in the states of Texas, California and Florida, continental Europe, and Japan.

In addition, changing climate conditions, primarily rising global temperatures, may be increasing, or may in the future increase the frequency and severity of natural catastrophes, including weather events, and may create new types of catastrophe losses. We expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. In the event that we experience catastrophe losses, there is a possibility that our premiums will be inadequate to cover these risks. In addition, because accounting regulations do not permit insurers and reinsurers to reserve for such catastrophic events until they occur, claims from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could have a material adverse effect on our financial condition and results of operations. Furthermore, the estimation of reserves related to catastrophic events can be affected by the inability to access portions of the affected areas, the complexity of factors contributing to the losses, legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; the impact of demand surge; infrastructure disruption; fraud; the effect of mold damage; business interruption costs; and reinsurance collectability. The timing of a catastrophe’s occurrence, such as at or near the end of a reporting period, can also affect the information available to us in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge and additional information becomes available. Our ability to write new business also could be adversely impacted. Although we attempt to manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our results of operations or financial condition.

As a property and casualty insurer and reinsurer, we could face losses from war, terrorism and political unrest.

We may have substantial exposure to losses resulting from acts of war, acts of terrorism and political instability. These risks are inherently unpredictable, although recent events may lead to increased frequency and severity. It is difficult to predict their occurrence with statistical certainty or to estimate the amount of loss an occurrence will generate. Accordingly, it is possible that our loss reserves will be inadequate to cover these risks. We closely monitor the amount and types of coverage we provide for terrorism risk under insurance policies and reinsurance treaties. We often seek to exclude terrorism when we cannot reasonably evaluate the risk of loss or charge an appropriate premium for such risk. Even in cases where we have deliberately sought to exclude coverage, we may not be able to eliminate our exposure to terrorist acts, and thus it is possible that these acts will have a material adverse effect on us.

The risks associated with property and casualty reinsurance underwriting could adversely affect us.

Because we participate in property and casualty reinsurance markets, the success of our underwriting efforts depends, in part, upon the policies, procedures and expertise of the ceding companies making the original underwriting decisions. We face the risk that these ceding companies may fail to accurately assess the risks that they assume initially, which, in turn, may lead us to inaccurately assess the risks we assume. If we fail to establish and receive appropriate premium rates, we could face significant losses on these contracts.

The terms of the Federal Multi-Peril Crop Insurance Program may change and adversely impact us.

We are one of 15 companies that currently participate in the U.S. Federal Multi-Peril Crop Insurance Program (“MPCI”) sponsored by the Risk Management Agency of the U.S. Department of Agriculture (the “RMA”). As a result of our acquisition of ARMtech in December of 2007, crop insurance premiums, which are primarily driven by MPCI, have become an increasingly larger portion of our business, totaling $901.7 million of gross premiums written in 2011, and representing 61.4% of the total gross premiums written in our Insurance segment in 2011.

The RMA periodically reviews and proposes changes to the Standard Reinsurance Agreement (“SRA”) used in connection with the MPCI program and such changes to the SRA could adversely affect the financial results of crop insurers such as ARMtech.

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As an agriculture insurer, we could face losses from commodity price volatility.

A significant portion of our agriculture insurance business provides revenue protection to farmers for their expected crop revenues, which can be affected by changes in crop prices. We face the risk that significant losses could be incurred in the event of a decline in the applicable commodity prices prior to harvest. While this risk is partially mitigated by policyholder retentions, it is possible that large declines in the commodity prices of the major crops we insure, including corn, soybeans, cotton and wheat, could have a material adverse effect on our results of operations or financial condition if we are unable to effectively reinsure these risks or enter into applicable commodity price hedges.

If actual renewals of our existing policies and contracts do not meet expectations, our gross premiums written in future years and our future results of operations could be materially adversely affected.

Our insurance policies and reinsurance contracts are generally for a one-year term. In our financial forecasting process, we make assumptions about the renewal of our prior year’s policies and contracts. If actual renewals do not meet expectations, our gross premiums written in future years and our future results of operations could be materially adversely affected. This risk is especially prevalent in the first quarter of each year when a large number of insurance and reinsurance contracts are subject to renewal.

The ongoing development of our U.S.-based insurance operations is subject to increased risk from changing market conditions.

Excess and surplus lines insurance is a substantial portion of the business written by our U.S.-based insurance operations. Excess and surplus lines insurance covers risks that are typically more complex and unusual than standard risks and require a high degree of specialized underwriting. As a result, excess and surplus lines risks do not often fit the underwriting criteria of standard insurance carriers. Our excess and surplus lines insurance business fills the insurance needs of businesses with unique characteristics and is generally considered higher risk than those in the standard market. If our underwriting staff inadequately judges and prices the risks associated with the business underwritten in the excess and surplus lines market, our financial results could be adversely impacted.

Further, the excess and surplus lines market is significantly affected by the conditions of the property and casualty insurance market in general. The impact of this cyclicality can be more pronounced in the excess and surplus market than in the standard insurance market. During times of hard market conditions (when market conditions are more favorable to insurers), as rates increase and coverage terms become more restrictive, business tends to move from the admitted market to the excess and surplus lines market and growth in the excess and surplus market can be significantly more rapid than growth in the standard insurance market. When soft market conditions are prevalent (when market conditions are less favorable to insurers), standard insurance carriers tend to loosen underwriting standards and expand market share by moving into business lines traditionally characterized as excess and surplus lines, exacerbating the effect of rate decreases. If we fail to manage the cyclical nature and volatility of the revenues and profit we generate in the excess and surplus lines market, our financial results could be adversely impacted.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or on our results of operations.

We seek to limit our loss exposure by writing many of our insurance and reinsurance contracts on an excess of loss basis, adhering to maximum limitations on policies written in defined geographical zones, limiting program size for each client, establishing per risk and per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for each program written. In the case of proportional treaties, we seek per occurrence limitations or loss ratio caps to limit the impact of losses from any one event. Most of our direct liability insurance policies include maximum aggregate limitations. We also seek to limit our loss exposure through geographic diversification. Disputes relating to coverage and choice of legal forum may also arise. As a result, various provisions of our policies, such as limitations or exclusions from coverage or choice of forum, may not be enforceable in the manner we intend and some or all of our other loss limitation methods may prove to be ineffective. Underwriting is a matter of judgment, involving important assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more future catastrophic or other events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our financial condition and our results of operations, possibly to the extent of eliminating our shareholders’ equity.

We may be unable to purchase reinsurance and our net income could be reduced or we could incur a net loss in the event of an unusual loss experience.

We purchase reinsurance if it is deemed prudent from a risk mitigation perspective or if it is expected to have a favorable cost/benefit relationship relative to our retained risk portfolio. Changes in the availability and cost of reinsurance, which are subject to market conditions that are outside of our control, may reduce to some extent our ability to use reinsurance to balance exposures across our reinsurance or insurance operations. Accordingly, we may not be able to obtain our desired amounts of reinsurance. In addition, even if we are able to obtain such reinsurance, we may not be able to negotiate terms that we deem appropriate or acceptable or obtain such reinsurance from entities with satisfactory creditworthiness.

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We are also subject to credit risk with respect to our reinsurers because the transfer of risk to a reinsurer does not relieve us of our liability to our clients. If our reinsurance companies experience financial difficulties, they may be unable to pay us. In addition, reinsurers may be unwilling to pay us, even though they are able to do so. The failure of one or more of the our reinsurers to honor their obligations to us in a timely fashion would impact our cash flow and reduce our net income and, depending upon the amount of reinsurance we have purchased, could cause us to incur a significant loss.

A decline in our financial strength ratings could affect our standing among brokers and customers and cause our premiums and earnings to decrease.

Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. We currently maintain an A.M. Best financial strength rating of “A” (Excellent) with a stable outlook and an S&P financial strength rating of “A” (Strong) with a stable outlook. Because all of our ratings are subject to continual review, the retention of these ratings cannot be assured. If our ratings are reduced from their current level by A.M. Best or S&P, our competitive position in the insurance and reinsurance industry would suffer. Such a downgrade may have a material negative impact on our ability to expand our insurance and reinsurance portfolio and renew our existing insurance and reinsurance policies and agreements, require us to establish trusts or post letters of credit for ceding company clients, and could trigger provisions allowing some ceding company clients to terminate their reinsurance contracts with us on terms disadvantageous to us. In addition, a downgrade of our A.M. Best rating below “B++” (two levels below our current rating) would constitute an event of default under our bank credit facility. Each of the effects of a downgrade of our financial strength rating described above could make it more expensive or otherwise difficult for us to compete in certain business segments in which we would otherwise desire to operate. If this were to occur, we could suffer a material and adverse effect on our financial position and results of operations, and the market price for our securities, including any ordinary shares, could be materially and adversely affected.

It is possible that rating agencies may in the future heighten the level of scrutiny they apply when analyzing companies in our industry, may increase the frequency and scope of their reviews, may request additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in their models for maintenance of certain rating levels.

We cannot predict what actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business. As with other companies in the financial services industry, our ratings could be downgraded at any time and without any notice.

Profitability may be adversely impacted by inflation.

The effects of inflation could cause the cost of claims from catastrophes or other events to rise in the future. Our reserve for losses and loss expenses includes assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified.

Adverse changes to the economy in the countries in which we operate could lower the demand for our insurance and reinsurance products and could have a materially adverse effect on the profitability of our operations.

Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, indirectly, the amount and profitability of our business. In an economic environment characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for insurance products could be adversely affected. Adverse changes in the economy could potentially lead our customers to have less need for insurance coverage, to cancel existing insurance policies, modify coverage or to not renew with us, and our premium revenue could be adversely affected. Challenging economic conditions also may impair the ability of our customers to pay premiums as they come due.

The downgrade in the S&P credit rating for U.S. government securities and the continuing economic instability in the Eurozone have resulted in global financial market uncertainty and economic instability. Consequently, evolving market conditions may continue to affect our investment portfolio, results of operations, financial position and capital resources. In the event that there is further deterioration or volatility in financial markets or general economic conditions, our investment portfolio, results of operations, financial position and/or liquidity, and competitive landscape could be materially and adversely affected.

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Since we depend on a few brokers for a large portion of our revenues, loss of business provided by any one of them could adversely affect us.

We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. In the year ended December 31, 2011, our top three brokers represented approximately 47.0% of our net premiums written. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.

Our reliance on brokers subjects us to their credit risk.

In accordance with industry practice, we frequently pay amounts owed on claims under our insurance or reinsurance contracts to brokers, and these brokers, in turn, pay these amounts to the clients that have purchased insurance or reinsurance from us. If a broker fails to make such a payment, in a significant majority of business that we write, it is highly likely that we will be liable to the client for the deficiency because of local laws or contractual obligations, notwithstanding the broker’s obligation to make such payment. Likewise, when the client pays premiums for these policies to brokers for payment over to us, these premiums are considered to have been paid and, in most cases, the client will no longer be liable to us for those amounts, whether or not we have actually received the premiums. Consequently, we assume a degree of credit risk associated with brokers around the world with respect to most of our insurance and reinsurance business. To date we have not experienced any losses related to such credit risks.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either broadening coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.

Recent examples of emerging claims and coverage issues include:

• An increase in the dollar magnitude of security class action settlements, particularly in the settlement of mega-cases, covered by professional liability and directors’ and officers’ liability insurance;

• continued challenges to tort reform by plaintiffs with mixed results across the United States;

• a low interest rate environment, which continues to create upward pressure on settlement values;

• a growing trend of plaintiffs targeting property and casualty insurers relating to claims-handling practices in the adjustment of losses relating to natural disasters; and

• securities litigation with a focus on initial public offerings and merger and acquisition activities.

The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict and could have a material adverse affect on our financial condition or results of operations.

We operate in a highly competitive environment which could adversely impact our operating margins.

The insurance and reinsurance industries are highly competitive. We compete with major U.S. and non-U.S. insurers and reinsurers, including other Bermuda-based insurers and reinsurers. Many of our competitors have greater financial, marketing and management resources. In addition, we may not be aware of other companies that may be planning to enter the segments of the insurance and reinsurance market in which we operate or of existing companies that may be planning to raise additional capital. Increasing competition could result in fewer submissions, lower premium rates and less favorable policy terms and conditions, which could have a material adverse impact on our growth and profitability.

Further, insurance/risk-linked securities and derivative and other non-traditional risk transfer mechanisms and vehicles are being developed and offered by other parties, including non-insurance company entities, which could impact the demand for traditional insurance or reinsurance. A number of new, proposed or potential industry or legislative developments could further increase competition in our industry. New competition from these developments could cause the demand for insurance or reinsurance to fall or the expense of customer acquisition and retention to increase, either of which could have a material adverse affect on our growth and profitability.

The historical cyclicality of the property and casualty reinsurance industry may cause fluctuations in our results.

Historically, property and casualty insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions and other factors. Demand for insurance and reinsurance is influenced significantly by prevailing general economic conditions and, in the case of reinsurance, the underwriting results of primary property and casualty insurers. The supply of insurance and reinsurance is related to prevailing prices, the levels of insured losses and the levels of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance

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business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. The continued strength of the industry’s surplus position and the establishment of new market entrants has increased the supply of insurance and reinsurance and has caused insurance and reinsurance prices in many of the markets in which we participate to decrease in the past 5 years. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer submissions for insurance and reinsurance coverage. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and cedants may affect the cycles of the insurance and reinsurance business significantly. To the extent these trends continue, our financial condition or results of operations could be materially and adversely affected.

INVESTMENT RISKS

We are exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices and foreign currency exchange rates, which may adversely affect our results of operations, financial condition or liquidity.

We are exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices, foreign currency exchange rates, market volatility, the performance of the economy in general, the performance of the specific issuers included in our portfolio and other factors outside our control.

Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates, in the absence of other countervailing changes, will reduce the net unrealized gain or increase the net unrealized loss position of our investment portfolio. As portions of our fixed maturity investments mature, we may be forced to reinvest these investments at lower rates, which could result in materially lower investment yields. In the event that our estimate of our liability-cash flow profile is inaccurate, we may be forced to liquidate investments prior to maturity at a loss in order to cover the liability. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to adequately mitigate the interest rate risk of our assets relative to our liabilities, which could have a material adverse effect on our consolidated results of operations, financial condition or liquidity.

Our exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. If issuer credit spreads widen or increase significantly over an extended period of time, it may result in a net unrealized loss position in our investment portfolio. If credit spreads tighten significantly, it will reduce net investment income associated with new purchases of fixed maturity investments.

Our exposure to equity price risk relates primarily to equity market price variability. Although we take measures to manage the economic risks of investing in a changing equity market, we may not be able to adequately mitigate the equity risk of our assets relative to our liabilities.

Our primary foreign currency exchange risks are related to net income from foreign operations, non–U.S. dollar denominated investments and investments in foreign subsidiaries. In general, the weakening of foreign currencies versus the U.S. dollar will unfavorably affect net income from foreign operations, the value of non-U.S. dollar denominated investments, and investments in foreign subsidiaries.

A portion of our investment portfolio is allocated to Other Investments that we expect will have different risk characteristics than our investments in traditional fixed maturity investments and short-term investments, which in turn could result in a material adverse change to our investment performance, and accordingly adversely affect our financial results.

A portion of our investment portfolio is allocated to Other Investments, both alternative funds and specialty funds, which we expect to have different risk characteristics than our investments in traditional fixed maturity securities and short term investments. Our alternative funds include investments in hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies and constituted 4.9% of the carrying value of our cash and invested assets as of December 31, 2011. As of December 31, 2011, we are committed to potential future capital calls in the aggregate amount of approximately $18.1 million in connection with our alternative funds. Our specialty funds currently include investments in high yield loan and convertible debt funds and constituted 1.9% of the carrying value of our cash and invested assets as of December 31, 2011. The amount and timing of net investment income from such Other Investments tends to be uneven as a result of the performance of the underlying investments. The timing of distributions from these investments, which depends on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. The amount of net investment income that we record from these investments can vary substantially from quarter to quarter. Many of the investments are subject to restrictions on redemptions and sales that limit our ability to liquidate these investments in the short-term. These investments expose us to market risks including interest rate risk, foreign currency risk, equity price risk and credit risk. In addition, we typically do not hold the underlying securities of these investments in our custody accounts. As a result, we generally do not have the ability to quantify the risks associated with these investments in the same manner as we have for our fixed maturity portfolio. The performance of these investments is also dependent on the individual investment managers and their investment strategies. It is possible that the investment managers will leave and/or the investment strategies will become ineffective. Any of the foregoing could result in a material adverse change to our investment performance, and accordingly adversely affect our financial results.

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Losses due to defaults by others, including issuers of investment securities (which include structured securities such as commercial mortgage-backed securities and residential mortgage-backed securities or high yield bonds), and reinsurance counterparties could adversely affect the value of our investments, results of operations, financial condition or cash flows.

Issuers or borrowers whose securities or loans we hold, customers, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors may default on the principal and interest they owe to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. We are also subject to the risk that the underlying collateral within loan-backed securities, including mortgage-backed and asset-backed securities, may default on principal and interest payments causing an adverse change in cash flows paid to us. At December 31, 2011, the fixed maturity portfolio of $4.9 billion represented 77.7% of our total cash and invested assets. The occurrence of a major economic downturn, acts of corporate malfeasance, widening risk spreads, or other events that adversely impact the issuers, guarantors or underlying collateral of these securities could cause the value of our fixed maturity portfolio and our net income to decline and the default rate of the fixed maturity investments to increase. A ratings downgrade affecting issuers or guarantors of particular securities, or similar trends that could worsen the credit quality of issuers, such as the corporate issuers of securities in our investment portfolio, could also have a similar effect. With economic uncertainty, credit quality of issuers or guarantors could be adversely affected. Similarly, a ratings downgrade affecting a loan-backed security we hold could indicate the credit quality of that security has deteriorated. Any event reducing the value of these securities other than on a temporary basis could have a material adverse effect on our business, results of operations and financial condition. Levels of write down or impairment are impacted by our assessment of the intent and ability to hold securities which have declined in value and whether such declines in the Company’s value below amortized cost are due to credit related factors.

We have also engaged third party investment managers to provide us with investment advisory and management services. It is possible that the investment strategies employed by these third party investment managers may become ineffective or that such managers will fail to follow our investment guidelines, which could result in a material adverse change to our investment performance, and accordingly adversely affect our financial results.

The further downgrade of U.S. or foreign government securities by credit rating agencies could adversely impact the value of the U.S. or foreign government and other securities in our investment portfolio and create uncertainty in the market generally.

The further downgrade of the U.S. or foreign government securities by credit rating agencies has the potential to adversely impact the value of the U.S. or foreign government and other securities in our investment portfolio. A further downgrade in the rating of U.S. or foreign government securities may cause the Company’s investment portfolio’s average credit rating to fall and may result in the Company no longer being in compliance with its current investment policy at its current level of U.S. or foreign government security holdings. In addition to the foregoing, a further downgrade in the rating of U.S. or foreign government securities may have an adverse impact on fixed income markets, which in turn could cause our net investment income to decline or have a material adverse effect on our financial condition.

Our investment portfolio contains direct and indirect exposure to the indebtedness and equity securities of those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) which may be subject to increased liquidity risk, interest rate risk and default risk as a result of deteriorating economic conditions in those countries. Increased defaults or a significant increase in interest rates could result in losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have a material adverse affect on our financial condition.

The determination of the other-than-temporary impairments taken on our investments is highly subjective and could materially impact our financial position or results of operations.

The determination of the amount of other-than-temporary impairments recognized on our investments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class as well as an analysis on a security by security basis. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects impairments in operations as such evaluations are revised.

During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities, such as mortgage-backed securities, if trading becomes less frequent or market data becomes less observable. In addition, there may be certain asset classes that were in active markets with significant observable data that become illiquid. In such cases, more securities may require more subjectivity and management judgment in determining their values, including the use of inputs and assumptions that are less observable or require greater estimation as well as valuation methods, which are more sophisticated or require greater estimation thereby resulting in values which may differ materially from the value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.

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There can be no assurance that our management has accurately assessed the level of impairments taken in our financial statements. Furthermore, additional impairments may need to be taken in the future, which could materially impact our financial position or results of operations. Historical trends may not be indicative of future impairments.

Some of our investments are relatively illiquid and are in asset classes that may experience significant market valuation fluctuations.

We hold certain investments that may lack liquidity, such as our alternative funds and specialty funds. If we require significant amounts of cash on short notice in excess of normal cash requirements or are required to post or return collateral in connection with our investment portfolio or securities lending activities, we may have difficulty selling these investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.

The reported value of our relatively illiquid types of investments and, at times, our high quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no assurance that we will be able to sell them for the prices at which we have recorded them, and we may be forced to sell them at significantly lower prices.

We are exposed to equity market and derivative financial instrument risks, which may adversely affect our results of operations, financial condition or liquidity.

We are exposed to risks associated with our investments in equity securities and investments in derivative financial instruments, which are subject to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices, real estate markets, foreign currency exchange rates, market volatility, the performance of the economy in general, the performance of the specific securities included in our investment portfolio and other factors outside our control.

Our exposure to equity price risk relates primarily to equity market price variability. Although we take measures to manage the economic risks of investing in a changing equity market, we may not be able to adequately mitigate the equity risk of our assets relative to our liabilities, which could have an adverse effect on our results of operations, financial condition or liquidity.

Losses due to defaults by our derivative counterparties could adversely affect the value of our investments, results of operations, financial condition or cash flows.

Derivative counterparties may default on the amounts they owe to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. The occurrence of a major economic downturn, acts of corporate malfeasance, widening risk spreads or other events that adversely impact our derivative counterparties or the collateral supporting our derivative instruments could cause our net income to decline and have a material adverse effect on our financial condition.

Our failure to comply with the financial strength standards governing our derivative instruments could obligate us to post collateral or settle our outstanding derivative instruments.

Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings of the individual legal entity which entered into the derivative agreement as set by nationally recognized statistical rating agencies. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could have a material adverse effect on the Company’s liquidity, financial condition, results of operations and ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity.

Our investment liquidity and investment performance may affect our financial assets and ability to conduct business.

We derive a significant portion of our income from our invested assets. As a result, our operating results depend in part on the performance of our investment portfolio, which consists primarily of fixed maturity investments. Our income derived from our invested assets (including net realized and unrealized gains and net impairment losses recognized in earnings) was $175.2 million for the year ended December 31, 2011. Our operating results are subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. In addition, we are subject to pre-payment or reinvestment risk as well as restrictions on redemptions or sale of certain of our investments.

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With respect to our liabilities, we strive to structure our investments in a manner that recognizes their cash flow profile and our potential liquidity needs. In that regard, we attempt to correlate the maturity and duration of our investment portfolio to our liability profile. However, if our liquidity needs or liability profile unexpectedly changes, we may not be successful in continuing to structure our investment portfolio in that manner. The market value of our fixed maturity portfolio will be subject to fluctuations depending on changes in various factors, including prevailing interest rates. To the extent that we are unsuccessful in correlating our investment portfolio with our liabilities, we may be forced to liquidate our investments at times and prices that are not optimal, which could have a material adverse effect on the performance of our investment portfolio.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we take measures to attempt to manage the risks of investing in a changing interest rate environment, we may not be able to mitigate interest rate sensitivity effectively. A significant increase in interest rates may have a material adverse effect on our book value.

LIQUIDITY AND CAPITAL RISKS

Our holding company structure and certain regulatory and other constraints affect our ability to pay dividends and make other payments.

Endurance Holdings is a holding company and, as such, has no substantial operations of its own. Dividends and other permitted distributions from our operating subsidiaries are expected to be Endurance Holdings’ primary source of funds to meet ongoing cash requirements, including debt service payments and other expenses, and to pay dividends, if any, to shareholders. Bermuda law and regulations, including, but not limited to, Bermuda insurance regulations, restrict the declaration and payment of dividends and the making of distributions by Endurance Bermuda unless certain regulatory requirements are met. The inability of Endurance Bermuda to pay dividends in an amount sufficient to enable Endurance Holdings to meet its cash requirements at the holding company level could have a material adverse effect on its operations. In addition, Endurance Holdings’ U.S. and U.K. operating subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. We therefore do not expect to receive material dividends from these operating subsidiaries for the foreseeable future.

Endurance Holdings is subject to Bermuda regulatory constraints that will affect its ability to pay dividends on its ordinary shares, class A shares, 7.75% Non-Cumulative Preferred Shares, Series A and 7.50% Non-Cumulative Preferred Shares, Series B (together, the “Preferred Shares”) and to make other payments. Under the Bermuda Companies Act 1981, as amended (the “Companies Act”), Endurance Holdings may declare or pay a dividend or make a distribution out of retained earnings or contributed surplus only if it has reasonable grounds for believing that it is, or would after the payment be, able to pay its liabilities as they become due and if the realizable value of its assets would thereby not be less than the aggregate of its liabilities and issued share capital and share premium accounts. In addition, the terms of our credit facility prohibit Endurance Holdings from declaring or paying any dividends if a default or event of default has occurred and is continuing at the time of such declaration or payment or would result from such declaration or payment. In addition, the terms of the Preferred Shares prohibit the declaration or payment of dividends on our ordinary shares unless dividends on the Preferred Shares have been declared and paid. Preference shares, including the Preferred Shares, may also not be redeemed if as a result of the redemption, our issued share capital would be reduced below the minimum capital specified in the memorandum of association of Endurance Holdings.

We could incur substantial losses and reduced liquidity if one of the financial institutions we use in our operations, including those institutions that participate in our credit facility, fails.

We have exposure to counterparties in many different industries and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, hedge funds and other investment funds and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the obligation. Current reinsurance recoverables are subject to the credit risk of the reinsurers.

We maintain cash balances, including restricted cash held in premium trust accounts, significantly in excess of the FDIC insurance limits at various depository institutions. We also maintain cash balances in foreign banks and institutions and rely upon funding commitments from several banks and financial institutions that participate in our credit facility. If one or more of these financial institutions were to fail, our ability to access cash balances or draw down on our credit facility may be temporarily or permanently limited, which could have a material adverse effect on our results of operations, financial condition or cash flows.

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The cost of reinsurance security arrangements may materially impact our margins.

As a Bermuda reinsurer, Endurance Bermuda is required to post collateral with respect to reinsurance liabilities it assumes from ceding insurers domiciled in the U.S. The posting of collateral is generally required in order for U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to reinsurance liabilities ceded to unlicensed or unaccredited reinsurers, such as Endurance Bermuda. Under applicable statutory provisions, the security arrangements may be in the form of letters of credit, reinsurance trusts maintained by third-party trustees or funds-withheld arrangements whereby the trusteed assets are held by the ceding company. Endurance Bermuda has the ability to issue up to $1.175 billion in letters of credit under our letter of credit and revolving credit facility that expires on May 8, 2012. If this facility is not sufficient or if the Company is unable to renew this facility or is unable to arrange for other types of security on commercially acceptable terms, the ability of Endurance Bermuda to provide reinsurance to U.S.-based clients may be severely limited.

Security arrangements may subject our assets to security interests and/or require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from our assets while held in trust typically accrues to our benefit, the investment of these assets is governed by the investment regulations of the state of domicile of the ceding insurer, which may be more restrictive than the investment regulations applicable to us under Bermuda law. The restrictions may result in lower investment yields on these assets, which could have a material adverse effect on our profitability.

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.

Our future capital requirements depend on many factors, including our ability to underwrite new business successfully, to establish premium rates and reserves at levels sufficient to cover losses, and to maintain our current rating agency ratings. In addition, we need liquidity to pay our operating expenses and without sufficient liquidity, we will be forced to curtail our operations, and our business will suffer. The principal sources of our liquidity are our invested assets. Sources of liquidity in normal markets also include a variety of short- and long-term instruments, including repurchase agreements, commercial paper, medium- and long-term debt, junior subordinated debt securities, capital securities and shareholders’ equity.

In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.

Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business, most significantly our insurance operations. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter tenor securities than we prefer, or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of our already outstanding securities. In the case of debt financings, our credit spreads have generally widened since we previously issued debt securities, which could lead to higher interest costs on new debt. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the financial markets and an inability to obtain adequate capital.

Our failure to comply with restrictive covenants contained in the indentures governing our senior notes or our current or future credit facility could trigger prepayment obligations, which could adversely affect our business, financial condition and results of operations.

The indentures governing our senior notes contain covenants that impose restrictions on us and certain of our subsidiaries with respect to, among other things, the incurrence of liens and the disposition of capital stock of these subsidiaries. In addition, our credit facility requires us and/or certain of our subsidiaries to comply with certain covenants, including the maintenance of a minimum consolidated net tangible worth and restrictions on the payment of dividends. Our failure to comply with these covenants could result in an event of default under the indentures or our credit facility, which, if not cured or waived, could result in us being required to repay the notes or any amounts outstanding under the credit facility prior to maturity. As a result, our business, financial condition and results of operations could be adversely affected.

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LEGAL AND REGULATORY RISKS

Recent or future legislation may decrease the demand for our property catastrophe reinsurance products and adversely affect our business and results of operations.

It is possible that U.S states, particularly those with Atlantic or Gulf Coast exposures, may enact new or expanded legislation establishing further state involvement in providing or governing the insurance or reinsurance of catastrophe exposed risks, or may otherwise enact legislation, which would further diminish aggregate private market demand for our products. Alternatively, legislation adversely impacting the private markets could be enacted on a regional or at the federal level. Moreover, we believe that numerous modeled potential catastrophes could exceed the actual or politically acceptable bonded capacity of one or more of the catastrophe funds established by U.S. states, which could lead either to a severe dislocation or the necessity of Federal intervention in the markets of one or more of those states, either of which would adversely impact the private insurance and reinsurance industry.

The regulatory system under which we operate, and potential changes thereto, including heightened scrutiny of issues and practices in the insurance industry could have a material adverse effect on our business.

The laws and regulations under which we operate, such as the regulations governing our insurance rates and forms, the U.S. multi-peril crop insurance program and the purchase of reinsurance by property insurers in Florida, could be revised in a manner materially adverse to the manner in which we conduct our business. Currently, there are several proposals to amend state insurance holding company laws to increase the scope of the regulation of insurance holding companies. These proposals include imposing standards for corporate governance, group-wide supervision of insurance holding companies, adjustments to risk-based capital calculations to account for group-wide risks and additional regulatory and disclosure requirements for insurance holding companies. In addition, changes to state laws and regulations may result from attention by state insurance regulators on the U.S. insurance solvency regulation framework pursuant to the NAIC’s “Solvency Modernization Initiative.”

The insurance and reinsurance regulatory framework continues to be subject to increased scrutiny in many jurisdictions, including the U.S. and various states within the U.S. Certain government authorities, including state officials in Florida, New York and Connecticut, have from time to time investigated a number of issues and practices within the insurance industry. It is possible such scrutiny could include us and it is also possible that these investigations or related regulatory developments could mandate or otherwise give rise to changes in industry practices in a fashion that increases our costs or requires us to alter how we conduct our business. In addition, if our Bermuda insurance or reinsurance operations become subject to the insurance laws of any state in the U.S., we could face inquiries or challenges to the future operations of these companies.

Our insurance and reinsurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or accreditations, or may be able to do so only at great cost. In addition, we may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance or reinsurance companies or holding companies. Failure to comply with or to obtain appropriate exemptions under any applicable laws could result in restrictions on our ability to do business in one or more of the jurisdictions in which we operate and fines and other sanctions, which could have a material adverse effect on our business.

Although surplus lines business is generally less regulated than the admitted market, the regulation of surplus lines insurance may undergo changes in the future. Federal and/or state measures may be introduced and promulgated that could result in increased oversight and regulation of surplus lines insurance.

Endurance American and Endurance Risk Solutions write insurance on an admitted basis within the U.S. and are subject to extensive regulation. Endurance American and Endurance Risk Solutions are primarily regulated by their state of domicile under state statutes which confer comprehensive regulatory, supervisory and administrative powers on state insurance commissioners. Such regulation generally is designed to protect policyholders rather than investors or shareholders of the insurer.

Our current or future business strategy could cause one or more of our currently unregulated non-insurance subsidiaries to become subject to some form of regulation. Any failure to comply with applicable laws could result in the imposition of significant restrictions on our ability to do business, and could also result in fines and other sanctions, any or all of which could adversely affect our financial results and operations.

Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may impact the operations of our insurance and non-insurance subsidiaries and ultimately could impact our financial condition as well. In addition, we could be adversely affected if a regulatory authority believed we had failed to comply with applicable law or regulation. Despite our efforts to maintain effective compliance procedures, there is a risk that applicable laws and regulations may be unclear, subject to multiple interpretations, under development or may conflict with one another, that regulators may revise their previous guidance or that courts overturn previous rulings, or that we could otherwise fail to meet the applicable standards.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) may adversely impact our business.

The U.S. Congress and the current administration have made, or called for consideration of, several additional proposals relating to a variety of issues with respect to financial regulation reform, including regulation of the over-the-counter derivatives market, the establishment of a single-state system of licensure for U.S. and foreign reinsurers, regulation of executive compensation and others. One of those initiatives, the Dodd-Frank Act, was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States and establishes a Federal Insurance Office under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. The director of the Federal Insurance Office will have the ability to recommend that an insurance company or an insurance holding company be subject to heightened prudential standards under the supervision of the Federal Reserve. The Dodd-Frank Act also provides for the pre-emption of state laws in certain instances involving the regulation of reinsurance and other limited insurance matters and established the federal Bureau of Consumer Financial Protection (the “BCFP”) which will require the BCFP and other federal agencies to implement many new rules. At this time, it is not possible to predict with any degree of certainty whether any other proposed legislation, rules or regulatory changes will be adopted or what impact, if any, the Dodd-Frank or any other such legislation, rules or changes could have on our business, financial condition or results of operations.

Solvency II could adversely impact our financial results and operations.

Solvency II, a European Union directive concerning the capital adequacy, risk management and regulatory reporting for insurers, which was adopted by the European Parliament in April of 2009, may adversely affect our (re)insurance businesses. Implementation of Solvency II by the European Commission is expected to take effect January 1, 2014 in the European Union Member States, and will replace the current solvency requirements. Implementation of Solvency II will require us to utilize a significant amount of resources to ensure compliance. In addition, the implementing measures that will establish the technical requirements governing the practical application of Solvency II remain subject to a consultation process; consequently, our implementation plans are based on our current understanding of the Solvency II requirements, which may change. The European Union is in the process of considering the Solvency II equivalence of Bermuda’s insurance regulatory and supervisory regime. The European Union equivalence assessment considers whether Bermuda’s regulatory regime provides a similar level of policyholder protection as provided under Solvency II. A finding that Bermuda’s insurance regulatory regime is not equivalent to the European Union’s Solvency II could have an adverse effect on our reinsurance operations in the European Union and on our group solvency calculations. Such a finding could also have adverse indirect commercial impacts on our operations. We are monitoring the ongoing legislative and regulatory steps following adoption of Solvency II. The principles, standards and requirements of Solvency II may also, directly or indirectly, impact the future supervision of additional operating subsidiaries of ours.

OPERATIONAL RISKS

Changes in current accounting practices and future pronouncements may materially impact our reported financial results.

Unanticipated developments in accounting practices may require us to incur considerable additional expenses to comply with such developments, particularly if it is required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, net equity, and other relevant financial statement line items. For example, the current proposal for the convergence of U.S. GAAP with International Financial Reporting Standards (“IFRS”) may require the Company to prepare financial statements in accordance with IFRS for the year ended December 31, 2015, including comparative information also prepared under IFRS for the two previous years. Also, recent proposals from U.S. and international standard setters have indicated a possible move away from the current insurance accounting models toward a more “present value” based model which could introduce significant volatility in the earnings of insurance industry participants and significant changes in financial statement presentations and disclosures.

Our results of operations may fluctuate significantly from period to period and may not be indicative of our long-term prospects.

Our results of operations may fluctuate significantly from period to period. These fluctuations result from a variety of factors, including the seasonality of the reinsurance and insurance business, the volume and mix of reinsurance and insurance products that we write, loss experience on our reinsurance and insurance liabilities, the performance of our investment portfolio and our ability to assess and integrate our risk management strategy effectively. In particular, we seek to underwrite products and make investments to achieve long-term results. As a result, our short-term results of operations may not be indicative of our long-term prospects.

If actual claims exceed our reserve for losses and loss expenses, our financial condition and results of operations could be adversely affected.

Our success depends upon our ability to accurately assess the risks associated with the businesses that we insure or reinsure. We establish loss reserves to cover our estimated liability for the payment of all losses and loss expenses incurred with respect to premiums earned on the policies that we write. Loss reserves do not represent an exact calculation of liability. Rather, loss reserves are estimates of what we expect the ultimate settlement and administration of claims will cost. These estimates are based upon actuarial and statistical projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined continually in an ongoing process as experience develops and claims are reported and settled. Establishing an appropriate level of loss reserves is an inherently uncertain process. Moreover, these uncertainties are greater for companies like us than for those with a longer operating history because we do not yet have an extensive loss history. Because of this uncertainty, it is possible that our reserves at any given time will prove inadequate.

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To the extent we determine that actual losses and loss expenses exceed our expectations and loss reserves recorded in our financial statements, we will be required to increase our reserve for losses and loss expenses. This could cause a material reduction in our profitability and capital.

We may be adversely affected by foreign currency fluctuations.

We have made a significant investment in the capitalization of Endurance U.K., which is denominated in British Sterling. In addition, we enter into reinsurance and insurance contracts where we are obligated to pay losses in currencies other than U.S. dollars. For the year ended December 31, 2011, approximately 11.3% of our gross premiums were written in currencies other than the U.S. dollar. A portion of our cash and cash equivalents, investments and loss reserves are also denominated in non-U.S. currencies. The majority of our operating foreign currency assets and liabilities are denominated in Euros, British Sterling, Canadian Dollars, Japanese Yen, New Zealand Dollars and Australian Dollars. We may, from time to time, experience losses from fluctuations in the values of these and other non-U.S. currencies, which could have a material adverse affect on our results of operations.

We periodically buy and sell currencies or investment securities denominated in non-U.S. dollars in an attempt to match our non-U.S. dollar assets to our related non-U.S. dollar liabilities. We currently have no currency hedges in place but may implement hedges in the future. As part of our asset-liability matching strategy, we also consider the use of hedges when we become aware of probable significant losses that will be paid in non-U.S. currencies. However, it is possible that we will not successfully match our exposures or structure the hedges to effectively manage these risks.

Acquisitions or strategic investments that we made or may make could turn out to be unsuccessful.

As part of our strategy, we have pursued and may continue to pursue growth through acquisitions and/or strategic investments in new businesses. The negotiation of potential acquisitions or strategic investments as well as the integration of an acquired business or new personnel could result in a substantial diversion of management resources. Successful integration will depend on, among other things, our ability to effectively integrate acquired businesses or new personnel into our existing risk management techniques, our ability to effectively manage any regulatory issues created by our entry into new markets and geographic locations, our ability to retain key personnel and other operational and economic factors. There can be no assurance that the integration of acquired business or new personnel will be successful or that the business acquired will prove to be profitable or sustainable. The failure to integrate successfully or to manage the challenges presented by the integration process may adversely impact our financial results. Acquisitions could involve numerous additional risks such as potential losses from unanticipated litigation or levels of claims and inability to generate sufficient revenue to offset acquisition costs.

Our ability to manage our growth through acquisitions or strategic investments will depend, in part, on our success in addressing these risks. Any failure by us to effectively implement our acquisitions or strategic investment strategies could have a material adverse effect on our business, financial condition or results of operations.

Operational risks, including systems or human failures, are inherent in business, including ours.

We are subject to operational risks including fraud, employee errors, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements or obligations under our agreements, information technology failures, or external events. Losses from these risks may occur from time to time and may be significant. As our business and operations grow more complex, we are exposed to more risk in these areas.

Our modeling, underwriting and information technology systems are critical to our success. Moreover, our proprietary technology and application systems have been an important part of our underwriting strategy and our ability to compete successfully. We have also licensed certain systems and data from third parties. We cannot be certain that we will have access to these, or comparable, service providers, or that our information technology or application systems will continue to operate as intended. While we have implemented disaster recovery and other business continuity plans, a defect or failure in our internal controls or information technology systems could result in reduced or delayed revenue growth, higher than expected losses, management distraction, or harm to our operations and/or our reputation. We believe appropriate controls and mitigation procedures are in place to prevent significant risk of defect in our internal controls and information technology systems, but internal controls provide only reasonable, not absolute, assurance as to the absence of errors or irregularities and any ineffectiveness of such controls and procedures could have a material adverse effect on our business.

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Cyber security incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems to sophisticated and targeted measures known as advanced persistent threats. While we employ measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our information technology networks and systems and maintenance of backup and protective systems), cyber security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cyber security incident include reputational damage, litigation with third parties, increased cyber security protection and remediation costs and loss of key data and systems, which in turn could have a material impact on our results of operation or financial condition.

Since we are dependent on key executives, the loss of any of these executives or our inability to retain other key personnel could adversely affect our business.

Our success substantially depends upon our ability to attract and retain qualified employees and upon the ability of our senior management and other key employees to implement our business strategy. We believe there are only a limited number of available qualified executives in the business lines in which we compete. We rely substantially upon the services of David Cash, Chief Executive Officer, and William M. Jewett, President. We believe we have been successful in attracting and retaining key personnel since our inception. The loss of any of their services or the services of other members of our management team or the inability to attract and retain other talented personnel could impede the further implementation of our business strategy, which could have a material adverse effect on our business. We do not currently maintain key man life insurance policies with respect to any of our employees.

Our business could be adversely affected by Bermuda employment restrictions.

We will need to continue to hire employees to work in Bermuda. Under Bermuda law, non-Bermudians (other than spouses of Bermudians or PRC Holders) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government upon showing that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian or PRC Holder) is available who meets the minimum standard requirements for the advertised position. Current Bermuda law limits the duration of work permits to six years, with certain exemptions for key employees. Under new legislation it may be possible for the most senior non-Bermudian executives to be eligible for Permanent Resident status after 10 years residence in Bermuda and employment with the Company. All of our 32 Bermuda-based professional employees who require work permits have been granted permits by the Bermuda government. The terms of such permits usually range from three to five years at the time of grant depending on the individual. It is possible that we could lose the services of one or more of our key employees if we are unable to obtain or renew their work permits, which could have a material adverse effect on our business.

CORPORATE RISKS

There are provisions in our charter documents that may reduce or increase the voting rights of our ordinary shares.

The bye-laws of Endurance Holdings generally provide that any shareholder owning, directly, indirectly or, in the case of any U.S. person, by attribution, outstanding ordinary shares possessing more than 9.5% of the aggregate voting power of our ordinary shares will have their voting rights reduced so that they may not exercise more than 9.5% of the voting rights conferred by our ordinary shares. Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. The bye-laws of Endurance Holdings provide that shareholders will be notified of their voting interests prior to any vote to be taken by the shareholders.

As a result of any reallocation of votes, your voting rights might increase above 5% of the aggregate voting power of the outstanding ordinary shares, thereby possibly resulting in your becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the reallocation of your votes could result in your becoming subject to filing requirements under Section 16 of the Exchange Act.

We also have the authority to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated pursuant to the bye-laws. If a shareholder fails to respond to a request for information from us or submits incomplete or inaccurate information (after a reasonable cure period) in response to a request, we may, in our reasonable discretion, reduce or eliminate the shareholder’s voting rights.

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Provisions of Endurance Holdings’ bye-laws may restrict the ability to transfer shares of Endurance Holdings.

Endurance Holdings’ Board of Directors may decline to register a transfer of any ordinary shares if the relevant instrument of transfer (if any) is in favor of five persons or more jointly or is not properly executed, the transferred shares are not fully paid shares or if the transferor fails to comply with all applicable laws and regulations governing the transfer.

A shareholder may be required to sell its shares of Endurance.

The bye-laws of Endurance Holdings provide that we have the option, but not the obligation, to require a shareholder to sell its ordinary shares for their fair market value to us, to other shareholders or to third parties if we determine, based on the written advice of legal counsel, that failure to exercise our option would result in non-de minimis adverse tax, legal or regulatory consequences to us or certain U.S. persons as to which the shares held by such shareholder constitute controlled shares. In the latter case, our right to require a shareholder to sell its ordinary shares to us will be limited to the purchase of a number of ordinary shares that will permit avoidance of those adverse tax consequences.

A shareholder may be required to indemnify us for any tax liability that results from the acts of that shareholder.

The bye-laws of Endurance Holdings provide certain protections against adverse tax consequences to us resulting from laws that apply to the shareholders of Endurance Holdings. If a shareholder’s death or non-payment of any tax or duty payable by the shareholder, or any other act or thing involving the shareholder, causes any adverse tax consequences to us (i) the shareholder (or his executor or administrator) is required to indemnify us against any tax liability that we incur as a result, (ii) we will have a lien on any dividends or any other distributions payable to the shareholder by us to the extent of the tax liability and (iii) if any amounts not covered by our lien on dividends and distributions are owed to us by the shareholder as a result of our tax liability, we have the right to refuse to register any transfer of the shareholder’s shares.

There are regulatory limitations on the ownership and transfer of our ordinary shares.

State laws in the United States and the United Kingdom require prior notices or regulatory agency approval of changes in control of an insurer or its holding company. The insurance laws of the domiciliary jurisdiction provide that no corporation or other person (except in certain jurisdictions an authorized insurer) may acquire control of a domestic insurance or reinsurance company unless it has given notice and obtained prior written approval of the appropriate regulatory agency. Any purchaser of 10% or more of our ordinary shares could become subject to such regulations and could be required to file certain notices and reports with the insurance commissioners of the domiciliary jurisdictions of our operating companies.

U.S. persons who own our ordinary shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.

The Companies Act, which applies to Endurance Holdings and Endurance Bermuda, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. These differences include the manner in which directors must disclose transactions in which they have an interest, the rights of shareholders to bring class action and derivative lawsuits and the scope of indemnification available to directors and officers.

Anti-takeover provisions in our bye-laws could impede an attempt to replace or remove our directors, which could diminish the value of our ordinary shares.

Endurance Holdings’ bye-laws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our ordinary shares if they are viewed as discouraging changes in management and takeover attempts in the future.

It may be difficult to enforce service of process and enforcement of judgments against us and our officers and directors.

Endurance Holdings is a Bermuda company and certain of its officers and directors are residents of jurisdictions outside the United States. A substantial portion of its assets and its officers and directors, at any one time, are or may be located in jurisdictions outside the United States. It may be difficult for investors to effect service of process within the United States on our directors and officers who reside outside the United States or to enforce against us or our directors and officers judgments of U.S. courts predicated upon civil liability provisions of the U.S. federal securities laws.

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There is no treaty in force between the United States and Bermuda providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As a result, whether a United States judgment would be enforceable in Bermuda against us or our directors and officers depends on whether the U.S. court that entered the judgment is recognized by the Bermuda court as having jurisdiction over us or our directors and officers, as determined by reference to Bermuda conflict of law rules.

In addition to and irrespective of jurisdictional issues, the Bermuda courts will not enforce a United States federal securities law that is either penal or contrary to Bermuda public policy. An action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, will not be entertained by a Bermuda court. Consequently, certain remedies available under the laws of U.S. jurisdictions, including certain remedies under U.S. federal securities laws, may not be available under Bermuda law or enforceable in a Bermuda court, as they may be contrary to Bermuda public policy. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.

TAXATION RISKS

We and our subsidiaries may be subject to U.S. tax which may have a material adverse effect on our financial condition and results of operations.

Endurance Holdings and Endurance Bermuda are Bermuda companies and Endurance U.K. is an English company. Endurance Holdings, Endurance Bermuda and Endurance U.K. each intend to operate in such a manner that none of these companies will be deemed to be engaged in the conduct of a trade or business within the United States. Nevertheless, because definitive identification of activities which constitute being engaged in a trade or business in the United States is not provided by the Internal Revenue Code (“Code”), regulations or court decisions, the Internal Revenue Service (“IRS”) might successfully contend that any of Endurance Holdings, Endurance Bermuda and/or Endurance U.K. are/is engaged in a trade or business in the United States. If Endurance Holdings, Endurance Bermuda and/or Endurance U.K. were/was engaged in a trade or business in the United States, and if Endurance U.K. or Endurance Bermuda was to qualify for benefits under the applicable income tax treaty with the United States, but such trade or business was attributable to a “permanent establishment” in the United States (or in the case of Endurance Bermuda, with respect to investment income, arguably even if such income was not attributable to a “permanent establishment”), Endurance Holdings, Endurance U.K. and/or Endurance Bermuda would be subject to U.S. federal income tax at regular corporate rates on the income that is effectively connected with the U.S. trade or business, plus an additional 30% “branch profits” tax in certain circumstances, in which case our financial condition and results of operations and your investment could be materially adversely affected.

Holders of Endurance Holdings’ ordinary shares or Preferred Shares who own 10% or more of our voting power may be subject to taxation under the “controlled foreign corporation” (“CFC”) rules.

Certain “10% U.S. Shareholders” of a foreign corporation that is considered a “controlled foreign corporation” (a “CFC”) for U.S. federal income tax purposes must include in gross income such 10% U.S. shareholder’s pro rata share of the CFC’s “subpart F income,” even if the subpart F income is not distributed. See “Material Tax Considerations – Certain United States Federal Income Tax Considerations – United States Taxation of Holders of Ordinary Shares and Preferred Shares – Shareholders Who Are U.S. Persons –Classification of Endurance Holdings, Endurance U.K. or Endurance Bermuda as a Controlled Foreign Corporation.” Due to the dispersion of Endurance Holdings’ share ownership among holders, its bye-law provisions that impose limitations on the concentration of voting power of its shares entitled to vote and authorize Endurance Holdings to purchase such shares under certain circumstances, and other factors, no U.S. Person that owns shares in Endurance Holdings directly or indirectly through foreign entities should be subject to treatment as a 10% U.S. Shareholder of a CFC. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge. Accordingly, investors should consult their tax advisors regarding the application of the CFC rules to an investment in Endurance Holdings.

U.S. Persons who hold ordinary shares or Preferred Shares may be subject to U.S. income taxation on their pro rata share of our “related party insurance income” (“RPII”).

The CFC rules apply to certain insurance and reinsurance companies that earn RPII. If the RPII rules were to apply to Endurance U.K. or Endurance Bermuda, a U.S. Person who owns ordinary shares or Preferred Shares of Endurance Holdings directly or indirectly through foreign entities on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes the shareholder’s pro rata share of Endurance U.K.’s or Endurance Bermuda’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately to such U.S. shareholders at that date regardless of whether such income is distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization would be treated as unrelated business taxable income. Although Endurance U.K. and Endurance Bermuda intend to generally operate in a manner so as to qualify for certain exceptions to the RPII rules, there can be no assurance that these exceptions will be available. Accordingly, there can be no assurance that U.S. Persons who own ordinary shares or Preferred Shares will not be required to recognize gross income inclusions attributable to RPII. See “Material Tax Considerations – Certain United States Federal Income Tax Considerations – United States Taxation of Holders of Ordinary Shares and Preferred Shares– Shareholders Who Are U.S. Persons – RPII Companies; RPII Exceptions.”

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The RPII rules provide that if a shareholder who is a U.S. Person disposes of shares in a foreign insurance corporation that has RPII and in which U.S. Persons collectively own 25% or more of the shares, any gain from the disposition will generally be treated as ordinary income to the extent of the shareholder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the shareholder owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such a shareholder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the shareholder. These rules should not apply to dispositions of ordinary shares or Preferred Shares because Endurance Holdings will not itself be directly engaged in the insurance business. The RPII provisions, however, have not been interpreted by the courts or the U.S. Treasury Department, and regulations interpreting the RPII provisions of the Code exist only in proposed form. Accordingly, the IRS might interpret the proposed regulations in a different manner and the applicable proposed regulations may be promulgated in final form in a manner that would cause these rules to apply to dispositions of our ordinary shares and Preferred Shares. See “Material Tax Considerations – Certain United States Federal Income Tax Considerations – United States Taxation of Holders of Ordinary Shares and Preferred Shares – Shareholders Who Are U.S. Persons – Disposition of Ordinary Shares and Preferred Shares; Uncertainty as to the Application of RPII.”

U.S. Persons who hold ordinary shares or Preferred Shares will be subject to adverse tax consequences if we are considered a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes.

We believe that we should not be considered a PFIC for U.S. federal income purposes for the year ended December 31, 2011. Moreover, we do not expect to conduct our activities in a manner that would cause us to become a PFIC in the future. However, there can be no assurance that the IRS will not challenge this position or that a court will not sustain such challenge. Accordingly, it is possible that we could be deemed a PFIC by the IRS or a court for the 2011 year or any future year. If we were considered a PFIC, it could have material adverse tax consequences for an investor that is subject to U.S. federal income taxation, including subjecting the investor to a greater tax liability than might otherwise apply or subjecting the investor to tax on amounts in advance of when tax would otherwise be imposed. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. We cannot predict what impact, if any, such guidance would have on a shareholder that is subject to U.S. federal income taxation. See “Material Tax Considerations – Certain United States Federal Income Tax Considerations – United States Taxation of Holders of Ordinary Shares and Preferred Shares – Shareholders Who Are U.S. Persons – Passive Foreign Investment Companies.”

Changes to U.S. Tax Legislation could have an adverse impact on us or our shareholders

The U.S. Congress and President Obama’s Administration have discussed from time-to-time proposals intended to eliminate certain perceived tax advantages of companies (including insurance and reinsurance companies) that have legal domiciles outside the United States but have certain U.S. connections. In particular, President Obama’s budget for fiscal year 2013 includes proposals that would deny a U.S. non-life insurance company a deduction for certain non-taxed reinsurance premiums paid to affiliates and defer interest deductions related to certain foreign source income. Congress has introduced similar legislation that would deny a U.S. non-life insurance company a deduction for certain non-taxed reinsurance premiums paid to affiliates, and, during prior sessions, Congress had introduced proposals relating to tax-haven jurisdictions, cross-border transactions, intangible products, and a proposal that would treat a foreign corporation that is primarily managed and controlled in the United States as a U.S. corporation for U.S. federal income tax purposes. We cannot be certain if, when or in what form any such legislation may be enacted and whether such legislation, if enacted, would have retroactive effect. Enactment of some versions of such legislation as well as other changes in U.S. tax laws, regulations and interpretations of such legislation or tax law changes to address these issues could adversely affect the results of our operations and financial condition and could have a material adverse effect on our business, financial condition or results of operations.

The Organization for Economic Cooperation and Development (“OECD”) and the European Union are considering measures that might increase our taxes and reduce our net income.

The OECD has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of preferential tax regimes in countries around the world. In the OECD’s periodic progress reports, Bermuda has not been listed as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. Bermuda was included in the most recently revised OECD white list with other countries that have substantially implemented the OECD’s international tax standards. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.

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We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on our financial condition.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda, has given Endurance Holdings and Endurance Bermuda an assurance that if any legislation is enacted in Bermuda that would “impose tax computed on profits or income or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition” any such tax will not be applicable to Endurance Holdings, Endurance Bermuda or any of their respective operations, shares, debentures or other obligations until March 31, 2035. It is possible that after March  31, 2035 we may be subject to Bermuda taxes.

Item 1B. Unresolved Staff Comments

The Company has no outstanding, unresolved comments from the SEC staff.

Item 2. Properties

The Company leases office space in Pembroke, Bermuda where the Company’s principal executive office is located. Additionally, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Switzerland and Singapore sufficient for the operation of its Insurance and Reinsurance segments. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2011, please see Note 11—“Commitments and Contingencies” to our Audited Consolidated Financial Statements.

Item 3. Legal Proceedings

We are party to various legal proceedings generally arising in the normal course of our business. While any proceeding contains an element of uncertainty, we do not believe that the eventual outcome of any litigation or arbitration proceeding to which we are presently a party could have a material adverse effect on our financial condition, results of operations or business. Pursuant to our insurance and reinsurance agreements, disputes are generally required to be finally settled by arbitration.

Item 4. Mine Safety Disclosures

Not Applicable.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

Our ordinary shares are publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “ENH.” The following table sets forth, for the fiscal quarters and periods indicated, the high and low closing sale price per ordinary share as reported on the NYSE for the two most recent fiscal years:

		September 30,		September 30,
	High		Low
2011
First quarter	$	50.43	$	44.99
Second quarter	$	48.98	$	39.86
Third quarter	$	41.76	$	33.46
Fourth quarter	$	38.97	$	32.19
2010
First quarter	$	39.12	$	34.86
Second quarter	$	40.43	$	35.08
Third quarter	$	39.97	$	35.90
Fourth quarter	$	46.64	$	39.25

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Number of Holders of Ordinary Shares

The approximate number of record holders of our ordinary shares as of February 17, 2012 was 162, not including beneficial owners of shares registered in nominee or street name.

Dividends

We paid a quarterly dividend of $0.30 per ordinary share in each of the four quarters of 2011 (2010—$0.25). Our Board of Directors reviews our ordinary share dividend each quarter and determines the amount, if any, of each dividend at that time. Among the factors considered by the Board of Directors in determining the amount of each dividend are the results of operations and the capital requirements, growth and other characteristics of our businesses. The declaration and payment of future dividends is also subject to certain legal, regulatory and other restrictions.

Endurance Holdings is a holding company and has no direct operations. The ability of Endurance Holdings to pay dividends or distributions depends almost exclusively on the ability of its subsidiaries to pay dividends to Endurance Holdings. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or other distributions. As of December 31, 2011, the maximum amount of distributions that Endurance Bermuda could pay to Endurance Holdings under applicable insurance and Companies Act regulations without prior regulatory approval was approximately $605.6 million. During 2011, Endurance U.K. was precluded by regulatory restrictions from declaring or distributing dividends. Endurance U.K. is currently completing statutory income (loss) statements for the year ended December 31, 2011. The Company does not expect Endurance U.K. to have material dividend capacity in 2012. As of December 31, 2011, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions and Endurance American Specialty did not have earned surplus and thus were precluded from dividend distributions in 2012 without prior regulatory approval. As of December 31, 2011, ARMtech (with notice to the Texas Department of Insurance) could pay $3.9 million of dividends without prior regulatory approval.

Our credit facilities prohibit Endurance Holdings from declaring or paying any dividends if a default or event of default has occurred and is continuing at the time of such declaration or payment or would result from such declaration or payment. In addition, the terms of our Preferred Shares prohibit dividends from being declared or paid on ordinary shares unless the full dividends for the latest completed dividend period on all outstanding Preferred Shares have been declared and paid.

For a description of working capital restrictions and other limitations upon the payment of dividends, see Item 1 – “Business – Regulatory Matters,” Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and Note 17 – “Statutory requirements and dividend restrictions” to the Company’s Audited Consolidated Financial Statements.

Recent Sales of Unregistered Securities

None.

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Purchase of Equity Securities by Issuer and Affiliated Purchasers

ISSUER PURCHASES OF EQUITY SECURITIES

		September 30,		September 30,		September 30,		September 30,
							(d) Maximum Number
					(c) Total Number		(or Approximate Dollar
	(a) Total				of Shares		Value) of Shares
	Number of		(b) Average		Purchased as Part of		that May Yet Be
	Shares		Price Paid		Publicly Announced		Purchased Under the
Period	Purchased(1)		per Share		Plans or  Programs(1) (2)		Plans or Programs(1) (2)
October 1—31, 2011		—	$	—		—		2,458,354
November 1—30, 2011(2)		—	$	—		—		7,000,000
December 1—31, 2011		—	$	—		—		7,000,000
Total		—	$	—		—		7,000,000

(1) Ordinary shares or share equivalents.

(2) At its meeting on November 9, 2011, the Board of Directors of the Company authorized the repurchase of up to a total of 7,000,000 ordinary shares and share equivalents through November 30, 2013, superseding all previous authorizations.

Performance Graph

The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The graph below illustrates the cumulative 5-year shareholder return, including reinvestment of dividends, of the Company’s ordinary shares, compared with such return for the (i) Standard & Poor’s (“S&P”) 500 Composite Stock Price Index and (ii) S&P Property & Casualty Industry Group Stock Price Index, in each case measured during the period from December 31, 2006 to December 31, 2011. During this period, the cumulative total return on the Company’s ordinary shares was 21.13%, the cumulative total return for the S&P 500 Composite Stock Price Index was -1.25% and the cumulative total return for the S&P Property & Casualty Industry Group Stock Price Index was -25.86%.

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		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	12/06		12/07		12/08		12/09		12/10		12/11
Endurance Specialty Holdings Ltd.		100.00		117.11		88.42		111.53		141.51		121.13
S&P 500		100.00		105.49		66.46		84.05		96.71		98.75
S&P Property & Casualty Insurance		100.00		86.04		60.73		68.23		74.33		74.14

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

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Item 6. Selected Financial Data

The following table sets forth our selected consolidated financial information for the years ended and as of the dates indicated. As described in Note 1 to our Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, our Audited Consolidated Financial Statements include the accounts of Endurance Holdings, Endurance Bermuda, Endurance U.K., Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions and ARMtech.

We derived the following selected consolidated financial information for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 from our Audited Consolidated Financial Statements and related notes. These historical results are not necessarily indicative of results to be expected from any future period.

You should read the following selected consolidated financial information along with the information contained in this Annual Report on Form 10-K, including Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Audited Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K.

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		September 30,			September 30,			September 30,			September 30,			September 30,
For the years ended December 31,	2011			2010			2009			2008			2007
Selected Income Statement Data:
Gross premiums written	$	2,467,114		$	2,053,236		$	2,021,450		$	2,246,420		$	1,781,115
Net premiums written		1,979,821			1,763,744			1,606,050			1,784,290			1,574,975
Net premiums earned		1,931,393			1,741,113			1,633,192			1,766,485			1,594,800
Net investment income		147,037			200,358			284,200			130,176			281,276
Net realized and unrealized gains (losses)		31,671			22,488			6,303			24,769			(972	)
Net impairment losses recognized in (losses) earnings		(3,520	)		(3,944	)		(20,251	)		(82,135	)		(17,330	)
Net losses and loss expenses		1,632,666			1,038,100			866,640			1,135,431			749,081
Acquisition expenses		282,911			264,228			267,971			299,913			307,576
General and administrative expenses		264,152			241,920			237,154			216,365			217,269
Net (loss) income		(93,734	)		364,738			536,104			98,624			521,107
Preferred dividends		24,125			15,500			15,500			15,500			15,500
Net (loss) income (attributable) available to common and participating shareholders		(117,859	)		349,238			520,604			83,124			505,607
Per Share Data:
Dividends declared and paid per common share	$	1.20		$	1.00		$	1.00		$	1.00		$	1.00
Basic (losses) earnings per common share	$	(2.95	)	$	6.73		$	9.14		$	1.41		$	7.76
Diluted (losses) earnings per common share	$	(2.95	)	$	6.38		$	8.69		$	1.31		$	7.13
Weighted average number of common shares outstanding:
Basic		40,215			50,882			55,929			57,756			64,697
Diluted		40,215			53,728			58,874			62,136			70,462

		September 30,		September 30,		September 30,		September 30,		September 30,
As of December 31,	2011		2010		2009		2008		2007
Selected Balance Sheet Data:
Cash and investments	$	6,283,107	$	6,187,215	$	5,974,615	$	5,358,087	$	5,586,189
Total assets		8,292,615		7,979,405		7,666,694		7,272,470		7,271,153
Reserve for losses and loss expenses		3,824,224		3,319,927		3,157,026		3,235,456		2,892,224
Reserve for unearned premiums		932,108		842,154		832,561		885,488		855,085
Debt		528,118		528,411		447,664		447,468		448,753
Preferred stock, Series A non-cumulative		8,000		8,000		8,000		8,000		8,000
Preferred stock, Series B non-cumulative		9,200		—		—		—		—
Total shareholders’ equity		2,611,165		2,848,153		2,787,283		2,207,283		2,512,259
Per Share Data:
Book value per common share (a)	$	51.48	$	57.25	$	47.74	$	35.76	$	38.94
Diluted book value per common share (b)	$	50.56	$	52.74	$	44.61	$	33.06	$	35.05

Selected Ratios (based on U.S. GAAP income statement data):

		September 30,			September 30,			September 30,			September 30,			September 30,
For the years ended December 31,	2011			2010			2009			2008			2007
Net loss ratio(c)		84.6	%		59.6	%		53.1	%		64.3	%		47.0	%
Acquisition expense ratio(d)		14.6	%		15.2	%		16.4	%		17.0	%		19.3	%
General and administrative expense ratio(e)		13.7	%		13.9	%		14.5	%		12.2	%		13.6	%
Combined ratio(f)		112.9	%		88.7	%		84.0	%		93.5	%		79.9	%

(a) Book value per share is a non-GAAP measure based on total shareholders’ equity, less the $430 million (2007—2010: $200 million) redemption value of the preferred stock, divided by basic common shares outstanding of 42,366,873 at December 31, 2011, 46,258,846 at December 31, 2010 , 54,194,822 at December 31, 2009, 56,127,552 at December 31, 2008 and 59,383,755 at December 31, 2007. Common shares outstanding include 0 vested restricted share units for purposes of the December 31, 2011, 0 at December 31, 2010, 12,104 at December 31, 2009, 58,311 at December 31, 2008 and 138,756, at December 31, 2007 book value per share calculation.

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(b) Diluted book value per share is a non-GAAP measure based on total shareholders’ equity, less the $430 million (2007—2010: $200 million) redemption value of the preferred stock, divided by the number of common shares and common share equivalents outstanding at the end of the period, using the treasury stock method. Common share equivalents include options and warrants which are dilutive when the market price of the Company’s shares exceeds the exercise price of the options or warrants. Diluted shares outstanding were 43,142,277 at December 31, 2011, 50,210,614 at December 31, 2010, 57,996,331 at December 31, 2009, 60,718,312 at December 31, 2008 and 65,978,030 at December 31, 2007. We believe that this is an effective measure of the per share value of the Company as it takes into account the effect of all outstanding dilutive securities.

(c) The net loss ratio is calculated by dividing losses and loss expenses by net premiums earned.

(d) The acquisition expense ratio is calculated by dividing acquisition expenses by net premiums earned.

(e) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.

(f) The combined ratio is the sum of the loss ratio, the acquisition expense ratio and the general and administrative expense ratio. Our historical combined ratio may not be indicative of future underwriting performance.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Annual Report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements that involve risk and uncertainties. Please see the “Cautionary Statement Regarding Forward-Looking Statements” in this Annual Report on Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the “Risk Factors” set forth in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Executive Overview

Endurance Specialty Holdings Ltd. (“Endurance Holdings”) was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings has seven wholly-owned operating subsidiaries:

• Endurance Specialty Insurance Ltd. (“Endurance Bermuda”), domiciled in Bermuda with branch offices in Zurich and Singapore;

• Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”), domiciled in Delaware;

• Endurance Worldwide Insurance Limited (“Endurance U.K.”), domiciled in England;

• Endurance American Insurance Company (“Endurance American”), domiciled in Delaware;

• Endurance American Specialty Insurance Company (“Endurance American Specialty”), domiciled in Delaware;

• Endurance Risk Solutions Assurance Co. (“Endurance Risk Solutions”), domiciled in Delaware; and

• American Agri-Business Insurance Company, managed by ARMtech Insurance Services, Inc. (collectively “ARMtech”), both domiciled in Texas.

Endurance Holdings and its wholly-owned subsidiaries are collectively referred to in this discussion and analysis as the “Company.”

The Company writes specialty lines of property and casualty insurance and reinsurance on a global basis and seeks to create a portfolio of specialty lines of business that are profitable and have limited correlation with one another. The Company’s portfolio of specialty lines of business is organized into two business segments, Insurance and Reinsurance.

In the Insurance segment, the Company writes agriculture, professional lines, casualty, property, healthcare liability, and surety and other specialty insurance. In the Reinsurance segment, the Company writes catastrophe, casualty, property, aerospace and marine, and surety and other specialty reinsurance.

The Company’s Insurance and Reinsurance segments both include property related coverages, which provide insurance or reinsurance of an insurable interest in tangible property for property loss, damage or loss of use. In addition, the Company’s Insurance and Reinsurance segments include various casualty insurance and reinsurance coverages, which are primarily concerned with the losses caused by injuries to third parties, i.e., not the insured, or to property owned by third parties and the legal liability imposed on the insured resulting from such injuries.

Business and Accounting Factors

The Company’s results of operations are affected by the following business and accounting factors:

Revenues. The Company derives its revenues primarily from premiums from its insurance policies and reinsurance contracts. The premiums the Company charges for the risks assumed are priced based on many assumptions and are a function of the amount and type of policies and contracts the Company writes as well as prevailing market prices, and in the case of agricultural insurance contracts, federally mandated pricing and commodity price levels. The Company prices these risks before its ultimate costs are known, which may extend many years into the future.

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The Company’s revenues also include income generated from its investment portfolio. The Company’s investment portfolio is comprised of fixed maturity investments, short-term investments and equity securities that are held as available for sale and Other Investments, comprised of alternative and specialty loan funds that are accounted for under the equity method of accounting. In accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), the available for sale investments are carried at fair market value and unrealized gains and losses on the Company’s investments are generally excluded from earnings. These unrealized gains and losses are included on the Company’s balance sheet in accumulated other comprehensive income as a separate component of shareholders’ equity. If unrealized losses are considered to be other-than-temporarily impaired due to the Company’s intent to sell, requirement to sell such securities or credit related factors, such losses are included in earnings as net impairment losses recognized in (losses) earnings. For Other Investments, the Company increases or decreases the value of these investments for the Company’s share of income or loss, less dividends, which is included in net investment income.

Expenses. The Company’s expenses consist primarily of losses and loss expenses, acquisition expenses, interest expense, amortization of intangible assets and general and administrative expenses. Losses and loss expenses are estimated by management and reflect its best estimate of ultimate losses and loss adjustment costs arising during the current reporting period and revisions of prior period estimates. The Company records losses and loss expenses based on an actuarial analysis of the estimated losses the Company expects to be reported on policies and contracts written. The ultimate losses and loss expenses will depend on the actual costs to settle claims. Acquisition expenses consist principally of commissions and brokerage expenses that are typically a percentage of the premiums on successful insurance policies or reinsurance contracts written. General and administrative expenses consist primarily of personnel expenses and general operating expenses.

Marketplace Conditions and Trends. In general, at the end of 2011, we believe operating conditions continued to be competitive. In most classes of property and casualty business, we experienced neutral to downward pricing driven largely by relatively high levels of underwriting capacity and competition. In the catastrophe exposed property business, we experienced pricing increase on international and peak zone exposures underwritten due to the recent high level of worldwide catastrophe losses and from changes to catastrophe risk management models commonly used in the industry. In our agriculture business, pricing was stable, although the underlying exposure base increased with the rise in commodity prices. We continued to maintain our adherence to underwriting standards by declining business when pricing, terms and conditions did not meet our underwriting criteria.

In 2012, we believe the following five primary influences may affect the market for our insurance and reinsurance products – the continuation of the challenging global economy, continued pricing competition in many of our markets, increased volatility in agriculture commodity prices, the high level of global catastrophe losses incurred by the industry, and a low interest rate environment. The United States and other markets around the world have continued to experience unsettled economic conditions, including high levels of unemployment, significant governmental regulation initiatives and continued uncertainty in global financial markets. Although economies are slowly recovering, the lower levels of economic activity are likely to continue to suppress growth in demand for insurance and reinsurance. This is likely to result in a continued competitive global insurance and reinsurance market in 2012. Potentially offsetting these factors is the increased volatility of agriculture commodity prices which could lead to increased risk exposure and higher demand in our agriculture insurance business. In addition, the high level of global catastrophe losses incurred by the industry in 2010 and 2011 will likely result in increased prices for catastrophe exposed property insurance and reinsurance in 2012. Lastly, the current low interest rate environment will likely encourage a lower appetite for risks that are not adequately priced as there will be reduced investment earnings from underwriting cash flows.

At this time, the Company cannot predict with any reasonable certainty whether and to what extent current marketplace conditions and trends will persist in the future.

Critical Accounting Estimates

The Company’s consolidated financial statements contain certain amounts that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values and related disclosures. Management considers an accounting estimate to be critical if:

• it requires assumptions to be made that were uncertain at the time the estimate was made; and

• changes in the estimate or different estimates that could have been selected could have a material impact on the Company’s consolidated results of operations or financial condition.

If factors such as those described in the “Risk Factors” section in this Annual Report on Form 10-K cause actual events or results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on the Company’s results of operations, financial condition and liquidity.

Management believes that the following critical accounting policies affect significant estimates used in the preparation of its consolidated financial statements.

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Premiums. The Company’s insurance premiums are earned pro rata over the terms of the applicable risk period specified in the insurance policy. The Company’s insurance policies are written on a losses occurring or claims made basis during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will only adjust if the underlying insured basis adjusts. Accordingly, we monitor the underlying insured basis and record additional or return premiums in the period in which amounts are reasonably determinable. Insurance premiums written accounted for 60%, 54%, and 57% of the Company’s gross premiums written during the years ended December 31, 2011, 2010, and 2009, respectively.

The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the terms of the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Losses occurring reinsurance contracts accounted for approximately 21%, 25%, and 21% of the Company’s gross premiums written during the years ended December 31, 2011, 2010, and 2009, respectively. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24 month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period. Policies attaching reinsurance contracts accounted for approximately 19%, 21%, and 22% of the Company’s gross premiums written during the years ended December 31, 2011, 2010, and 2009, respectively.

In addition to determining the applicable risk period, the Company’s estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract’s written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Excess of loss reinsurance contracts accounted for approximately 21%, 24%, and 23% of the Company’s gross premiums written during the years ended December 31, 2011, 2010, and 2009, respectively. For proportional reinsurance contracts, the Company estimates premiums, commissions and related expenses based on broker and ceding company estimates. In addition to ceding company estimates, the Company also utilizes its judgment in establishing proportional reinsurance contract premium estimates after considering the following factors:

• the ceding company’s historical premium versus projected premium;

• the ceding company’s history of providing accurate estimates;

• anticipated changes in the marketplace and the ceding company’s competitive position therein;

• reported premiums to date; and

• correspondence and communication between the Company and its brokers, intermediaries and ceding companies.

Proportional reinsurance contracts accounted for approximately 19%, 22%, and 20% of the Company’s gross premiums written during the years ended December 31, 2011, 2010, and 2009, respectively.

Premiums on the Company’s excess of loss and proportional reinsurance contracts are estimated by management at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the contracts incept. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustment to these estimates is recorded in the period in which it becomes known. The Company has not historically experienced material adjustments to its initial premium estimates for its excess of loss reinsurance contracts. For proportional contracts, as is customary in the reinsurance market, there is a time lag from the point when premium and related commission and expense activity is recorded by a ceding company to the point when such information is reported by the ceding company to the Company, either directly or through a reinsurance intermediary. This time lag can vary from one to several months or calendar quarters. In addition, uncertainty in premium estimates arises due to changes in renewal rates or rate of new business acceptances by the cedant insurance companies and changes in the rates being charged by cedants. Changes to original premium estimates for proportional contracts could be material and such adjustments may directly and significantly impact earnings in the period they are determined because the subject premium may be fully or substantially earned.

The Company’s historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 8%, although larger variations, both positive and negative, are possible as a result of changes in one or more of the premium assumptions as noted above. An 8% variation in the Company’s proportional premiums receivable, net as of December 31, 2011, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $1.1 million on the Company’s net income.

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The following summarizes the Company’s net proportional premium estimates within premiums receivable, net on the Company’s Audited Consolidated Balance Sheet as of December 31, 2011 and 2010:

		September 30,		September 30,		September 30,		September 30,		September 30,
							Surety
					Aerospace		and Other
Classes of Coverage	Casualty		Property		and Marine		Specialty		Total
	(U.S. dollars in thousands)
As of December 31, 2011
Proportional premiums receivable, net	$	96,001	$	73,355	$	25,986	$	18,569	$	213,911
As of December 31, 2010
Proportional premiums receivable, net	$	100,600	$	54,800	$	22,900	$	28,300	$	206,600

As a result of recognizing the estimated gross premium written at the inception of the policy and collecting that premium over an extended period, we include a premiums receivable asset on our balance sheet. We actively monitor our premiums receivable asset to consider whether we need an allowance for doubtful accounts. As part of this process, we consider the credit quality of our cedants and monitor premium receipts versus expectations. At December 31, 2011, the Company has an allowance for estimated uncollectible premiums receivable of $3.4 million (2010 — $4.9 million).

Reserve for Losses and Loss Expenses. The Company’s reserve for losses and loss expenses includes case reserves and reserves for losses incurred but not reported (referred to as “IBNR reserves”). Case reserves are established for losses that have been reported to us, but not yet paid. IBNR reserves represent the estimated ultimate cost of events or conditions that have not been reported to or specifically identified by the Company, but have occurred. Case reserves and IBNR reserves are established by management based on reports from reinsurance intermediaries, ceding companies and insureds and consultations with independent legal counsel. In addition, IBNR reserves are established by management based on reported losses and loss expenses and actuarially determined estimates of ultimate losses and loss expenses.

Under U.S. GAAP, the Company is not permitted to establish loss reserves until the occurrence of an actual loss event. Once such an event occurs, the Company establishes reserves based upon estimates of total losses incurred by the ceding companies or insureds as a result of the event, its estimate of the potential losses incurred, and its estimate of the portion of such loss the Company has insured or reinsured. As a result, only loss reserves applicable to losses incurred up to the financial statement date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. Losses arising from future events will be estimated and recognized at the time the loss is incurred and could be substantial. See “Reserve for Losses and Loss Expenses” below for further discussion.

The Company’s loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company’s financial condition for any particular period. While we believe that we have made a reasonable estimate of loss and loss expense reserves, the ultimate loss experience may not be as reliably predicted as may be the case with other insurance and reinsurance operations, and it is possible that losses and loss expenses will be higher or lower than the total reserve for losses and loss expenses recorded by the Company.

Information Used in Determining the Reserve for Losses and Loss Expenses. In order to estimate the Company’s reserve for losses and loss expenses, management uses information either developed from internal or independent external sources, or pricing information created by the Company or provided to the Company by insureds and brokers at the time individual contracts and policies are bound. In addition, we use commercially available risk analysis models, contract by contract review by our underwriting teams and, to a limited extent, overall market share assumptions to estimate our loss and loss expense reserves related to specific loss events.

Actuarial Methods Used to Estimate Loss and Loss Expense Reserves. When the applicable information has been obtained, the Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company in connection with business it has underwritten and thus, the applicable reserve for losses and loss expenses. One actuarial method used by the Company to estimate its reserve for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). Another actuarial method used by the Company is known as the Bornhuetter-Ferguson method. The Bornhuetter-Ferguson method uses an initial loss estimate (expected loss technique) for each underwriting quarter by business line and type of contract. The portion of the initial loss estimate that is the IBNR reserve is then reduced in each subsequent quarter by the losses reported for that business segment during that quarter. Over time, the IBNR reserve will be reduced and will be replaced with the actual losses reported to the Company or, if losses do not develop as expected, reserves for those losses are reduced with the amounts by which reserves are reduced then reflected in net income. Management uses these multiple actuarial methods, supplemented with its own professional judgment, to establish its best estimate of reserves for losses and loss expenses.

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The information gathered by the Company and the actuarial analyses performed on the gathered information is used to develop individual point estimates of carried loss and loss expense reserves for each of the Company’s business segments and underlying lines of business. These individual point estimates are then aggregated along with actual losses reported to reach the total reserve for losses and loss expenses carried on the Company’s consolidated financial statements. All of the Company’s loss reserving is currently performed on a point estimate basis. The Company does not utilize range estimation in its loss reserving process.

Since inception, the Company has used reserving methods that are commonly applied when limited loss development experience exists. In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the key lines of business within each business segment are aggregated based on their potential expected length of loss emergence. The period over which loss emergence occurs is typically referred to as the tail. The Company has classified its lines of business as either having a “short,” “long” or “other” tail pattern. As the Company has accumulated its own loss reserve history, it has determined it is more appropriate to incorporate the Company’s actual loss experience. As of 2006, the Company determined that its own loss development history in relation to its short tail and other lines of business had reached a level of maturity sufficient to provide a credible basis on which to estimate its reserve for losses and loss expenses related to these lines of buinsess. As such, the Company’s actual reporting patterns were considered when determining the reserve for losses and loss expenses in the short tail and other lines of business in its Reinsurance and Insurance segments for the year ended December 31, 2011. The Company continues to utilize industry loss and development patterns in the establishment of loss and loss expense reserves for its long tail and certain other lines of business in both its Insurance and Reinsurance segments.

Significant Assumptions Employed in the Estimation of Loss and Loss Expense Reserves. The most significant assumptions used as of December 31, 2011 to estimate the reserve for losses and loss expenses within the Company’s Insurance and Reinsurance segments are as follows:

• the information developed from internal and independent external sources can be used to develop meaningful estimates of the likely future performance of business bound by the Company;

• the loss and exposure information provided by ceding companies, insureds and brokers in support of their submissions can be used to derive meaningful estimates of the likely future performance of business bound with respect to each contract and policy;

• historic loss development and trend experience is assumed to be indicative of future loss development and trends; and

• no significant emergence of losses or types of losses that are not represented in the information supplied to the Company by its brokers, ceding companies and insureds will occur.

The above four assumptions most significantly influence the Company’s determination of initial expected loss ratios and expected loss reporting patterns that are the key inputs which impact potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company’s business segments. While there can be no assurance that any of the above assumptions will prove to be correct, we believe that these assumptions represent a realistic and appropriate basis for estimating the reserve for losses and loss expenses.

Factors Creating Uncertainty in the Estimation of the Reserve for Losses and Loss Expenses. While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for losses and loss expenses, certain of the Company’s business lines are by their nature subject to additional uncertainties, including the Company’s casualty, property, catastrophe, aerospace and marine and surety and other specialty lines in the Reinsurance segment and the Company’s casualty and professional lines in the Insurance segment, which are discussed in detail below. In addition, the Company’s Reinsurance segment is subject to additional factors which add to the uncertainty of estimating loss and loss expense reserves. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating loss and loss expense reserves.

The aspects of the Company’s casualty line in the Reinsurance segment and the casualty and professional lines in the Insurance segment that complicate the process of estimating loss reseves include the lack of long-term historical data for losses of the same type intended to be covered by the policies and contracts written by the Company and the expectation that a portion of losses in excess of the Company’s attachment levels in many of its contracts will be low in frequency and high in severity, limiting the usefulness of claims experience of other insurers and reinsurers for similar claims. In addition, the portion of the Company’s casualty line in its Insurance segment which is underwritten in Bermuda includes policy forms that vary from more traditional policy forms. The primary difference in the casualty policy form used by Endurance Bermuda from more traditional policy forms relates to the coverage being provided on an occurrence reported basis instead of the typical occurrence or claims-made basis used in traditional policy forms. The occurrence reported policy forms typically cover occurrences causing unexpected and unintended personal injury or property damage to third parties arising from events or conditions that commence at or subsequent to an inception date, and prior to the expiration of the policy provided that proper notice is given during the term of the policy or the discovery period.

The inherent uncertainty of estimating the Company’s loss and loss expense reserves for its Reinsurance segment increases principally due to:

• the lag in time between the time claims are reported to the ceding company and the time they are reported through one or more reinsurance broker intermediaries to the Company;

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• the differing reserving practices among ceding companies;

• the diversity of loss development patterns among different types of reinsurance treaties or contracts; and

• the Company’s need to rely on its ceding companies for loss information.

In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company’s underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews of the Company’s ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserves. On occasion, these reviews reveal that the ceding company’s reported losses and loss expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company’s policy is to vigorously defend its position in litigation or arbitration. As of December 31, 2011, the Company was not involved in any material claims litigation or arbitration proceedings.

Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and loss expense reserve estimates. As of December 31, 2011, there were no significant backlogs related to the processing of policy or contract information in the Company’s Insurance or Reinsurance segments.

The Company assumes in its loss and loss expense reserving process that, on average, the time periods between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time. The time period over which all losses are expected to be reported to the Company varies significantly by line of business. This period can range from a few quarters for some lines, such as catastrophe, to many years for some casualty lines of business. For the Company’s Reinsurance business segment, due to ceding company and reinsurance intermediary reporting frequency, the time period is generally longer than for its Insurance segment, resulting in a reliance by the Company for a longer period of time on its actuarial estimates of loss and loss expense reserves. To the extent that actual reported losses are reported more quickly than expected, the Company may adjust upward its estimate of ultimate loss and to the extent that actual reported losses are reported more slowly than expected, the Company may reduce its estimate of ultimate loss.

Potential Volatility in the Reserve for Losses and Loss Expenses. In addition to the factors creating uncertainty in the Company’s estimate of loss and loss expense reserves, the Company’s estimated reserve for losses and loss expenses can change over time because of unexpected changes in the external environment. Potential changing external factors include:

• changes in the inflation rate for goods and services related to the covered damages;

• changes in the general economic environment that could cause unanticipated changes in claim frequency or severity;

• changes in the litigation environment regarding the representation of plaintiffs and potential plaintiffs;

• changes in the judicial and/or arbitration environment regarding the interpretation of policy and contract provisions relating to the determination of coverage and/or the amount of damages awarded for certain types of claims;

• changes in the social environment regarding the general attitude of juries in the determination of liability and damages;

• changes in the legislative environment regarding the definition of damages;

• new types of injuries caused by new types of injurious activities or exposures; and

• in the case of assumed reinsurance, changes in ceding company case reserving and reporting patterns.

The Company’s estimates of reserves for losses and loss expenses can also change over time because of changes in internal company operations, such as:

• alterations in claims handling procedures;

• growth in new lines of business where exposure and loss development patterns are not well established; or

• changes in the quality of risk selection or pricing in the underwriting process.

Due to the inherent complexity of the assumptions used in establishing the Company’s loss and loss expense reserve estimates, final claim settlements made by the Company may vary significantly from the present estimates, particularly when those settlements may not occur until well into the future. For an illustration of the effect of a 10% change in the Company’s two key inputs used in determining its loss and loss expense reserves – the expected loss ratio and the expected loss reporting pattern – please see “Reserve for Losses and Loss Expenses” below.

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Investments. The Company currently classifies its fixed maturity investments, short-term investments and equity securities, as “available for sale” and, accordingly, they are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive income. The Company determines the fair value of its fixed maturity, short-term and equity investments 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 use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. Current accounting guidance establishes three levels as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Quoted prices for similar assets in markets that are active, quoted prices for identical or similar assets in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own views about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity, short-term and equity portfolios. The Company obtains multiple prices for its securities where available. Pricing sources used in pricing the Company’s fixed maturity, short-term and equity portfolios at December 31, 2011 were as follows:

	September 30,
Pricing services	29.2	%
Index providers	59.8	%
Broker/dealers	11.0	%

Pricing Services and Index Providers. Pricing services, including index providers, provide pricing for less-complex, liquid securities based on market quotations in active markets. For securities that do not trade on a listed exchange, these pricing services may use a matrix pricing consisting of observable market inputs to estimate the fair value of a security. These observable market inputs include: reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic factors. Additionally, pricing services may use a valuation model such as an option adjusted spread model commonly used for estimating fair values of mortgage-backed and asset-backed securities. At December 31, 2011, the Company has not adjusted any pricing provided by independent pricing services and index providers and have classified all such securities as Level 2.

Broker/Dealers. Generally, the Company obtains quotes directly from broker/dealers who are active in the corresponding markets when prices are unavailable from independent pricing services or index providers. Broker/dealer quotes may also be used if the pricing from pricing services or index providers is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker/dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities. Quotes from broker/dealers are all non-binding. At December 31, 2011, the Company has not adjusted any pricing provided by broker/dealers and has classified all such securities as Level 2.

As described above, independent pricing services, index providers and broker/dealers have their own method for determining the fair value of securities. As such, prices provided by independent pricing services, index providers and independent broker quotes can vary widely, even for the same security, and may have a material effect on the estimated fair values of the Company’s securities. If the Company determines that there has been a significant decrease in the volume and level of trading activity for the securities in relation to the normal market activity for such security (or similar securities), then transactions or quoted prices may not accurately reflect fair value and, if there is evidence that the transaction for the security is not orderly, the Company may place less weight on the transaction price as an indicator of fair value. To validate the techniques or models used by pricing sources, the Company’s review process includes, but is not limited to:

• quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated);

• initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and

• comparing the fair value estimates to its knowledge of the current market.

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Other than Temporary Impairment. Following a determination of fair value, the Company reviews its fixed maturity, short-term and equity portfolios to determine whether any declines in the fair value below the amortized cost basis of its fixed maturity, short-term and equity portfolios are other-than-temporary. If the Company determines that a decision to sell the security has been made or that it is more likely than not that the Company will be required to sell the security, the Company deems the security to be other-than-temporarily impaired and writes it down to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other-than-temporary impairment (“OTTI”) loss.

For the remaining fixed maturity and short-term investments in an unrealized loss position for which a decision to sell has not been made and it is more likely than not that the Company will not be required to sell, the Company performs additional reviews to determine whether the investment will recover its amortized cost.

If the amortized cost of the Company’s fixed maturity and short-term investments is, based upon the judgment of management, unlikely to be recovered, the Company writes down the investment by the amount representing the credit related portion of the decline in value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an OTTI loss. The new cost basis is not changed for subsequent recoveries in fair value.

To the extent the Company determines that the amortized cost of the Company’s fixed maturity and short-term investments is likely to be recovered and related to non-credit factors (such as interest rates, market conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive income in the shareholders’ equity section of the Company’s balance sheet.

For equity securities in an unrealized loss position for which a decision to sell has not been made and it is not more likely than not that the Company will be required to sell the equity security, the Company considers its ability and intent to hold an equity security in an unrealized loss position for a reasonable period of time to allow for a full recovery. When the Company determines that the decline in value of an equity security is other-than-temporary, the Company reduces the cost of the equity security to its fair value and recognizes the loss in the Consolidated Statements of Income and Comprehensive Income. The new cost basis is not changed for subsequent recoveries in fair value.

Other Investments. Other Investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. Other Investments consist of alternative funds and specialty funds. Alternative funds include investments in hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies. Specialty funds currently include high yield loan and convertible debt funds. The carrying value of these investments are increased or decreased to reflect the Company’s share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by certain of the fund managers, valuations of certain alternative funds and specialty funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.

Goodwill. The Company is required to make an annual assessment as to whether the value of the Company’s goodwill asset is impaired. Impairment, which can be either partial or full, is based on a fair value analysis by individual reporting unit. Based upon the Company’s assessment at the reporting unit level, there was no impairment of its goodwill asset of $90.5 million as of December 31, 2011.

In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company’s stock price relative to both its book value and its net income. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead to an impairment of goodwill, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2011.

Deferred Tax Assets. We provide for income taxes in accordance with the provisions of the relevant accounting guidance on, “Accounting for Income Taxes” and “Accounting for Uncertain Tax Positions” for Endurance Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions, ARMtech and Endurance U.K., which are our operating subsidiaries in income tax paying jurisdictions. Our deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our Audited Consolidated Financial Statements and the tax basis of our assets and liabilities. We determine deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.

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At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax asset will not be realized. The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction and available tax planning strategies. Estimates of future taxable income incorporate several assumptions that may differ from actual experience. Differences in our assumptions and resulting estimates could be material and have an adverse impact on our financial results of operations and liquidity. Any such differences are recorded in the period in which they become known. As of December 31, 2011, the Company had a net deferred income tax asset of $33.4 million (2010—$33.7 million), which includes a valuation allowance of $31.4 million (2010—$13.6 million).

Reclassifications. Certain comparative information has been reclassified to conform to current year presentation.

Recent Accounting Pronouncements. See Note 2(p), “Summary of Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes accompanying our Audited Consolidated Financial Statements.

Results of Operations

Years Ended December 31, 2011, 2010 and 2009

The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2011, 2010 and 2009:

		September 30,			September 30,			September 30,
	2011			2010			2009
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	2,467,114		$	2,053,236		$	2,021,450
Ceded premiums written		(487,293	)		(289,492	)		(415,400	)
Net premiums written		1,979,821			1,763,744			1,606,050
Net premiums earned		1,931,393			1,741,113			1,633,192
Net investment income		147,037			200,358			284,200
Net realized and unrealized gains		31,671			22,488			6,303
Net impairment losses recognized in (losses) earnings		(3,520	)		(3,944	)		(20,251	)
Other underwriting (loss) income		(3,547	)		(1,636	)		3,914
Total revenues		2,103,034			1,958,379			1,907,358
Expenses
Net losses and loss expenses		1,632,666			1,038,100			866,640
Acquisition expenses		282,911			264,228			267,971
General and administrative expenses		264,152			241,920			237,154
Amortization of intangibles		11,213			10,460			10,463
Net foreign exchange gains		(7,422	)		(2,989	)		(29,740	)
Interest expense		36,254			34,762			30,174
Income tax (benefit) expense		(23,006	)		7,160			(11,408	)
Total expenses		2,196,768			1,593,641			1,371,254
Net (loss) income	$	(93,734	)	$	364,738		$	536,104
Ratios
Net loss ratio		84.6	%		59.6	%		53.1	%
Acquisition expense ratio		14.6	%		15.2	%		16.4	%
General and administrative expense ratio		13.7	%		13.9	%		14.5	%
Combined ratio		112.9	%		88.7	%		84.0	%

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Premiums

Gross premiums written in 2011 were $2,467.1 million, an increase of $413.9 million, or 20.2%, compared to 2010 and an increase of $445.7 million, or 22.0% compared to 2009. The following table provides the distribution of gross premiums written by the geographic location in which the risk originated for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
	2011		2010		2009
	(U.S. dollars in thousands)
United States	$	2,001,117	$	1,598,335	$	1,637,649
Worldwide		259,707		239,912		243,105
Europe		106,070		102,574		75,985
Japan		37,610		40,608		27,926
Canada		17,103		17,674		13,741
Australasia		15,364		19,325		6,566
Other		30,143		34,808		16,478
Total gross premiums written	$	2,467,114	$	2,053,236	$	2,021,450

Net premiums written in 2011 were $1,979.8 million, an increase of $216.1 million, or 12.3%, compared to 2010 and an increase of $373.8 million, or 23.3% compared to 2009. The change in net premiums written for 2011 compared to 2010 and 2009 was driven primarily by the following factors:

• Increased net premiums written in the agriculture business within the Insurance segment resulting from increased commodity prices for corn, cotton, wheat and soybeans;

• Modest growth in the property and catastrophe lines of the Reinsurance segment and the casualty line of the Insurance segment as a result of new business written, increased shares and improved pricing on renewals and reinstatement premiums related to the catastrophes occurring during 2011; and

• Declines in the property and professional lines of the Insurance segment and casualty and surety and other lines of the Reinsurance segment as a result of non-renewed business.

Ceded premiums written by the Company increased in 2011 compared to 2010 and 2009 principally in the agriculture line of the Insurance segment consistent with the growth experienced in gross premiums written. In addition, the Company chose to retain a lower level of premiums in the property, casualty and professional lines of the Insurance segment and purchased additional protection in the catastrophe line of the Reinsurance segment. Ceded premiums written were higher in 2011 than 2009 principally as a result of the growth in cessions in the agriculture line of the Insurance segment. Net premiums earned increased in 2011 compared to 2010 and 2009 as a result of the growth in net premiums written experienced over the last two years.

Net Investment Income

The components of net investment income for the years ended December 31, 2011, 2010 and 2009 are as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
	(U.S. dollars in thousands)
Available for sale investments	$	160,580		$	174,491		$	195,295
Other investments		(694	)		40,281			98,106
Cash and cash equivalents		924			490			2,214
	$	160,810		$	215,262		$	295,615
Investment expenses		(13,773	)		(14,904	)		(11,415	)
Net investment income	$	147,037		$	200,358		$	284,200

The Company’s 2011 net investment income of $147.0 million represents a decrease of 26.6% or $53.3 million as compared to 2010 and a decrease of 48.3% or $137.2 million as compared to 2009. Net investment income during 2011 included net mark to market losses of $0.7 million on Other Investments, comprised of alternative and specialty funds, as compared to mark to market gains of $40.3 million in 2010 and mark to market gains of $98.1 million in 2009. Investment income generated by the Company’s available for sale investments decreased by $13.9 million in 2011 compared to 2010 and by $34.7 million compared to 2009 due to lower reinvestment rates. Cash and cash equivalents and investments (including pending investment settlements) increased 1.9% from

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2010 and 5.5% from 2009. The increase in cash and cash equivalents and investments during 2011 and 2010 resulted from increases in market valuations of investments, positive net operating cash flows, and proceeds from the issuance of Series B Preferred Shares, partially offset by share repurchases. The increase in investment expenses in 2010 and 2011 compared to 2009 was due to an overall increase in invested assets and changes in the Company’s external investment managers.

The annualized net earned yield, total return of the investment portfolio for the years ended December 31, 2011, 2010 and 2009 and market yield and portfolio duration as of December 31, 2011, 2010 and 2009 were as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
Annualized net earned yield(1)		2.41	%		3.32	%		4.97	%
Total return on investment portfolio(2)		3.50	%		5.54	%		10.04	%
Market yield(3)		1.93	%		2.38	%		3.04	%
Portfolio duration(4)		2.39 years			2.39 years			2.30 years

(1) The actual net earned income from the investment portfolio after adjusting for expenses and accretion and amortization from the purchase price divided by the average book value of assets.

(2) Includes realized and unrealized gains and losses.

(3) The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes Other Investments and Operating Cash.

(4) Includes only cash and cash equivalents and fixed maturity securities held by the Company’s investment managers.

During 2011, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 162 basis point range, with a high of 2.40% and a low of 0.78%. Trading activity in the Company’s portfolio in 2011 included reductions in foreign governments, corporates, government guaranteed corporate securities and non-agency residential and commercial mortgage-backed securities and increased allocations to U.S. government and agency securities and equity securities. The duration of the fixed maturity portfolio held at December 31, 2011 did not change substantially compared to the end of 2010 and 2009.

Net Realized and Unrealized Gains

The Company’s investment portfolio is managed to generate attractive economic returns and income while providing the Company with liquidity. Movements in financial markets and interest rates influence the timing and recognition of net realized investment gains and losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale for the year ended December 31, 2011 were $3,034.9 million compared to $3,422.5 million for the year ended December 31, 2010. Net realized investment gains increased in the year ended December 31, 2011 compared to 2010 and 2009 as the Company realized gains as a result of managing the duration of the investment portfolio. Realized gains and losses on investment sales and the change in the fair value of derivative financial instruments for the years ended December 31, 2011, 2010 and 2009 were as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
	(U.S. dollars in thousands)
Gross realized gains on investment sales	$	50,884		$	33,788		$	51,121
Gross realized losses on investment sales		(18,500	)		(11,300	)		(44,818	)
Change in fair value of derivative financial instruments		(713	)		—			—
Net realized and unrealized gains	$	31,671		$	22,488		$	6,303

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Net Impairment Losses Recognized in (Losses) Earnings

During 2011, 2010 and 2009, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. Net impairment losses recognized in earnings for the years ended December 31, 2011, 2010 and 2009 as a result of other-than-temporarily impaired securities were as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
	(U.S. dollars in thousands)
Other-than-temporary impairment losses	$	(2,659	)	$	(2,695	)	$	(50,993	)
Portion of loss recognized in other comprehensive (loss) income		(861	)		(1,249	)		30,742
Net impairment losses recognized in (losses) earnings	$	(3,520	)	$	(3,944	)	$	(20,251	)

For the years ended December 31, 2011, 2010 and 2009, the Company recorded $3.5 million, $3.9 million and $20.3 million of OTTI losses in earnings, respectively. The other-than-temporary impairment losses recognized by the Company in 2011 relating to specific credit events occurred primarily due to reductions in expected recovery values on residential and commercial mortgage-backed securities during the period, along with certain credit related downgrades in corporate securities.

The 2009 OTTI losses of $20.3 million included a portion related to credit losses and a portion related to non-credit factors. Non-credit related factors included market and sector related factors, including limited liquidity and credit spread widening.

Net Foreign Exchange Gains

During 2011, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange gains of $7.4 million compared to gains of $3.0 million for 2010 and gains of $29.7 million for 2009. The gains recorded in the current period resulted from net gains realized as the U.S. dollar fluctuated over the year. The net foreign exchange gains recorded in 2010 resulted from the weakening of the U.S. dollar compared to other currencies over that period. The net foreign exchange gains recorded in 2009 resulted from the weakening of the U.S. dollar and strengthening of British Sterling compared to other currencies over that period.

Net Losses and Loss Expenses

The Company’s reported net losses and loss expenses are characterized by various factors and are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. In 2011, multiple events adversely affected the Company’s net loss ratio in the Reinsurance segment. These included Thailand floods, Hurricane Irene, Danish floods, brushfires in Texas, the Tohuko, Japan earthquake and tsunami, the Christchurch, New Zealand earthquake, Queensland, Australia floods, Midwest United States tornadoes and multiple storms in the Midwest which when accumulated triggered certain aggregate catastrophe contracts. The Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals, of $466.7 million in relation to these events which added 24.8 percentage points to the Company’s net loss ratio for the year ended December 31, 2011. For the twelve months ended December 31, 2010, the Chilean earthquake, the New Zealand Earthquake and European Windstorm Xynthia adversely affected the Company’s net loss ratio in the Reinsurance segment. The Company recorded losses, net of reinstatement premiums and other loss sensitive accruals, of $81.1 million in relation to the three events, which added 4.8 percentage points to the Company’s net loss ratio for 2010. In 2009, the Company’s net loss ratio benefited from a relative absence of major catastrophes. Additionally, the Company recorded higher reserves for attritional losses in the Insurance segment’s agriculture and property lines in the year ended December 31, 2011 compared to 2010 which were partially offset by lower losses in the casualty line where a small number of individual risk events impacted results in 2010. The higher reserves in the agriculture line of business were due to drought conditions experienced in the Southwest United States and excess moisture in the Midwest United States in the spring, and the higher reserves in the property line of business was due to several small loss events related to storms and flooding. The Company recorded higher reserves for attritional losses in the Insurance segment’s property and healthcare lines in the year ended December 31, 2011 compared to 2009.

During 2011, 2010 and 2009, the Company’s previously estimated ultimate losses for prior accident years were reduced by $180.0 million, $126.8 million and $150.9 million, respectively, as the loss emergence related to prior accident years was lower than expected, resulting in the reserves held by the Company for those accident years being redundant. The overall net reduction in the Company’s estimated losses for prior accident years experienced in 2011 emerged in the Company’s short tail, long tail and other lines of both the Insurance and Reinsurance segments.

The Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are the only valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company’s consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. As a result of the

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incorporation of the Company’s own loss reporting patterns and loss history related to its short tail business, including catastrophe reinsurance and property insurance and reinsurance business lines, the Company would expect its prior year loss reserve development and adjustments for short tail business to be less than recorded in prior years. Reserve adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss reserves were established by the Company’s actuaries and reflect management’s best estimate of ultimate losses. See “Reserve for Losses and Loss Expenses” below for further discussion.

Acquisition Expenses

The Company’s acquisition expense ratio decreased in 2011 as compared to 2010 and 2009 primarily due to shifts in the earned premium mix, notably within the Insurance segment as earned premiums have increased in the agriculture line which has lower related acquisition costs than other lines. Additionally, the Company exited the workers’ compensation line of business within the Insurance segment during 2009 which had higher commission rates than other lines.

General and Administrative Expenses

The Company’s general and administrative expense ratio for 2011 was comparable to that of 2010 as higher net earned premiums offset increased expenditures. The general and administrative ratio in 2011 was lower than that of 2009 as the impact of higher net earned premiums outweighed an increase in expenditures. The increase in expenditures in 2011 compared to 2010 and 2009 was due to higher personnel costs resulting from increased headcount, increased facilities costs and increased professional service fees related to information systems consulting. At December 31, 2011, the Company had a total of 844 employees as compared to 820 employees at December 31, 2010 and 759 employees at December 31, 2009.

Income Tax (Benefit) Expense

The Company incurred a tax benefit for the year ended December 31, 2011 of $23.0 million compared to tax expense of $7.2 million and benefit of $11.4 million for the years ended December 31, 2010 and 2009. The Company incurred a higher tax benefit in 2011 due to an increase in net losses experienced in its United States taxable jurisdictions compared to 2010 and 2009.

Net (Loss) Income

The Company produced a net loss of $93.7 million in 2011 compared to net income of $364.7 million in 2010 and $536.1 million in 2009 primarily due to the increase in catastrophe losses experienced in the current year and from lower net investment income.

Underwriting Results by Business Segment

The determination of the Company’s business segments is based on the manner in which management monitors the performance of the Company’s underwriting operations. As a result, we report two business segments – Insurance and Reinsurance.

Management measures the Company’s results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company’s historic combined ratios may not be indicative of future underwriting performance. 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 business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by business segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the segment to which they apply.

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Insurance

The following table summarizes the underwriting results and associated ratios for the Company’s Insurance segment for the years ended December 31, 2011, 2010 and 2009:

		September 30,			September 30,			September 30,
	2011			2010			2009
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	1,469,798		$	1,112,192		$	1,152,150
Ceded premiums written		(464,308	)		(282,328	)		(411,840	)
Net premiums written		1,005,490			829,864			740,310
Net premiums earned		981,592			821,828			823,703
Other underwriting (loss) income		(3,368	)		475			3,533
		978,224			822,303			827,236
Expenses
Net losses and loss expenses		765,119			558,040			553,008
Acquisition expenses		71,295			63,556			84,724
General and administrative expenses		146,115			123,335			119,766
		982,529			744,931			757,498
Underwriting (loss) income	$	(4,305	)	$	77,372		$	69,738
Ratios
Net loss ratio		77.9	%		67.9	%		67.1	%
Acquisition expense ratio		7.3	%		7.7	%		10.3	%
General and administrative expense ratio		14.9	%		15.0	%		14.6	%
Combined ratio		100.1	%		90.6	%		92.0	%

Premiums. Net premiums written in the Insurance segment increased in 2011 by 21.2% compared to 2010 and increased 35.8% compared to 2009, respectively. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2011, 2010 and 2009 were as follows:

		xxx		xxx		xxx			xxx			xxx		xxx
	2011				2010						2009
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written			Net Premiums Written			Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Agriculture	$	901,746	$	586,659	$	567,461		$	404,767		$	572,096	$	324,480
Professional lines		169,319		137,962		170,146			148,717			193,799		167,091
Casualty		205,950		137,373		167,549			107,801			152,580		91,071
Property		109,312		64,930		122,110			88,299			124,621		68,011
Healthcare liability		82,519		77,609		87,593			82,893			82,955		78,284
Surety and other specialty		952		957		(2,667	)		(2,613	)		26,099		11,373
Total	$	1,469,798	$	1,005,490	$	1,112,192		$	829,864		$	1,152,150	$	740,310

The change in the Insurance business segment net premiums written in 2011 compared to 2010 and 2009 was driven by the following factors:

• Growth in agriculture net premiums written due to increased commodity prices for corn, cotton, wheat and soybeans partially offset by a slight reduction in policy counts;

• An increase in the casualty line driven by new business emanating from our contract binding authority business which was launched at the end of 2010;

• Declines in the property, healthcare liability and professional lines due to increased competition which led to either non-renewing business or a move to higher policy attachment points combined with reduced premium retentions; and

• A decline in surety and other specialty premiums written as a result of the Company’s exit from its workers’ compensation business in the first quarter of 2009.

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Ceded premiums written by the Company in the Insurance segment increased in 2011 compared to 2010 and 2009 as the Company increased agriculture premiums ceded to the Federal Crop Insurance Corporation in line with the growth experienced in gross premiums written. In 2010, ceded premiums were significantly lower as the Company retained more agriculture premiums due to favorable growing conditions during 2010. In addition, the Company reduced premium retentions in the property and professional lines.

Net premiums earned by the Company in the Insurance segment in 2011 were higher than in both 2010 and 2009. The increases were primarily due to the growth in net premiums written in the agriculture line in 2011 compared to the prior years.

Net Losses and Loss Expenses. The increase in the net loss ratio in the Company’s Insurance segment for year ended December 31, 2011 compared to 2010 reflected higher levels of current accident year losses in the agriculture line as a result of drought conditions experienced in the Southwest United States and excess moisture in the Midwest United States in the spring. Higher current year losses also impacted the property line as a result of several small loss events related to storms and flooding. Offsetting these loss increases was a reduction in the current accident year loss ratio in the casualty line which experienced fewer individual risk loss events in 2011 than in 2010. In addition, higher favorable prior year loss reserve development recorded in the agriculture line in 2011 partially offset the overall increase in losses incurred. The net loss ratio in the Company’s Insurance segment was higher in 2011than in 2009 primarily as a result of the shift in the mix of business toward the agriculture line which experienced higher loss ratios than the other lines of business in the Insurance segment.

The net loss ratio reflected higher favorable prior year loss reserve development recorded for 2011 as compared to 2010 and lower favorable prior year loss reserve development than in 2009. Prior year loss reserves were reduced in 2011 by $70.8 million as compared to reductions of $46.9 million and $92.1 million for the years ended December 31, 2010 and 2009. Of the lines of business in the Company’s Insurance segment, the short tail property, long tail healthcare liability and other agriculture lines experienced significant net reductions in the Company’s estimated losses for prior accident years in 2011 as claims have not materialized as originally estimated by the Company. These reductions were offset by increases in the long tail workers’ compensation business within the surety and other specialty line.

Acquisition Expenses. The Company’s acquisition expense ratio in the Insurance segment decreased in 2011 as compared to 2010 and 2009 as a result of a larger portion of the net premiums earned originating from the agriculture line, which has lower net acquisition costs than other lines of business in the Insurance segment.

General and Administrative Expenses. The Company’s general and administrative expense ratio in the Insurance segment for 2011 was comparable to that of both 2010 and 2009 as growth in net earned premiums offset increased expenditures. The increased expenditures in 2011 were due to higher personnel costs as the Company has been investing in several new insurance lines of business, which has resulted in increased headcount, and costs related to office closures and severance payments near the end of 2011.

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Reinsurance

The following table summarizes the underwriting results and associated ratios for the Company’s Reinsurance segment for the years ended December 31, 2011, 2010 and 2009:

		September 30,			September 30,			September 30,
	2011			2010			2009
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	997,316		$	941,044		$	869,300
Ceded premiums written		(22,985	)		(7,164	)		(3,560	)
Net premiums written		974,331			933,880			865,740
Net premiums earned		949,801			919,285			809,489
Other underwriting (loss) income		(179	)		(2,111	)		381
		949,622			917,174			809,870
Expenses
Net losses and loss expenses		867,547			480,060			313,632
Acquisition expenses		211,616			200,672			183,247
General and administrative expenses		118,037			118,585			117,388
		1,197,200			799,317			614,267
Underwriting (loss) income	$	(247,578	)	$	117,857		$	195,603
Ratios
Net loss ratio		91.3	%		52.2	%		38.8	%
Acquisition expense ratio		22.3	%		21.8	%		22.6	%
General and administrative expense ratio		12.4	%		12.9	%		14.5	%
Combined ratio		126.0	%		86.9	%		75.9	%

Premiums. Net premiums written in the Reinsurance segment increased in 2011 by 4.3% over 2010 and 12.5% over 2009, respectively. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2011, 2010 and 2009 were as follows:

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2011				2010				2009
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Catastrophe	$	346,021	$	329,081	$	309,886	$	305,617	$	303,404	$	302,218
Casualty		277,495		276,697		294,030		293,222		255,142		254,897
Property		266,562		266,562		224,544		224,544		215,085		215,085
Aerospace and marine		54,591		52,335		48,761		46,696		44,696		42,563
Surety and other specialty		52,647		49,656		63,823		63,801		50,973		50,977
Total	$	997,316	$	974,331	$	941,044	$	933,880	$	869,300	$	865,740

The change in the Reinsurance business segment net premiums written during 2011 compared to 2010 and 2009 was driven by the following factors:

• Catastrophe premiums increased as a result of renewals at higher rates and new business recorded on international catastrophe programs. Part of this growth in new business was attributable to relationships established following the assumption of business from Glacier Reinsurance AG in a quota share and renewal rights transaction in the third quarter of 2010. The growth in catastrophe premiums was also attributable to reinstatement premiums of $21.9 million recorded in 2011 related to the various catastrophes;

• Growth in the property line of business from the Company’s international operations through new business and increased shares of renewals. In addition, a significant favorable premium adjustment on a 2010 incepting policy contributed $13.2 million to net written premium in 2011 and additional growth upon its renewal in the latter part of the year; and

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• Declines in the casualty and surety and other specialty lines compared to 2010 as a result of non-renewed business. Increased premiums in the casualty line of business compared to 2009 as elements of growth generated in 2010 through new and renewal business were sustained in 2011.

Ceded premiums written by the Company in the Reinsurance segment amounted to $23.0 million in 2011 as compared to $7.2 million and $3.6 million in 2010 and 2009, respectively. The increase in ceded premiums in 2011 compared to 2010 and 2009 resulted from the Company entering into a new worldwide property catastrophe quota share retrocession contract in 2011.

Net premiums earned increased in 2011 compared to 2010 and 2009 primarily due to the growth in gross premiums written.

Net losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for 2011 increased compared to 2010 and 2009 as a result of multiple catastrophe losses incurred in the period. These included Hurricane Irene, Thailand floods, Danish floods, brushfires in Texas, the Tohuko, Japan earthquake and tsunami, the Christchurch, New Zealand earthquake, Queensland, Australia floods, Midwest United States tornadoes and multiple storms in the Midwest which when accumulated triggered certain aggregate catastrophe contracts. The Company recorded Reinsurance segment losses, net of reinstatement premiums and other loss sensitive accruals, of $457.1 million in relation to these events for the year ended December 31, 2011. The net losses from the 2011 events added 49.9 percentage points to the Reinsurance segment’s net loss ratio for the year. The Company’s Reinsurance segment results for the year ended December 31, 2010 were impacted by net losses of $81.1 million in relation to the Chilean earthquake, New Zealand earthquake and Windstorm Xynthia. The net loss ratio incurred by the Reinsurance segment in 2009 was characterized by a relative absence of major catastrophe events.

The Company experienced higher favorable loss reserve development in its Reinsurance segment in 2011 compared to 2010 and 2009. The majority of the current year favorable loss reserve development emanated from the segment’s short tail catastrophe and the long tail casualty lines of business. During 2011, 2010 and 2009, the Company’s previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $109.2 million, $79.9 million and $58.8 million, respectively. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company.

Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance segment for the year ended December 31, 2011 was comparable to 2010 and 2009.

General and Administrative Expenses. The general and administrative expense ratio experienced by the Reinsurance segment in 2011, as compared to 2010 and 2009 reduced slightly due to modest growth in net premiums earned.

Investment Portfolio

The Company had an investment portfolio (including cash and cash equivalents) with a value of $6.3 billion as of December 31, 2011. The Company’s investment portfolio is comprised of cash, cash equivalents, fixed maturity investments, short-term investments, equity securities and investments in hedge funds, private equity funds, high yield loan funds and other specialty funds, which we categorize as “Other Investments.”

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The following tables set forth the types of securities, amortized costs, fair values and related gross unrealized gains and losses of our investment portfolio held as of December 31, 2011 and 2010:

		September 30,		September 30,		September 30,			September 30,
			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2011	Cost		Gains		Losses			Fair Value
U.S. government and agencies securities	$	1,218,069	$	51,140	$	(86	)	$	1,269,123
U.S. state and municipal securities		52,274		1,262		(19	)		53,517
Foreign government securities		73,361		1,820		(184	)		74,997
Government guaranteed corporate securities		349,447		2,531		(153	)		351,825
Corporate securities		1,118,481		31,526		(10,108	)		1,139,899
Residential mortgage-backed securities
Agency mortgage-backed securities		933,479		31,884		(344	)		965,019
Non-agency mortgage-backed securities		119,599		1,366		(6,303	)		114,662
Commercial mortgage-backed securities
Agency mortgage-backed securities		28,257		552		(2	)		28,807
Non-agency mortgage-backed securities(1)		491,810		29,741		(3,068	)		518,483
Asset-backed securities		316,212		2,336		(2,914	)		315,634
Total fixed maturity investments	$	4,700,989	$	154,158	$	(23,181	)	$	4,831,966
Short term investments		67,803		4		(5	)		67,802
Total fixed income investments	$	4,768,792	$	154,162	$	(23,186	)	$	4,899,768
Equity securities	$	56,381	$	4,162	$	(776	)	$	59,767

⁽¹⁾ Balances include amounts related to collateralized debt obligations held with total fair values of $17.2 million.

		September 30,		September 30,		September 30,			September 30,
			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2010	Cost		Gains		Losses			Fair Value
U.S. government and agencies securities	$	993,667	$	23,576	$	(6,424	)	$	1,010,819
U.S. state and municipal securities		29,472		745		(238	)		29,979
Foreign government securities		138,157		2,557		(253	)		140,461
Government guaranteed corporate securities		663,709		7,806		(365	)		671,150
Corporate securities		1,205,231		31,174		(3,894	)		1,232,511
Residential mortgage-backed securities
Agency mortgage-backed securities		855,637		30,946		(2,635	)		883,948
Non-agency mortgage-backed securities		254,138		4,457		(12,185	)		246,410
Commercial mortgage-backed securities
Agency mortgage-backed securities		22,130		761		(2	)		22,889
Non-agency mortgage-backed securities(1)		578,951		28,673		(2,804	)		604,820
Asset-backed securities		269,055		6,168		(1,508	)		273,715
Total fixed maturity investments	$	5,010,147	$	136,863	$	(30,308	)	$	5,116,702
Short term investments		70,455		3		(14	)		70,444
Total fixed income investments	$	5,080,602	$	136,866	$	(30,322	)	$	5,187,146
Equity securities	$	8,000	$	5,583	$	(18	)	$	13,565

⁽¹⁾ Balances include amounts related to collateralized debt obligations held with total fair values of $13.1 million.

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Fixed Maturity Investments

U.S. Government and Agencies Securities. U.S. government and agencies securities are comprised of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation (“FreddieMac”) and the Federal National Mortgage Association (“FannieMae”).

U.S. State and Municipal Securities. U.S. State and Municipal Securities are debt securities issued by a state, municipality, or county, in order to finance its capital expenditures. Most municipal bonds are exempt from federal taxes and from most state and local taxes.

Foreign Government Securities. Non U.S. government securities represent the fixed maturity obligations of non-U.S. governmental entities, including securities issued by governments of countries other than the United States.

Government Guaranteed Corporate Securities. Corporate issued securities backed by the full faith and credit of the sponsor country. In the U.S., government guaranteed corporates were issued under the Temporary Liquidity Guarantee Program program and issued with maturities of up to three years.

Corporate Securities. Corporate securities are comprised of bonds issued by corporations, primarily rated A-/A3 or higher and are diversified across a wide range of issuers and industries. Corporate securities also include high yield securities comprised of bonds issued by corporations rated below BBB-. The principal risk of corporate securities is the potential loss of income and potential realized and unrealized principal losses due to insolvencies or deteriorating credit. The largest corporate security in our portfolio represented less than 0.78% of the fixed maturity portfolio at December 31, 2011. We had minimal realized credit related losses during 2011.

Residential Mortgage-Backed Securities. The majority of the residential mortgage-backed securities in our investment portfolio are issued by FreddieMac and FannieMae. The principal risks inherent in holding agency mortgage-backed securities are prepayment and extension risks, which will affect the timing of when principal cash flows will be received. Non-agency mortgage-backed securities also have credit risk should losses on the underlying collateral exceed the credit protection provided by subordinated tranches. Endurance has no exposure to subprime mortgages and Alt-A mortgages represented 0.5% of the fixed maturity portfolio as of December 31, 2011.

Commercial Mortgage-Backed Securities. Our commercial mortgage-backed securities (“CMBS”) portfolio is diversified both geographically and by the types of underlying properties. Our portfolio is primarily backed by office and retail buildings. We have limited exposure to lodging and industrial properties. The majority of commercial mortgage-backed securities in our portfolio are non-agency and in the super senior tranche with average credit support in excess of approximately 31.7%. The principal risks inherent in holding agency commercial mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash flows will be received. Non-agency CMBS also have credit risk should losses on the underlying collateral exceed the credit protection provided.

Asset-Backed Securities. Asset-backed securities are diversified both by type of collateral and issuer. The majority of our asset-backed securities are AAA-rated bonds backed by pools of automobile loan receivables and credit card receivables and other collateral originated by a variety of financial institutions. The principal risks in holding asset-backed securities are structural and credit risks. Structural risks include the security’s priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include performance of the underlying consumer or corporate loans, which act as collateral to these securities.

Short-term Investments

Short-term investments are investments which mature within no more than one year or no less than 90 days. The Company’s short-term investments generally consist of U.S. Government and Agencies securities.

Equity Securities

Equity securities in the Company’s investment portfolio consist of publically traded common and preferred stocks. Of the Company’s equity securities, 40.3% represent investments in an exchange traded fund that seeks to track the performance of a benchmark index of common stocks of companies that have a record of increasing dividends over time.

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Investment Ratings

The investment ratings (provided by major rating agencies) for the fixed maturity portion of our investment portfolio held as of December 31, 2011 and 2010 and the percentage of our total fixed maturity portfolio they represented at such date were as follows:

		September 30,		September 30,			September 30,		September 30,
	December 31, 2011					December 31, 2010
Ratings(1)	Fair Value		Percentage			Fair Value		Percentage
U.S. government and agencies securities	$	1,269,123		25.9	%	$	1,010,819		19.5	%
AAA / Aaa		941,500		19.2	%		2,639,682		50.9	%
AA / Aa(2)		1,665,593		34.0	%		465,315		9.0	%
A / A		776,251		15.8	%		793,980		15.3	%
BBB		130,864		2.7	%		50,733		1.0	%
Below BBB		114,716		2.3	%		221,848		4.2	%
Not rated		1,721		0.1	%		4,769		0.1	%
Total	$	4,899,768		100.0	%	$	5,187,146		100.0	%

⁽¹⁾ The credit rating for each asset reflected above was determined based on the rating assigned to the individual security by Standard & Poor’s. If a rating is not supplied by Standard & Poor’s, the equivalent rating supplied by either Moody’s Investor Service or Fitch Ratings is used.

⁽²⁾ Includes agency mortgage-backed securities of $993.8 million and $906.8 million at December 31, 2011 and 2010, respectively.

The contractual maturity distribution for our fixed maturity portfolio held as of December 31, 2011 and 2010 was as follows:

		September 30,		September 30,		September 30,		September 30,
	December 31, 2011				December 31, 2010
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due within one year	$	517,156	$	520,755	$	390,886	$	393,333
Due after one year through five years		1,732,335		1,773,553		2,240,820		2,279,581
Due after five years through ten years		584,107		612,052		404,322		413,462
Due after ten years		45,837		50,803		64,663		68,988
Residential mortgage-backed securities
Agency mortgage-backed securities		933,479		965,019		855,637		883,948
Non-agency mortgage-backed securities		119,599		114,662		254,138		246,410
Commercial mortgage-backed securities
Agency mortgage-backed securities		28,257		28,807		22,130		22,889
Non-agency mortgage-backed securities		491,810		518,483		578,951		604,820
Asset-backed securities		316,212		315,634		269,055		273,715
Total	$	4,768,792	$	4,899,768	$	5,080,602	$	5,187,146

Other Investments

The Company’s investments in (i) hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan and convertible debt funds (“specialty funds”) are recorded on the Company’s balance sheet as “Other Investments.” As of December 31, 2011, our Board of Directors had approved investments in alternative funds at the time of commitment of capital of up to the lesser of (x) 15% of total shareholders’ equity, or (y) $350 million. This restriction does not apply to investments in specialty funds. As of December 31, 2011, the Company had invested, net of capital returned, a total of $230.7 million in alternative funds. The Company had $119.3 million available for additional alternative fund commitments at December 31, 2011. As of December 31, 2011, the market value of alternative funds represented $309.8 million or approximately 71.6% of Other Investments, and specialty funds represented $122.9 million or approximately 28.4% of Other Investments. As of December 31, 2011, our $432.7 million of Other Investments represented 6.9% of the Company’s invested assets including cash and cash equivalents, fixed maturity investments, short-term investments, equity securities, Other Investments and net pending securities transactions.

Other Investments are accounted for under the equity method of accounting. Adjustments to the carrying value of these investments are made based upon the net valuation criteria established by the managers of the Other Investments, which in turn are established based upon the valuation criteria in the governing documents of the Other Investments. Such valuations may differ significantly from the values that would have been used had liquid markets existed for the shares or partnership interests of the Other Investments. Due to a delay in the valuations reported by certain of the fund managers, valuations of certain alternative funds and

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specialty funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements. Many of the Other Investments are subject to restrictions on redemptions and sale that limit our ability to liquidate these investments in the short-term. Interest income, income distributions and realized and unrealized gains and losses on our investments in the Other Investments are included in net investment income and totaled $0.7 million of losses for the year ended 2011.

Investment Portfolio Management

We have engaged outside investment managers to provide us with investment advisory and management services. Investment management fees, which vary depending on the amount of assets under management and the type of assignment, are offset against net investment income. Agreements with our investment managers may be terminated by either party upon written notice.

Our investment returns for the years ended December 31, 2011, 2010 and 2009 were as follows:

		September 30,			September 30,			September 30,
Investment Returns	2011			2010			2009
	(U.S. dollars in thousands)
Net investment (loss) income from other investments	$	(694	)	$	40,281		$	98,106
Net investment income from available for sale investments and cash and cash equivalents		147,731			160,077			186,094
Net investment income included in net (loss) income		147,037			200,358			284,200
Net realized and unrealized gains included in net (loss) income		31,671			22,488			6,303
Net impairment losses recognized in (losses) earnings		(3,520	)		(3,944	)		(20,251	)
Net increase in unrealized gain included in other comprehensive (loss) income		20,073			96,049			216,790
Total net investment return	$	195,261		$	314,951		$	487,042

During 2011, 2010 and 2009, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. In identifying such securities, the Company initially considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at the end of the applicable period. To the extent that the Company did not identify securities meeting these criteria, the Company then performed various analyses and reviews to determine whether the investments in an unrealized loss position were other-than-temporarily impaired as a result of credit factors or non-credit related factors. We identified certain securities that we believe will not recover their amortized costs. As such, the Company recorded total other than temporary impairments of $3.5 million (2010—$3.9 million; 2009—$20.3 million) related to credit factors and recognized in earnings.

Securities Lending

The Company participated in a securities lending program until July of 2011. Under this program, fixed maturity investments were loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The borrowers of the Company’s securities provided the Company with collateral, typically cash, which the Company separately maintained. The Company typically invested such cash collateral in overnight repurchase agreements. As of December 31, 2010, the fair value of the investments purchased with the cash collateral received from the borrower was $59.9 million. All securities on loan were issued on a term or overnight basis and were subject to daily recall at the Company’s discretion. Upon termination of the securities lending program in July of 2011, the Company recalled all securities on loan and refunded all collateral previously held as part of the program. At December 31, 2010, securities with an estimated fair value of $58.7 million were on loan under the program and the Company was liable for cash collateral under the Company’s control of $59.9 million.

Sovereign Debt Exposure

The Company’s diversified portfolio of investments includes exposures to the debt of various European countries. The Company continuously monitors its exposures through review of its portfolio and has established investment guidelines that restrict the amount of investment exposure to any one issuer or country to depending on specific ratings of such issuer or country as stated by credit rating agencies. The Company has reduced its aggregate direct exposure to the indebtedness and equity securities of those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) from $335.8 million at the beginning of 2011 to $239.8 million at the end of 2011.

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The following table shows the fair value of the Company’s investments exposed to all countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) by any of the recognized rating agencies at December 31, 2011. The amortized cost basis of these investments was not significantly different from their fair value at December 31, 2011. The Company determined the underlying exposure of the investment by reference to the risk country or parent risk country as published by a third party pricing service. The Company does not have any direct exposure to sovereign debt issued by Ireland, Greece or Portugal.

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	Sovereign Exposure				Non-Sovereign Exposure
	Foreign Government		Government Guaranteed Corporate		Corporate securities				Structured		Equity		Gross
Country	Securities		Securities		Financial		Non-Financial		Securities(1)		Securities		Exposure
	(U.S. dollars in thousands)
Austria	$	6,430	$	—	$	—	$	—	$	—	$	—	$	6,430
Belgium		—		—		—		538		—		—		538
Brazil		—		—		982		4,814		—		—		5,796
Cayman Islands		—		—		2,311		—		—		—		2,311
Chile		—		—		—		2,036		—		—		2,036
China		—		—		—		135		—		378		513
Columbia		—		—		—		—		—		445		445
Finland		—		—		—		102		—		—		102
France		10,049		15,079		1,328		32,913		—		1,345		60,714
Germany		13,980		650		13,523		3,141		3,630		—		34,924
Hong Kong		—		—		—		3,527		—		—		3,527
India		—		—		332		267		—		—		599
Italy		—		—		—		2,794		—		—		2,794
Japan		—		—		4,424		5,094		—		—		9,518
Republic of Korea		3,480		—		253		1,402		—		—		5,135
Luxembourg		—		—		140		1,628		275		—		2,043
Mexico		—		—		—		9,881		—		—		9,881
Netherlands		—		20,713		13,397		17,970		2,089		8,089		62,258
New Zealand		—		—		—		712		—		—		712
Philippines		—		—		—		—		—		288		288
Quatar		7,567		—		—		1,592		—		—		9,159
Russia		3,684		—		646		2,582		—		—		6,912
Saudi Arabia		—		—		—		1,802		—		—		1,802
South Africa		—		—		—		312		—		—		312
Spain		—		—		980		—		—		—		980
European Supranational(2)		7,068		—		—		—		—		—		7,068
Taiwan		—		—		—		—		—		280		280
Thailand		—		—		—		—		—		212		212
United Arab Emirates		—		—		2,503		—		—		—		2,503
Total	$	52,258	$	36,442	$	40,819	$	93,242	$	5,994	$	11,037	$	239,792

(1) Structured securities includes residential non-agency mortgage-backed securities, commercial non-agency mortgage-backed securities, and asset-backed securities

(2) European Supranational securities are issued by entities formed by two or more central governments to promote economic development for the member countries, such as the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank.

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The following table shows the fair value as of December 31, 2011 based on the ratings of the securities held by country of risk in those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) by any of the recognized rating agencies at December 31, 2011:

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
Country	AAA		AA		A		BBB		Below BB		NR		Total
	(U.S. dollars in thousands)
Austria	$	6,430	$	—	$	—	$	—	$	—	$	—	$	6,430
Belgium		—		—		538		—		—		—		538
Brazil		—		—		2,032		3,568		196		—		5,796
Cayman Islands		—		—		—		—		2,311		—		2,311
Chile		—		—		2,036		—		—		—		2,036
China		—		—		—		—		135		378		513
Colombia		—		—		—		—		—		445		445
Finland		—		—		—		—		102		—		102
France		22,871		28,924		6,864		734		330		991		60,714
Germany		22,613		1,019		9,287		1,037		968		—		34,924
Hong Kong		—		—		3,527		—		—		—		3,527
India		—		—		—		332		267		—		599
Italy		—		—		2,433		—		361		—		2,794
Japan		—		3,768		5,750		—		—		—		9,518
Republic of Korea		—		—		4,882		253		—		—		5,135
Luxembourg		—		—		275		—		1,768		—		2,043
Mexico		—		—		9,881		—		—		—		9,881
Netherlands		29,710		17,763		14,034		—		304		447		62,258
New Zealand		—		—		—		—		712		—		712
Philippines		—		—		—		—		—		288		288
Qatar		—		4,467		4,692		—		—		—		9,159
Russia		—		—		646		6,266		—		—		6,912
Saudi Arabia		—		—		1,802		—		—		—		1,802
South Africa		—		—		—		—		312		—		312
Spain		—		—		980		—		—		—		980
European Supranational		7,068		—		—		—		—		—		7,068
Taiwan		—		—		—		—		—		280		280
Thailand		—		—		—		—		—		212		212
United Arab Emirates		—		2,503		—		—		—		—		2,503
Total	$	88,692	$	58,444	$	69,659	$	12,190	$	7,766	$	3,041	$	239,792

On January 13, 2012, S&P downgraded the sovereign ratings of nine Eurozone countries, including France (from “AAA” to “AA+”), Austria (from “AAA” to “AA+”), and Spain (from “AA-” to “A”). If these downgrades were in effect at December 31, 2011, the total fair value of securities having a “AAA” rating in the foregoing table would have declined by $29.3 million, while securities having a “AA” rating would have increased by the same amount.

On February 15, 2012, Moody’s placed a “negative outlook” on the “AAA” rating of the United Kingdom. The Company had sovereign and non-sovereign securities of the United Kingdom with a total fair value of $167.3 million as of December 31, 2011.

In addition to the direct exposures above, the Company has indirect exposure to sovereign and non-sovereign investments held within certain alternative funds in its Other Investments. The Company has one investment in the Other Investments category in a hedge fund with a primary focus on European indebtedness, principally focused on the declining value of European sovereign indebtedness. The Company’s initial investment in the fund was $20.0 million and its fair market value as of December 31, 2011 was in excess of that amount. The remainder of the Company’s investment within its Other Investments do not have a primary investing focus on Europe or the sovereign indebtedness of lower rated nations outside of Europe. The Company has no unfunded European exposures.

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Liquidity and Capital Resources

Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries. Endurance Holdings relies primarily on dividends and other permitted distributions from its subsidiaries to pay its operating expenses, interest on debt and dividends on its Preferred Shares and common shares, if any. There are restrictions on the payment of dividends by Endurance Holdings’ operating subsidiaries to Endurance Holdings, which are described in more detail below.

The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. As of December 31, 2011, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $605.6 million without prior regulatory approval based upon the regulations of the Bermuda Insurance and Companies Acts. In addition, in December 2009, Endurance Holdings loaned Endurance Bermuda $300.0 million which was repaid by Endurance Bermuda in January 2011. In 2011, Endurance Holdings loaned a further $200 million to Endurance Bermuda which is callable on demand.

Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance. ARMtech is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2011, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions, and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends during 2012 without the prior approval of the applicable insurance regulator. At December 31, 2011, ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $3.9 million without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.

Under the jurisdiction of the United Kingdom’s Financial Services Authority (“FSA”), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The FSA regulatory requirements impose no explicit restrictions on Endurance U.K.’s ability to pay a dividend, but Endurance U.K. would have to notify the FSA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At December 31, 2011, Endurance U.K. did not have profits available for distributions.

Cash and Invested Assets. The Company’s aggregate invested assets, including fixed maturity investments, short-term investments, equity securities, Other Investments, cash and cash equivalents and pending securities transactions, as of December 31, 2011 totaled $6.3 billion compared to aggregate invested assets of $6.2 billion as of December 31, 2010. The increase in invested assets since December 31, 2010 resulted from collections of premiums on insurance policies and reinsurance contracts, investment income, the change in market value of invested assets and the issuance of preferred shares offset in part by losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid, interest and dividends paid, and the repurchase of the Company’s ordinary shares.

As of December 31, 2011 and 2010, the Company had pledged cash and cash equivalents and fixed maturity investments of $171.4 million and $143.6 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2011 and 2010, the Company had also pledged $517.2 million and $500.9 million of its cash and fixed maturity investments to meet collateral obligations for $447.3 million and $439.3 million in secured letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2011 and 2010, cash and fixed maturity investments with fair values of $370.4 million and $369.1 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $7.6 million and $10.7 million were on deposit with Canadian regulators, respectively.

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Cash Flows

		September 30,			September 30,			September 30,
	2011			2010			2009
	(U.S. dollars in thousands)
Net cash provided by operating activities	$	281,285		$	407,174		$	471,905
Net cash provided by (used in) investing activities		238,105			6,185			(782,161	)
Net cash used in financing activities		(234,102	)		(331,862	)		(233,854	)
Effect of exchange rate changes on cash and cash equivalents		(4,226	)		(589	)		11,060
Net increase (decrease) in cash and cash equivalents		281,062			80,908			(533,050	)
Cash and cash equivalents, beginning of year		609,852			528,944			1,061,994
Cash and cash equivalents, end of year	$	890,914		$	609,852		$	528,944

During 2011, our cash and cash equivalents increased $281.1 million to $890.9 million at December 31, 2011, compared to $609.9 million at December 31, 2010, and increased compared to $528.9 million of cash and cash equivalents held at December 31, 2009.

Cash flows provided by operating activities. Cash flows provided by operating activities for the year ended December 31, 2011 were $281.3 million compared to $407.2 million for the year ended December 31, 2010 and $471.9 million for the year ended December 31, 2009. The decrease in cash flows provided by operating activities during 2011 was primarily due to lower net income and higher claim payments which was partially offset by increased premium collections.

Cash flows provided by investing activities. During the twelve months ended December 31, 2011, cash flows provided by investing activities were $238.1 million, compared to cash flows provided by investing activities of $6.2 million for 2010 and cash flows used in investment activities of $782.2 million in 2009. The Company manages it investment portfolio to generate attractive economic returns and income while providing the Company with liquidity. Movements in financial markets and interest rates influence the timing of investment sales and purchases. The cash flows provided by investing activities in 2011 principally reflected $194.5 million in net proceeds from the sale and maturity of investments held within our investment portfolio, while 2010 reflected net sales and maturities of $6.3 million and 2009 reflected net purchases of $817.3 million.

Cash flows used in financing activities. Our cash flows used in financing activities for the twelve months ended December 31, 2011 were $234.1 million, compared to cash flows used in financing activities of $331.9 million and $233.9 million for 2010 and 2009, respectively. The 2011 cash flows used in financing activities decreased compared to 2010 principally due to the issuance of the Series B Preferred Shares by the Company in 2011.

During the years ended December 31, 2011 and 2010, the Company used its capital to repurchase its ordinary shares and share equivalents in open market and private transactions. On January 28, 2011, the Company repurchased 7,143,056 ordinary shares and options to purchase 10,000 ordinary shares from two affiliated funds of Perry Corp., a founding shareholder of Endurance. The aggregate repurchase price for the shares and the options was $321.5 million. The ordinary shares acquired by the Company represented approximately 15% of its ordinary shares outstanding at December 31, 2010. Endurance Holdings funded the repurchase of these shares primarily from calling an outstanding loan between Endurance Holdings and Endurance Bermuda. Endurance Bermuda funded the settlement of the loan from its existing cash and investments. The repurchase did not impact the disclosed dividend payment capacity of Endurance Bermuda as of December 31, 2011. During the three months ended December 31, 2011, the Company repurchased $0.5 million of its 6.15% Senior Notes due October 15, 2015.

Variable Delivery Forward. On September 11, 2007, Endurance Holdings entered into a variable delivery equity forward sale agreement under which Endurance Holdings was entitled to sell ordinary shares to an affiliate of Deutsche Bank Securities, Inc. for proceeds of approximately $150 million. The equity forward sale agreement was originally scheduled to be settled or terminate commencing on July 20, 2010. On June 18, 2010, Endurance Holdings, Deutsche Bank AG, London Branch and Deutsche Bank Securities Inc. entered into an agreement to terminate the equity forward sale agreement. The Company did not issue any of its ordinary shares in connection with the transaction, nor did the Company incur any early termination penalties in connection with the termination of the agreement.

Credit Facility. On May 8, 2007, Endurance Holdings amended its credit facility among Endurance Holdings, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent to, among other things, increase the size of the facility to $1,175 million from $925 million and to extend the maturity of the facility to May 8, 2012 (the “Credit Agreement”). On July 18, 2007, the Company entered into the First Amendment to the Credit Agreement, to, among other things, modify the restrictive covenants in the Credit Agreement to permit the Company to pay dividends on its preferred equity securities following the occurrence of certain defaults as defined pursuant to the terms of the Credit Agreement. As amended, the credit facility is referred to as the “2007 Credit Facility.”

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The full amount of the 2007 Credit Facility is available for revolving credit borrowings and for the issuance of letters of credit. The proceeds of the facility may be used for general corporate and working capital purposes, to finance potential acquisitions and for the repurchase of Endurance Holdings’ outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the facility, the Company may request that the size of the facility be increased by $500 million, provided that no participating lender is obligated to increase its commitments under the facility.

Up to $675 million of borrowings or letter of credit issuances under the 2007 Credit Facility may be collateralized by a portion of the investment portfolio of such subsidiary borrowing under the facility. The facility allows for the issuance of up to $200 million in multicurrency letters of credit and up to $300 million of fronted letters of credit that may also be multicurrency letters of credit. Endurance Holdings guarantees the obligations of its subsidiaries that are parties to the 2007 Credit Facility.

The interest rate for revolving loans under the 2007 Credit Facility is either (i) the higher of (a) the Federal Funds Effective Rate plus 0.5% and (b) the prime commercial lending rate of JPMorgan Chase Bank or (ii) LIBOR, plus additional interest ranging from 0.165% to 0.375% depending on the Company’s leverage ratio and if the loan is collateralized or uncollateralized. For letters of credit issued on a collateralized basis, the Company is required to pay a fee ranging from 0.165% to 0.29% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis, the Company is required to pay a fee ranging from 0.275% to 0.375% on the daily stated amount of such letters of credit. In addition, the 2007 Credit Facility requires the Company to pay to the lenders a facility fee and a utilization fee.

The 2007 Credit Facility requires the Company’s compliance with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a leverage ratio (no greater than 0.35:1.00 at any time) and a consolidated tangible net worth (no less than $1.4 billion at any time). In addition, each of the Company’s regulated insurance subsidiaries that have a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the facility generally restrict the declaration or payment of dividends on the Company’s common shares if the Company is already in default or the payment or declaration would cause a default under the terms of the facility.

The 2007 Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 2007 Credit Facility, the lenders can terminate their commitments under the credit facility, require repayment of any outstanding revolving loans, give notice of termination 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 security held by the lenders under the 2007 Credit Facility.

Contractual Obligations. At December 31, 2011, letters of credit totaling $447.3 million were outstanding, $199.5 million face value of 6.15% Senior Notes due October 15, 2015 (the “6.15% Senior Notes”) were outstanding and $335 million face value of 7% Senior Notes due July 15, 2034 (the “7% Senior Notes”) were outstanding.

The Company’s contractual obligations as of December 31, 2011 are summarized as follows:

		September 30,		September 30,		September 30,		September 30,		September 30,
	Payments due by period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
	(U.S. dollars in thousands)
Reserve for losses and loss expenses	$	3,824,244	$	1,331,823	$	1,120,194	$	550,905	$	821,322
6.15% Senior Notes		199,500		—		—		199,500		—
Interest on 6.15% Senior Notes		49,077		12,269		24,539		12,269		—
7% Senior Notes		335,000		—		—		—		335,000
Interest on 7% Senior Notes		539,350		23,450		46,900		46,900		422,100
Investment commitments(1)		18,061		18,061		—		—		—
Operating lease obligations(2)		70,857		13,701		21,152		12,575		23,429
Total	$	5,036,089	$	1,399,304	$	1,212,785	$	822,149	$	1,601,851

(1) The Company entered into investment agreements to invest additional amounts in Other Investments.

(2) The Company leases office space and office equipment under various operating leases.

The Company expects to fund these estimated obligations noted in the table above through operating cash flows and existing cash and investments.

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The following table summarizes the components of our capital resources at December 31, 2011 and 2010:

		September 30,			September 30,
	2011			2010
	(U.S. dollars in thousands)
Senior notes	$	528,001		$	528,324
Preferred shares		430,000			200,000
Common shareholders equity		2,181,165			2,648,153
Total capital resources(1)		3,139,166			3,376,477
Ratio of debt to total capital resources		16.8	%		15.6	%
Ratio of debt plus preferred shares to total capital resources		30.5	%		21.6	%

(1) The Company also has credit facility capacity of $727.7 million and $735.7 million as at December 31, 2011 and 2010 , respectively.

Credit Facility. As of December 31, 2011 and 2010, the Company had $447.3 million and $439.3 million, respectively, of letters of credit outstanding under the 2007 Credit Facility and no revolving loans outstanding. The Company was in compliance with all covenants contained in the 2007 Credit Facility as of December 31, 2011.

Senior Notes. On October 17, 2005, Endurance Holdings issued $200 million principal amount of 6.15% Senior Notes. The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%, and, unless previously redeemed, will mature on October 15, 2015. Endurance Holdings used net proceeds from the offering to repay the $143.5 million revolving loan then outstanding under the credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes. On December 16, 2011, the Company repurchased $0.5 million of its 6.15% Senior Notes due October 15, 2015.

On July 15, 2004, the Company issued $250 million principal amount of 7% Senior Notes. On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior Notes. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than the date of issue, the initial purchase price to the public and the first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with, the previously issued 7% Senior Notes. The 7% Senior Notes were offered by the underwriters at a price of 99.108% (original issuance) and 94.976% (additional issuance) of their principal amount, providing an effective yield to investors of 7.072% (original issuance) and 7.449% (additional issuance) and, unless previously redeemed, will mature on July 15, 2034.

The 6.15% Senior Notes and the 7% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings’ existing and future unsecured and unsubordinated debt. The Senior Notes are also effectively junior to claims of creditors of Endurance Holdings’ subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.

The indentures governing the Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness.

At December 31, 2011, the carrying value of the Senior Notes stood at $528.0 million while the fair value as determined by quoted market valuation was $535.3 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2011.

Given that the Company’s Senior Notes and the 2007 Credit Facility contain cross default provisions, the risk exists that the holders of the Senior Notes and the lenders under the credit facility may declare such debt due and payable, which could result in an acceleration of all debt due under both the Senior Notes and the 2007 Credit Facility. If this were to occur, the Company may not have liquid funds sufficient to repay any or all of such indebtedness.

Preferred Shares. On October 10, 2005, Endurance Holdings issued 8,000,000 shares of its 7.75% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”) and on June 1, 2011, Endurance Holdings issued 9,200,000 shares of its 7. 5% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”). The Series A Preferred Shares and Series B Preferred Shares sold were registered under the Securities Act of 1933, as amended, and are traded on the New York Stock Exchange. The Series A Preferred Shares and Series B Preferred Shares were both issued at a price to the public of $25.00 per share. Endurance Holdings received net proceeds of $193.5 million from its offering of Series A Preferred Shares and $224.0 million from its offering of Series B Preferred Shares, in each case after expenses and underwriting discounts. The proceeds from both offerings were used to provide additional capital to Endurance Holdings’ subsidiaries and for other general corporate purposes.

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The Series A Preferred Shares and Series B Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after December 15, 2015 (in the case of the Series A Preferred Shares) and after June 1, 2016 (in the case of the Series B Preferred Shares) in each case at a redemption price of $25.00 per share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series A Preferred Shares or Series B Preferred Shares before their respective redemption dates at a redemption price of $26.00 per share, plus any declared and unpaid dividends, to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series A Preferred Shares or Series B Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction or change in Bermuda law.

Dividends on the Series A Preferred Shares and Series B Preferred Shares, when, as and if declared by the Board of Directors of Endurance Holdings or a duly authorized committee of the board, accrue and are payable on the liquidation preference amount from the original issue date, quarterly in arrears on each dividend payment date, at an annual rate of 7.75% in the case of the Series A Preferred Shares and an annual rate of 7.5% in the case of the Series B Preferred Shares. Dividends on the Series A Preferred Shares and Series B Preferred Shares are not cumulative.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of Endurance Holdings, holders of the Series A Preferred Shares, Series B Preferred Shares and any parity shares are entitled to receive out of Endurance Holdings’ assets available for distribution to shareholders, before any distribution is made to holders of Endurance Holdings’ common equity securities, a liquidating distribution in the amount of $25 per Series A Preferred Share and Series B Preferred Share, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Distributions will be made pro rata as to the Series A Preferred Shares, Series B Preferred Shares and any parity shares and only to the extent of Endurance Holdings’ assets, if any, that are available after satisfaction of all liabilities to creditors.

In conjunction with the issuance by the Company of the Series A Preferred Shares, the Company entered into a “Declaration of Covenant” for the benefit of the holders of the 7% Senior Notes. The Covenant states that the Company will redeem its Series A Preferred Shares only if the total redemption price is less than or equal to the proceeds Endurance Holdings or its subsidiaries have received during the six months prior to the date of such redemption from the sale of certain qualifying securities that, among other things, are, with limited exceptions, pari passu with or junior to the Series A Preferred Shares upon the Company’s liquidation, dissolution or winding-up; perpetual, or have a mandatory redemption or maturity date that is not less than sixty years after the initial issuance of such securities; and provide for dividends or other income distributions that are non-cumulative.

Holders of the Series A Preferred Shares and the Series B Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares or the Series B Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings’ bye-laws.

On an ongoing basis, the Company expects its internally generated funds, together with borrowings available under the 2007 Credit Facility, capital generated from the offering and sale of its Senior Notes, Series A Preferred Shares, Series B Preferred Shares and ordinary shares, to be sufficient to operate its business. However, there can be no assurance that the Company will not incur additional indebtedness or issue additional equity or hybrid securities in order to implement its business strategy or pay claims.

Currency and Foreign Exchange

The Company’s functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all entities is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K which was valued at £93.5 million as of December 31, 2011. Endurance U.K. is subject to the United Kingdom’s Financial Services Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.’s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company’s results of operations.

Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.

Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.

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For the year ended December 31, 2011, 11.3% of the Company’s gross premiums were written in currencies other than the U.S. dollar. The portions of our cash and cash equivalents, investments and reserves for loss and loss expenses denominated in non-U.S. currencies at December 31, 2011 were approximately 29%, 3% and 13%, respectively. As of December 31, 2011, the Company’s principal foreign currency exposures are denominated in Japanese Yen and British Sterling. The Company measures and manages its exposure in these currencies, among others, by monitoring its estimated gross and net asset positions. In order to estimate such exposures, the Company considers currency specific investments, cash and cash equivalents, premiums receivable, reserve for losses and loss expenses, and unearned premiums. The total estimated gross asset and net liability balances denominated in Japanese Yen were $50.2 million and $106.9 million, respectively. The total estimated gross and net asset balances denominated in British Sterling were $199.0 million and $129.5 million, respectively. Assuming all other variables are held constant and disregarding any tax effects, a 10% change in the U.S. dollar relative to these currencies could result in a $2.3 million increase or decrease in the net assets held by the Company at December 31, 2011.

Effects of Inflation

The effects of inflation could cause the severity of claims to rise in the future. The Company’s estimates for losses and loss expenses include assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, the Company will be required to increase the reserve for losses and loss expenses with a corresponding reduction in its earnings in the period in which the deficiency is identified. In addition, inflation could lead to higher interest rates causing the current unrealized gain position on the Company’s fixed maturity portfolio to decrease. The current short duration of the Company’s fixed maturity portfolio has the potential to help reduce the negative effects of higher interest rates on the Company’s fixed income portfolio. The Company may also choose to hold its fixed maturity portfolio to maturity which would result in the unrealized gains largely amortizing through net investment income.

Reserve for Losses and Loss Expenses

Reserving Process

The Company establishes loss and loss expense reserves to provide for the estimated costs of paying claims under insurance policies and reinsurance contracts underwritten by the Company. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported and include estimates of all expenses associated with processing and settling these claims. Estimating the ultimate cost of future claims and claim adjustment expenses is an uncertain and complex process. This estimation process is based largely on the assumption that past developments are an appropriate predictor of future events and involves a variety of actuarial techniques and judgments that analyze experience, trends and other relevant factors.

The Company’s reserving actuaries, who are independent of the Company’s business units, review the Company’s loss and loss expense reserves on a quarterly basis for both current and prior accident years using the most current claims data. These reserve reviews incorporate a variety of actuarial methods and judgments, including the three most common methods of actuarial evaluation used within the insurance industry: the expected loss ratio method; the Bornhuetter-Ferguson method; and the loss development method. The expected loss ratio approach is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). The Bornhuetter-Ferguson method involves the application of selected loss ratios to the Company’s earned premiums to determine estimates of ultimate expected unpaid claims and claims expenses for each underwriting year. When the IBNR reserves are added to the losses and loss expenses amounts with respect to claims that have been reported to date, an estimated ultimate expected loss results. The Company believes that this method provides a more stable estimate of IBNR reserves that is insulated from wide variations in reported losses. In contrast, the loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. The Company uses these multiple methods, supplemented with its own actuarial and professional judgment, to establish its best estimate of loss and loss expense reserves.

The estimate of the reserve for losses and loss expenses is reviewed each quarter by the Company’s Loss Reserve Committee, consisting of the Company’s Chief Executive Officer, President, Chief Financial Officer, Chief Actuary and representatives of various disciplines from within the Company, such as claims, underwriting and legal.

Current Reserve for Losses and Loss Expenses

In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the key lines of business within each business segment are aggregated based on their potential expected length of loss emergence. The period over which loss emergence occurs is typically referred to as the tail. The Company has classified its lines of business as either having a “short,” “long” or “other” tail pattern. The Company views short tail business as that for which development typically emerges within a period of several quarters while long tail business would emerge over many years. The Company’s short tail lines of business in the Insurance segment includes property; long tail lines of business include casualty, healthcare liability, professional lines and surety and other specialty; and other tail lines of business include certain specialty lines of business for which loss emergence is considered unique in nature, such as the Company’s agriculture insurance

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business. The Company’s short tail lines of business in the Reinsurance segment include catastrophe, property, aerospace and marine and surety while the long tail line of business is casualty related business. Within the Company’s Reinsurance segment, the Company writes certain specialty lines of business for which the loss emergence is considered unique in nature and thus, has been included as “other” in the table below.

As more fully described under “Reserving Process” above, the Company incorporates a variety of actuarial methods and judgments in its reserving process. Two key inputs in the various actuarial methods employed by the Company are initial expected loss ratios and expected loss reporting patterns. These key inputs impact the potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company’s business segments. The Company’s loss and loss expense reserves consider and reflect, in part, deviations resulting from differences between expected loss and actual loss reporting as well as judgments relating to the weights applied to the reserve levels indicated by the actuarial methods. Expected loss reporting patterns are based upon internal and external historical data and assumptions regarding claims reporting trends over a period of time that extends beyond the Company’s own operating history.

Differences between actual reported losses and expected losses are anticipated to occur in any individual period and such deviations may influence future initial expected loss ratios and/or expected loss reporting patterns as recent actual experience becomes part of the historical data utilized as part of the ongoing reserve estimation process. The Company has demonstrated the impact of changes in the speed of loss reporting patterns, as well as changes in expected loss ratios, within the table under the heading “Potential Variability in Reserves for Losses and Loss Expenses” below.

Losses and loss expenses for the year ended December 31, 2011 are summarized as follows:

		September 30,		September 30,			September 30,
	Incurred related to:					Total incurred
	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	48,071	$	(18,738	)	$	29,333
Long tail		267,956		(17,467	)		250,489
Other		519,871		(34,574	)		485,297
Total Insurance		835,898		(70,779	)		765,119
Reinsurance segment:
Short tail		737,376	$	(89,764	)		647,612
Long tail		225,107		(15,541	)		209,566
Other		14,263		(3,894	)		10,369
Total Reinsurance		976,746		(109,199	)		867,547
Totals	$	1,812,644	$	(179,978	)	$	1,632,666

Losses and loss expenses for the year ended December 31, 2011 include $180.0 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2011 year benefited the Company’s 2011 reported loss ratio by approximately 9.3 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company’s reserve categories within both the Insurance and Reinsurance segments.

For the year ended December 31, 2011, for the vast majority of our business, the Company did not materially alter the two key inputs it utilizes to establish its reserve for losses and loss expenses, initial expected loss ratios or loss reporting patterns, for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2011 for those reserve categories were within the range of possible results anticipated by the Company.

Insurance

Short Tail Insurance. The favorable loss emergence within the short tail insurance reserve category during 2011 was primarily due to lower than expected claims reported and favorable case reserve development related to the property line of business.

Long Tail Insurance. The favorable loss emergence within the long tail insurance reserve category during 2011 was primarily due to lower than expected claims activity within the Bermuda based healthcare liability, casualty and professional lines of business. This favorable loss emergence was partially offset by adverse development within the U.S. based workers’ compensation line of business (which the Company exited in 2009) as well as other U.S. based casualty business.

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Other Insurance. The favorable loss emergence within this reserve category resulted from lower than anticipated agriculture claims settlements for the 2010 crop year.

Reinsurance

Short Tail Reinsurance. The Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity and favorable case reserve development within the catastrophe and surety and other specialty lines of business.

Long Tail Reinsurance. The Company recorded favorable prior period development within this reserve category primarily due to lower than expected claims reported within the casualty line of business.

Other Reinsurance. The Company recorded a modest amount of favorable prior period development in this reserve category due to lower than expected claims reported within the agriculture line of business.

Losses and loss expenses for the year ended December 31, 2010 are summarized as follows:

		September 30,		September 30,			September 30,
	Incurred related to:					Total incurred
	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	27,615	$	(21,349	)	$	6,266
Long tail		272,223		(11,649	)		260,574
Other		305,073		(13,873	)		291,200
Total Insurance		604,911		(46,871	)		558,040
Reinsurance segment:
Short tail		348,327	$	(68,865	)		279,462
Long tail		200,415		(7,700	)		192,715
Other		11,249		(3,366	)		7,883
Total Reinsurance		559,991		(79,931	)		480,060
Totals	$	1,164,902	$	(126,802	)	$	1,038,100

Losses and loss expenses for the year ended December 31, 2010 include $126.8 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2010 year benefited the Company’s 2010 reported loss ratio by approximately 7.3 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company’s reserve categories within both the Insurance and Reinsurance segments.

For the year ended December 31, 2010, for the vast majority of our business, the Company did not materially alter the two key inputs it utilizes to establish its reserve for losses and loss expenses, initial expected loss ratios or loss reporting patterns, for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2010 for those reserve categories were within the range of possible results anticipated by the Company. For the insurance workers’ compensation line of business we increased our prior initial expected loss ratios and for the Bermuda based Healthcare insurance line we decreased our prior initial expected loss ratios to recognize the emerging loss experience within those lines.

Insurance

Short Tail Insurance. The prior year favorable loss development in the short tail insurance reserve category during 2010 was primarily as a result of lower than expected claims reported and favorable case reserve development in the Company’s property line of business. As a result, the Company reduced its estimated losses and loss expenses related to prior years in this reserve category during 2010.

Long Tail Insurance. The favorable loss emergence within the long tail insurance reserve category during 2010 was primarily due to lower than expected claims activity and favorable case settlement within the Bermuda based healthcare liability, casualty and professional lines of business. This favorable loss emergence was partially offset by adverse loss development in the U.S. based primary and excess casualty and the workers’ compensation line of business. The Company exited the workers’ compensation business in 2009.

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Other Insurance. Lower than anticipated claims settlements for the 2009 crop year resulted in a reduction in prior years’ estimated loss and loss expenses within this reserve category during 2010.

Reinsurance

Short Tail Reinsurance. The Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity and favorable case reserve development within the catastrophe, property, and surety and other specialty lines of business.

Long Tail Reinsurance. The Company recorded a modest amount of favorable prior period development within this reserve category overall, primarily within the casualty line of business due to lower than anticipated claim activity.

Other Reinsurance. The Company recorded a modest amount of favorable prior period development in this reserve category due to lower than expected claims reported within the agriculture line of business.

Reserves for losses and loss expenses were comprised of the following at December 31, 2011:

		September 30,		September 30,		September 30,
	Case Reserves		IBNR Reserves		Reserve for Losses and Loss Expenses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	31,408	$	26,313	$	57,721
Long tail		404,377		1,219,844		1,624,221
Other		203,844		51,757		255,601
Total Insurance		639,629		1,297,914		1,937,543
Reinsurance segment:
Short tail		497,218		405,274		902,492
Long tail		284,619		694,788		979,407
Other		403		4,379		4,782
Total Reinsurance		782,240		1,104,441		1,886,681
Totals	$	1,421,869	$	2,402,355	$	3,824,224

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Reserves for losses and loss expenses were comprised of the following at December 31, 2010:

		September 30,		September 30,		September 30,
	Case Reserves		IBNR Reserves		Reserve for Losses and Loss Expenses
	(U.S. dollars in thousands)
Insurance segment:
Short tail	$	14,730	$	30,600	$	45,330
Long tail		325,750		1,167,648		1,493,398
Other		116,687		74,178		190,865
Total Insurance		457,167		1,272,426		1,729,593
Reinsurance segment:
Short tail		319,322		351,428		670,750
Long tail		248,870		658,514		907,384
Other		990		11,210		12,200
Total Reinsurance		569,182		1,021,152		1,590,334
Totals	$	1,026,349	$	2,293,578	$	3,319,927

Selected quarterly activity in the reserve for losses and loss expenses for the year ended December 31, 2011 is summarized as follows:

		September 30,			September 30,			September 30,			September 30,			September 30,
	Quarter Ended March 31,			Quarter Ended June 30,			Quarter Ended September 30,			Quarter Ended December 31,			Year Ended December 31,
	2011			2011			2011			2011			2011
	(U.S. dollars in thousands)
Incurred related to:
Current year	$	450,558		$	406,751		$	501,104		$	454,231		$	1,812,644
Prior years		(48,705	)		(44,781	)		(44,413	)		(42,079	)		(179,978	)
Total incurred	$	401,853		$	361,970		$	456,691		$	412,152		$	1,632,666
Paid related to:
Current year	$	(2,958	)	$	(66,741	)	$	(251,364	)	$	(529,069	)	$	(850,132	)
Prior years		(180,454	)		(151,826	)		(131,822	)		(156,029	)		(620,131	)
Total paid	$	(183,412	)	$	(218,567	)	$	(383,186	)	$	(685,098	)	$	(1,470,263	)

The following table represents the development of GAAP balance sheet reserve for losses and loss expenses, net of losses and loss expenses recoverable, for 2002 through December 31, 2011. This table does not present accident or policy year development data. The top line of the table shows the gross and net reserve for losses and loss expenses at the balance sheet date for each of the indicated years. This represents the estimated amounts of gross and net losses and loss expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “cumulative redundancy” represents the aggregate change to date from the original estimate.

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The table also shows the cumulative paid amounts as of successive years with respect to the reserve liability. All amounts reflect the conversion from the original currency of the underlying business if not initially denominated in U.S. dollars. The data in the table has been restated using the rate of exchange to U.S. dollars as of December 31, 2011. Information presented herein may differ materially from that reported in the Company’s financial statements due to differences in foreign currency exchange rates.

		xx		xx			xx			xx			xx			xx			xx			xx			xx			xx
Years Ended Dec. 31,	2002		2003			2004			2005			2006			2007			2008			2009			2010			2011
	(U.S. dollars in thousands)
Gross reserve for losses and loss expenses	$	200,840	$	833,158		$	1,549,661		$	2,603,590		$	2,701,686		$	2,892,224		$	3,235,456		$	3,157,026		$	3,319,927		$	3,824,224
Less: Loss recoverable		—		(1,442	)		(12,203	)		(17,248	)		(44,244	)		(187,354	)		(557,834	)		(467,664	)		(319,349	)		(666,928	)
Net reserve for losses and loss expenses	$	200,840	$	831,716		$	1,537,458		$	2,586,342		$	2,657,442		$	2,704,870		$	2,677,622		$	2,689,362		$	3,000,578		$	3,157,296
Net reserve estimated as of:
1 year later		164,923		695,036			1,374,996			2,528,603			2,498,055			2,548,330			2,526,733			2,562,560			2,820,600			—
2 years later		143,295		629,925			1,305,424			2,467,734			2,356,210			2,464,893			2,396,200			2,436,531			—			—
3 years later		153,179		607,614			1,256,798			2,371,899			2,277,847			2,284,478			2,317,976			—			—			—
4 years later		147,977		589,425			1,199,472			2,321,813			2,119,160			2,192,337			—			—			—			—
5 years later		140,225		568,421			1,152,412			2,194,657			2,054,334			—			—			—			—			—
6 years later		136,086		544,127			1,076,060			2,147,534			—			—			—			—			—			—
7 years later		124,048		513,050			1,058,305			—			—			—			—			—			—			—
8 years later		111,547		501,355			—			—			—			—			—			—			—			—
9 years later		112,547		—			—			—			—			—			—			—			—			—
10 years later		—		—			—			—			—			—			—			—			—			—
Cumulative redundancy		88,293		330,361			479,153			438,808			603,108			512,533			359,646			252,831			179,978			—
Cumulative paid losses
1 year later		39,165		118,907			300,393			686,670			615,891			545,452			398,245			428,762			616,642			—
2 years later		56,250		183,199			452,467			1,113,575			925,754			838,149			805,061			777,511			—			—
3 years later		60,727		237,182			570,057			1,337,933			1,137,231			1,111,054			1,038,079			—			—			—
4 years later		76,490		280,816			646,254			1,483,319			1,274,681			1,257,101			—			—			—			—
5 years later		77,531		314,668			705,305			1,584,047			1,351,751			—			—			—			—			—
6 years later		85,835		340,366			753,149			1,632,828			—			—			—			—			—			—
7 years later		92,937		370,472			801,930			—			—			—			—			—			—			—
8 years later		94,946		384,111			—			—			—			—			—			—			—			—
9 years later		95,590		—			—			—			—			—			—			—			—			—
10 years later		—		—			—			—			—			—			—			—			—			—

The following table reconciles cumulative paid losses per the table above to the cumulative paid losses reported in the Company’s audited financial statements.

		xxx		xxx			xxx		xxx		xxx		xxx		xxx		xxx			xxx
Years Ended December 31,	2002		2003			2004		2005		2006		2007		2008		2009			2010
	(U.S. dollars in thousands)
Cumulative paid losses	$	39,165	$	118,907		$	300,393	$	686,670	$	615,891	$	545,452	$	398,245	$	428,762		$	616,642
Cumulative paid losses due to foreign exchange		1,367		(348	)		6,683		32,522		45,705		30,478		8,597		(9,631	)		3,489
Cumulative paid losses excluding the impact of foreign exchange	$	40,532	$	118,559		$	307,076	$	719,192	$	661,596	$	575,930	$	406,842	$	419,131		$	620,131

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Potential Variability in Reserves for Losses and Loss Expenses

The Company’s estimated reserve for losses and loss expenses can change over time because of unexpected changes in the external business environment in which the Company operates or changes in internal Company operations. For a discussion of the factors which can contribute to uncertainty in the reserving process and volatility in the reserve for losses and loss expenses, see “Critical Accounting Estimates – Reserves for Losses and Loss Expenses” above.

Two key inputs utilized in determining loss and loss expense reserves for the Company’s two business segments are the initial expected loss ratio and the speed of the loss reporting pattern. The following tables illustrate the possible percentage effects on current estimates of the reserve for losses and loss expenses due to 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern as of December 31, 2011. The 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern in the tables below were chosen consistent with commonly accepted actuarial practice, due to the Company’s limited empirical data regarding loss and loss expense reserves variability. In order to capture the key dynamics of loss development and expected volatility that may arise within the disclosed amounts for the reserve for losses and loss expenses, the lines of business within each business segment are aggregated based on their potential expected length of loss emergence or tail.

Insurance

Short Tail

Potential Percentage Change in Total Loss and Loss Expense Reserves

		September 30,			September 30,			September 30,
	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(6.9	)%		(4.9	)%		(2.8	)%
Unchanged		(0.4	)%		—	%		5.1	%
10% Slower		12.2	%		16.4	%		20.5	%

Long Tail

Potential Percentage Change in Total Loss and Loss Expense Reserves

		September 30,			September 30,			September 30,
	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(7.6	)%		(3.8	)%		—	%
Unchanged		(4.2	)%		—	%		4.1	%
10% Slower		(0.6	)%		4.0	%		8.5	%

Other

Potential Percentage Change in Total Loss and Loss Expense Reserves

		September 30,			September 30,			September 30,
	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(3.3	)%		—	%		3.3	%
Unchanged(1)		(3.3	)%		—	%		3.3	%
10% Slower		(3.3	)%		—	%		3.3	%

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Reinsurance

Short Tail

Potential Percentage Change in Total Loss and Loss Expense Reserves

		September 30,			September 30,			September 30,
	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(5.0	)%		(3.9	)%		(2.9	)%
Unchanged		(0.9	)%		—	%		2.1	%
10% Slower		5.8	%		8.1	%		10.3	%

Long Tail

Potential Percentage Change in Total Loss and Loss Expense Reserves

		September 30,			September 30,			September 30,
	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(4.0	)%		(1.9	)%		0.2	%
Unchanged		(1.9	)%		—	%		2.8	%
10% Slower		0.2	%		2.7	%		5.3	%

Other

Potential Percentage Change in Total Loss and Loss Expense Reserves

		September 30,			September 30,			September 30,
	Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(8.5	)%		(2.1	)%		4.3	%
Unchanged		(6.6	)%		—	%		6.6	%
10% Slower		(0.4	)%		6.9	%		14.2	%

(1) The Other reserve category of the Insurance segment includes agricultural business written by the Company. Reporting pattern changes are not applicable to the agricultural business as it is typically settled at an established time each year.

Each of the impacts set forth in the tables above is estimated individually, without consideration for any correlation among key assumptions or among lines of business. Therefore, it would be inappropriate to take each of the amounts set forth above and add them together in an attempt to estimate volatility for the Company’s loss and loss expense reserves in total. The Company believes the assumed variations in loss and loss expense reserves by individual development tail set forth in the tables above represents a reasonable estimate of the possible loss and loss expense reserve variations by individual development tail that may occur in the future. It is important to note that the variations set forth in the tables above are not meant to be a “best-case” or “worst-case” series of scenarios, and therefore, it is possible that future variations may be more or less than the amounts set forth above.

Ceded Reinsurance

Ceded premiums written were $487.3 million for the year ended December 31, 2011, $289.5 million for the year ended December 31, 2010 and $415.4 million for the year ended December 31, 2009. The increase in ceded premiums written was due to decreased retentions in our U.S. insurance operations, specifically related to the agriculture, property, casualty and professional lines. The Company’s U.S. and Bermuda insurance operating subsidiaries use proportional and excess reinsurance to protect larger limits on certain business written by this segment. Our agriculture line of business participates in a crop reinsurance program sponsored by the U.S. federal government. Excess reinsurance coverage is often purchased in relation to the property insurance line to protect against catastrophic events.

At December 31, 2011 and 2010, the Company had reinsurance recoverables of $666.9 million and $319.3 million, respectively, related to its ceded reinsurance agreements. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded related to the agriculture line of business. Accordingly, the Company has evaluated the reinsurers and retrocessionaires that are providing reinsurance and retrocessional protection and will continue to monitor the stability of its reinsurers and retrocessionaires. The Company has an allowance of $0.1 million for estimated uncollectible reinsurance recoverable balances at December 31, 2011 (2010—Nil).

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Goodwill and Intangible Assets

Goodwill and other intangibles that arise from business combinations are accounted for by the Company in accordance with the applicable accounting guidance on “Business Combinations” and “Goodwill and Other Intangible Assets.” The accounting literature requires that identifiable intangible assets are amortized in accordance with their useful lives and goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually.

The Company’s intangible assets and goodwill are tested at least annually for impairment and more often if a triggering event is deemed to have occurred. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The Company’s reporting units identified include the agriculture line of the Insurance segment, the remaining Insurance segment lines of business, and the Reinsurance segment. The fair value of the reporting unit is impacted by the performance of the business. The Company uses discounted cash flow analyses to estimate fair value. There have been no changes in the Company’s methodologies from the prior year. If it is determined that the goodwill has been impaired, the Company must write down the goodwill by the amount of the impairment, with a corresponding charge to net income.

During the fourth quarter of 2011, the Company performed its annual impairment testing of goodwill. The Company has two primary sources of goodwill – goodwill obtained from a renewal rights transaction completed in 2003 with HartRe and goodwill obtained from the Company’s acquisition of ARMtech in 2007. The Company determined that the appropriate reporting units for evaluation were the Reinsurance segment in relation to HartRe goodwill and the agriculture line of business of the Insurance segment. The Company used a discounted cash flow approach to estimate the fair value of these reporting units. The fair value determined was in excess of the carrying value including goodwill for both transactions noted. As a result of the impairment testing, no write-downs were deemed necessary at December 31, 2011 and 2010.

Income Taxes

The Company is subject to income taxes on the operations of its subsidiaries and branch offices in the United States, United Kingdom, Switzerland, Singapore and Canada. The Company is not required to pay any income or capital gains taxes on its operations in Bermuda.

The Company’s income tax benefit (expense) was as follows for the years ended December 31, 2011, 2010 and 2009, respectively:

		September 30,		September 30,			September 30,
	2011		2010			2009
	(U.S. dollars in thousands)
Current income tax benefit (expense)	$	13,518	$	(28,556	)	$	6,081
Deferred income tax benefit		9,488		21,396			5,327
Income tax benefit (expense)	$	23,006	$	(7,160	)	$	11,408

Of the 2011 current income tax benefit (expense), $12.7 million related to taxes incurred in the United States (2010 – $(27.7) million; 2009 – $6.5 million). Of the deferred income tax benefit, $9.6 million related to deferred income tax benefits in the United States (2010 – $21.4 million; 2009 – $5.3 million). A full valuation allowance has been recorded against the net asset position of Endurance Bermuda’s foreign branches and Endurance U.K.

Income tax refunds received in 2011 totaled $15.7 million. The Company paid income taxes and received refunds totaling $24.3 million and $6.8 million for the years ended December 31, 2010 and 2009, respectively. Net operating loss carryforwards in the amount of $45.5 million, $59.1 million, $41.6 million, and $26.7 million are available for application against future taxable income in the United States, United Kingdom, Singapore and Switzerland respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carry forwards expire through 2018 and 2031, respectively. There were no income taxes payable in the United Kingdom as at December 31, 2011 or 2010.

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The Company’s (loss) income before income taxes (benefits) was distributed as follows for the years ended December 31, 2011, 2010 and 2009, respectively:

		September 30,			September 30,		September 30,
	2011			2010		2009
	(U.S. dollars in thousands)
U.S. (domestic)	$	(125,752	)	$	88,147	$	26,832
Non-U.S. (foreign)		9,012			283,751		497,864
Pre-tax (loss) income	$	(116,740	)	$	371,898	$	524,696

Gross premiums written and earned by our non-U.S. and U.S. operations generally do not bear a proportionate relationship to the respective pre-tax (loss) income of these operations. The disproportionate relationship between gross premium written and net (loss) income between our operations occurs as a result of various factors, including but not limited to the differences in the underlying type of business underwritten, the underwriting profitability attributable to such business, and the applicable investment income generated.

Pre-tax (loss) income for our non-U.S. operations was favorable compared to U.S. operations for the year ending December 31, 2011 because our U.S. operations were impacted by losses resulting from severe drought conditions within our agriculture line of business which is underwritten by the Company’s ARMtech U.S. subsidiary. Pre-tax income for our non-U.S. operations was higher compared to our U.S. operations for the years ending December 31, 2010 and 2009 primarily as a result of the more volatile catastrophe business underwritten in our non-U.S. operations during these periods being relatively free of losses and thus generating higher levels of net underwriting income than our U.S. operations, which underwrite less volatile business and as a result produce lower levels of net underwriting income in benign loss years. In addition, our non-U.S. operations hold a substantial amount of our invested assets and thus a larger portion of the Company’s investment income is earned in our non-U.S. operations as compared to our U.S. operations.

In February 2012, the IRS notified the Company that it would be conducting an audit of the Company’s U.S. subsidiaries’ 2010 tax return. In addition, the Canada Revenue Agency has commenced an examination of income tax returns for 2008 and 2009 for the Canadian branch of one of the Company’s U.S. subsidiaries. Due to the uncertainty of the outcome of these audits, the Company cannot estimate the range of reasonably possible changes to its unrecognized tax benefits at this time. The Company does not expect to receive any adjustments that would result in a material change to its financial position.

None of the Company’s other subsidiaries or branch operations are under an examination in any of the jurisdictions in which they operate, but they generally remain subject to examination for tax years 2007—2011. As of December 31, 2011 and 2010, the Company had no uncertain tax positions.

Deferred Tax Assets and Liabilities

The Company is subject to income taxes in certain jurisdictions in which the Company operates; however, since the majority of the Company’s income is currently earned in Bermuda, a jurisdiction with no corporate income tax, the tax impact to the Company’s operations has historically been minimal. In 2011, the Company generated cumulative losses before income taxes in its subsidiaries, which generated a consolidated (19.7)% effective income tax rate. In 2010, certain subsidiaries of the Company in the U.S. generated taxable income largely contributing to the Company’s income tax expense.

The Company’s balance sheet at December 31, 2011 contains a net deferred tax asset in the amount of $33.4 million (2010—$33.7 million deferred tax asset). The current year net deferred tax asset consists of gross deferred tax assets of $150.1 million, gross deferred tax liabilities of $85.4 million and a valuation allowance of $31.4 million. Of the Company’s gross deferred tax assets, $41.6 million (2010—$24.1 million) relates to net operating loss carryforwards that are available to offset future taxable income generated by the Company’s subsidiaries. The Company’s net operating losses may be carried forward indefinitely in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carryforwards expire through 2018 and 2031, respectively.

The Company has established a valuation allowance of $31.4 million (2010—$13.6 million) against certain operating loss carryforwards at December 31, 2011. The $31.4 million valuation allowance was established against net operating loss carryforwards in the Company’s United States subsidiaries, United Kingdom subsidiary and non-U.S. branches. The valuation allowance in 2010 was established against net operating loss carryforwards in the United Kingdom and non-U.S. branches. The increase in the valuation allowance was charged to the Company’s income tax expense during 2011. Management believes the net deferred tax assets, less the valuation allowance noted, are more likely than not to be fully realized in corresponding future periods, and the Company’s net deferred tax asset has been stated appropriately as at December 31, 2011. In the event that management determines in the future that it is more likely than not that the net deferred tax assets will not be fully realized in the near term and prior to their expiration, the Company will reassess the valuation allowance against the net deferred tax assets and record any changes to income tax expense in the period determined.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The following is a discussion of our primary market risk exposures at December 31, 2011. Our policies to address these risks in 2011 were not materially different from 2010. The Company believes that it is principally exposed to seven types of market risk: interest rate risk, liquidity risk, foreign currency risk, credit risk, equity price risk, derivative counterparty credit risk and inflation.

Interest Rate Risk. The Company’s primary market risk exposure is to changes in interest rates. The Company’s fixed investment portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, the market value of our fixed maturity portfolio generally falls, and the converse is generally also true. The Company manages its interest rate risk through an asset liability matching strategy that involves the selection of investments with appropriate characteristics, such as duration, yield, currency and liquidity that are tailored to the anticipated cash outflow characteristics of our liabilities to create a match of assets and liabilities. The long-term target duration of the assets comprising the fixed maturity portfolio versus liabilities (including reserves for losses and loss expenses) was approximately 2.75 years for the majority of 2011. Our target duration for managed assets was 2.75 years at December 31, 2011. A significant portion of the investment portfolio matures each quarter, allowing for reinvestment at current market rates. As of December 31, 2011, assuming parallel shifts in interest rates, the impact of these interest rate shifts in basis points on the Company’s cash and fixed maturity portfolio of $5,790.7 million at December 31, 2011 would have been as follows:

		September 30,			September 30,			September 30,			September 30,			September 30,
	Interest Rate Shift in Basis Points
December 31, 2011	-100			-50			-			50			100
	(U.S. dollars in millions)
Total market value	$	5,875.6		$	5,846.2		$	5,790.7		$	5,725.6		$	5,659.6
Market value change from base		1.47	%		0.96	%		—	%		(1.12	)%		(2.26	)%
Change in unrealized value	$	84.9		$	55.5		$	—		$	(65.1	)	$	(131.1	)

In addition, we consider the effect of credit spread movements on the market value of our fixed maturities, short-term investments and certain of our Other Investments accounted for using the equity method which invest in fixed maturity securities and the corresponding change in unrealized appreciation. As credit spreads widen, the market value of our fixed maturity securities falls, and the converse is also true.

The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on the Company’s cash and fixed maturity portfolio at December 31, 2011:

		September 30,			September 30,			September 30,			September 30,			September 30,
	Credit Spread Shift in Basis Points
December 31, 2011	-100			-50			-			50			100
	(U.S. dollars in millions)
Total market value	$	5,901.1		$	5,845.9		$	5,790.7		$	5,736.1		$	5,680.3
Market value change from base		1.91	%		0.95	%		—	%		(0.94	)%		(1.91	)%
Change in unrealized value	$	110.4		$	55.2		$	—		$	(54.6	)	$	(110.4	)

Another method used by the Company to evaluate portfolio risk is Value-at-Risk (“VaR”). VaR is a probabilistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. Portfolio risk, as measured by VaR, is affected by four primary risk factors: asset concentration, asset volatility, asset correlation and systematic risk. For a one year period over 95% of the time, assuming the risks taken into account in the VaR model perform per their historical tendencies, the portfolio loss for this year period is expected to be less than or equal to 2.77% at December 31, 2011.

The Company’s Other Investments are exposed to interest rate risk. To the extent that the securities underlying these investments have fixed maturities, fluctuations in interest rates have a direct impact on the market valuation of these investments.

Liquidity Risk. When financial markets experience a reduction in liquidity, our ability to conduct orderly investment transactions may be limited and may result in declines in fair values of the securities in our investment portfolio. In addition, if we require significant amounts of cash on short notice in excess of normal cash requirements (which could include claims on a major catastrophe event) in a period of market illiquidity, we may have difficulty selling our investments in a timely manner and may have to dispose of our investments for less than what may otherwise have been possible under other conditions.

94

Foreign Currency Risk. The Company has made a significant investment in the capitalization of Endurance U.K., which is denominated in British Sterling. In addition, the Company enters into reinsurance and insurance contracts for which it is obligated to pay losses in currencies other than U.S. dollars. The majority of our operating foreign currency assets and liabilities are denominated in Euros, British Sterling, Canadian Dollars, Japanese Yen, New Zealand Dollars and Australian Dollars. The Company may, from time to time, experience losses from fluctuations in the values of these and other non-U.S. currencies, which could have a material adverse effect on its results of operations. The Company will attempt to manage its foreign currency risk by seeking to match its liabilities under insurance and reinsurance contracts that are payable in foreign currencies with investments that are denominated in such currencies. The Company purchases assets which are matched in currency to its case reserves for liabilities incurred in major currencies including U.S. dollars, Euros, British Sterling, Canadian Dollars, Japanese Yen, New Zealand Dollars and Australian Dollars at or shortly after the time such reserves are established. The investment portfolio will at times have non-U.S. dollar exposure hedged back to U.S. dollars. As part of its asset-liability matching strategy, the Company may also consider the use of hedges when it becomes aware of probable significant losses that will be paid in non-U.S. dollar currencies. For liabilities incurred in currencies other than those listed above, U.S. dollars are converted to the currency of the loss at the time of claims payment. As a result, the Company may, from time to time, experience losses resulting from fluctuations in the value of foreign currencies.

Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the period. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.

Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.

For the year ended December 31, 2011, 11.3% of the Company’s gross premiums were written in currencies other than the U.S. dollar. The portions of our cash and cash equivalents, investments and reserves for loss and loss expenses denominated in non-U.S. currencies at December 31, 2011 were approximately 29%, 3% and 13%, respectively. As of December 31, 2011, the Company’s principal foreign currency exposures are denominated in Japanese Yen and British Sterling. The Company measures and manages its exposure in these currencies, among others, by monitoring its estimated gross and net asset positions. In order to estimate such exposures, the Company considers currency specific investments, cash and cash equivalents, premiums receivable, reserve for losses and loss expenses, and unearned premiums. The total estimated gross asset and net liability balances denominated in Japanese Yen were $50.2 million and $106.9 million, respectively. The total estimated gross and net asset balances denominated in British Sterling were $199.0 million and $129.5 million, respectively. Assuming all other variables are held constant and disregarding any tax effects, a 10% change in the U.S. dollar relative to these currencies could result in a $2.3 million increase or decrease in the net assets held by the Company at December 31, 2011.

Credit Risk. The Company has exposure to credit risk primarily as a holder of fixed maturity investments, short-term investments, equity securities, alternative funds and specialty funds. The Company’s risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. The Company attempts to limit its credit exposure by investing the fixed maturity portfolio primarily in investments rated A-/A3 or higher. In addition, the Company has limited its exposure to any single corporate issuer to 0.78% of its fixed maturity portfolio.

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The following table summarizes the fair value composition of the Company’s fixed maturity investments and short-term investments by investment ratings assigned by S&P, Moody’s or other rating agencies and by contractual maturity at December 31, 2011. In some cases, where bonds are unrated, the rating of the issuer has been applied. 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,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	Due within one year		Due after one year through five years		Due after five years  through ten years		Due after  ten years		Mortgage- backed securities(1)		Asset-backed securities(1)		Total
	(U.S. dollars in thousands)
Ratings
U.S. government and agencies securities	$	51,964	$	816,841	$	373,892	$	26,426	$	—	$	—	$	1,269,123
AAA / Aaa		125,758		107,871		38,335		—		438,950		230,586		941,500
AA / Aa		294,773		266,033		9,169		—		1,031,833		63,785		1,665,593
A / A		43,693		517,635		121,562		9,888		64,642		18,831		776,251
BBB		1,680		53,970		29,904		10,405		32,473		2,432		130,864
Below BBB		2,640		10,402		38,739		4,084		58,851		—		114,716
Not rated		247		801		451		—		222		—		1,721
Total	$	520,755	$	1,773,553	$	612,052	$	50,803	$	1,626,971	$	315,634	$	4,899,768

(1) The effective durations of the Company’s mortgage-backed and asset-backed securities portfolios were 1.97 and 0.68, respectively, as of December 31, 2011. These securities are subject to prepayment risk and as such, actual maturity may differ significantly from contract maturity.

In addition, the Company has exposure to credit risk as it relates to losses recoverable on paid and unpaid losses where the Company has purchased reinsurance and retrocessional coverages. The Company relies on reinsurance within its insurance businesses in order to manage risk accumulations. The Company continues not to rely heavily on retrocessional reinsurance, but strategically purchases coverage across the entire portfolio to reduce exposure to the risk of a severe catastrophe event or occurrence of multiple significant catastrophe events. When reinsurance or retrocessional reinsurance is purchased, the Company requires its reinsurers to have strong financial strength ratings. The Company evaluates the financial condition of its reinsurers and monitors its concentration of credit risk on an ongoing basis. The balance of losses recoverable at December 31, 2011 was $666.9 million. At December 31, 2011, the Company had an allowance of $0.1 for estimated uncollectible losses recoverable. The balance of losses recoverable at December 31, 2011 was distributed as follows based on the ratings of the reinsurers:

		September 30,
Rating	December 31, 2011
	(U.S. dollars in thousands)
U.S. government sponsored program	$	364,773
A+ and above		152,439
A		124,037
A- and below		23,229
Not rated		2,450
Total	$	666,928

Equity Price Risk. The Company invests a portion of its investment portfolio in marketable equity securities (fair market value of $59.8 million) at December 31, 2011. These equity investments are exposed to equity price risk, defined as the potential that the Company incurs an economic loss due to a decline of common stock prices. Beta analysis is used to measure the sensitivity of our equity portfolio to changes in the value of the S&P 500 Index (an index representative of the broad equity market). Our current equity portfolio excluding perpetual preferred equities has a beta of 0.71 in comparison to the S&P 500 Index.

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In addition to beta analysis, a sensitivity analysis can be used to assess equity price risk under varying conditions. The base sensitivity analysis below uses market scenarios of the S&P 500 Index declining both 10 percent and 20 percent to determine the impact of such a decline on the value of the Company’s equity securities. These scenarios would result in approximate decreases in the fair market value of the Company’s equity securities of $4.2 million and $8.5 million, respectively. As we designate all equities as available-for-sale, these fair value declines would impact the Company’s Consolidated Balance Sheet.

		xxxx			xxxx			xxxx			xxxx			xxxx		xxxx		xxxx			xxxx		xxxx
	20%			%			10%			%			December 31,		10%		%			20%		%
	decrease			change			decrease			change			2011		increase		change			increase		change
	(U.S. dollars in thousands)
Equities	$	(8,458	)		(14.15	)%	$	(4,229	)		(7.08	)%	$	59,767	$	4,229		7.08	%	$	8,458		14.15	%
Total invested assets(1)	$	(8,458	)		(0.13	)%	$	(4,229	)		(0.07	)%	$	6,305,685	$	4,229		0.07	%	$	8,458		0.13	%
Shareholders’ equity	$	(8,458	)		(0.32	)%	$	(4,229	)		(0.16	)%	$	2,611,165	$	4,229		0.16	%	$	8,458		0.32	%

(1) Includes total investments and cash and cash equivalents net of investments pending settlement.

The changes described above do not take into account any potential mitigating impact from the Company’s fixed income or alternative investment portfolios or the impact of taxes.

Derivative Counterparty Credit Risk. In addition to the Company’s exposure to credit risk as a holder of fixed maturity investments, short-term investments, equity securities, alternative funds and specialty funds, and the Company’s exposure to credit risk as relates to reinsurance and retrocessional recoverables, the Company also has credit risk exposure as a party to derivative financial instruments. In order to mitigate the risks associated with derivatives, the Company diversifies its counterparty credit risk, ensures that the counterparties to its derivative contracts are credit worthy and monitors on a regular basis its exposure by counterparty in order to mitigate the counterparty credit risks associated with its derivative contracts. In addition, counterparty risk is mitigated by the periodic receipt of payment of margin. At December 31, 2011, the Company’s absolute notional value of derivative contracts was $230.9 million, while the net liability position of those derivative contracts was $0.4 million.

Derivative Interest Rate Risk. The Company uses interest rate futures and swaps within our portfolio of fixed maturity investments to manage our exposure to interest rate risk, which can include increasing or decreasing our exposure to this risk. We account for these derivatives at fair value and record them in our consolidated balance sheet as other assets or other liabilities depending on the rights or obligations. The fair value of these derivatives as recognized in other assets and liabilities in our consolidated balance sheet at December 31, 2011, was $(0.3) million.

The aggregate hypothetical loss generated from an immediate upward parallel shift in the treasury yield curve of 100 basis points would cause a decrease in market value of our net position in the Eurodollar futures contracts and interest rate swaps of approximately $0.2 million at December 31, 2011. Credit spreads are assumed to remain constant in these hypothetical examples.

Effects of Inflation. The effects of inflation could cause the cost of claims to rise in the future. The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. The Company’s estimates for losses and loss expenses include assumptions about future payments for settlement of claims and claims handling expenses, however to the extent inflation causes these costs to increase above the reserves established, the Company will be required to increase the reserve for losses and loss expenses. In addition, inflation could lead to higher interest rates causing the current unrealized gain position on the Company’s fixed maturity portfolio to decrease. The current short duration of the Company’s fixed maturity portfolio has the potential to help reduce the negative effects of higher interest rates on the Company’s fixed maturity portfolio. The Company may also choose to hold its fixed maturity portfolio to maturity which would result in the unrealized gains largely amortizing through net investment income.

97

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

ENDURANCE SPECIALTY HOLDINGS LTD.

We have audited Endurance Specialty Holdings Ltd.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Endurance Specialty Holdings Ltd.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Endurance Specialty Holdings Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2011 and 2010, and the related consolidated statements of (loss) income and comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 and our report dated February 29, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young Ltd.

Hamilton, Bermuda

February 29, 2012

98

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	100
Consolidated Balance Sheets at December 31, 2011 and 2010	101
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the years ended December 31, 2011, 2010 and 2009	102
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009	103
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009	104
Notes to the Consolidated Financial Statements for the years ended December 31, 2011, 2010 and 2009	105

99

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

ENDURANCE SPECIALTY HOLDINGS LTD.

We have audited the accompanying consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2011 and 2010, and the related consolidated statements of (loss) income and comprehensive (loss) income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Endurance Specialty Holdings Ltd. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

As described in Note 2, on April 1, 2009 the Company adopted FSP FAS 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (Codified in FASB ASC Topic 320, Investments-Debt and Equity Securities.)

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endurance Specialty Holdings Ltd.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young Ltd.

Hamilton, Bermuda

February 29, 2012

100

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2011 AND 2010

(In thousands of United States dollars except share amounts)

		September 30,		September 30,
	DECEMBER 31,		DECEMBER 31,
	2011		2010
ASSETS
Investments
Fixed maturity investments, available for sale at fair value (amortized cost: $4,700,989 and $5,010,147 at December 31, 2011 and 2010, respectively)	$	4,831,966	$	5,116,702
Short-term investments, available for sale at fair value (amortized cost: $67,803 and $70,455 at December 31, 2011 and 2010, respectively)		67,802		70,444
Equity securities, available for sale at fair value (cost: $56,381 and $8,000 at December 31, 2011 and 2010, respectively)		59,767		13,565
Other investments		432,658		376,652
Total investments		5,392,193		5,577,363
Cash and cash equivalents		890,914		609,852
Premiums receivable, net		636,727		827,609
Deferred acquisition costs		166,049		154,484
Securities lending collateral		—		59,886
Prepaid reinsurance premiums		149,670		107,977
Losses recoverable		666,928		319,349
Accrued investment income		29,708		32,934
Goodwill and intangible assets		181,828		181,954
Deferred tax asset		33,355		33,684
Net receivable on sales of investments		77,821		602
Other assets		67,422		73,711
Total assets	$	8,292,615	$	7,979,405
LIABILITIES
Reserve for losses and loss expenses	$	3,824,224	$	3,319,927
Reserve for unearned premiums		932,108		842,154
Deposit liabilities		26,887		32,505
Reinsurance balances payable		189,488		228,860
Securities lending payable		—		59,886
Debt		528,118		528,411
Net payable on purchases of investments		55,243		—
Other liabilities		125,382		119,509
Total liabilities		5,681,450		5,131,252
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred shares
Series A and B, total liquidation preference $430,000 (2010 - $200,000)		17,200		8,000
Common shares
Ordinary – 43,086,834 issued and outstanding (2010 – 47,218,468)		43,087		47,218
Additional paid-in capital		526,910		613,915
Accumulated other comprehensive income		150,550		138,571
Retained earnings		1,873,418		2,040,449
Total shareholders’ equity		2,611,165		2,848,153
Total liabilities and shareholders’ equity	$	8,292,615	$	7,979,405

See accompanying notes to the consolidated financial statements

101

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009

(In thousands of United States dollars, except share and per share amounts)

		September 30,			September 30,			September 30,
	2011			2010			2009
Revenues
Gross premiums written	$	2,467,114		$	2,053,236		$	2,021,450
Ceded premiums written		(487,293	)		(289,492	)		(415,400	)
Net premiums written		1,979,821			1,763,744			1,606,050
Change in unearned premiums		(48,428	)		(22,631	)		27,142
Net premiums earned		1,931,393			1,741,113			1,633,192
Net investment income		147,037			200,358			284,200
Net realized and unrealized gains		31,671			22,488			6,303
Total other-than-temporary impairment losses		(2,659	)		(2,695	)		(50,993	)
Portion of loss recognized in other comprehensive income		(861	)		(1,249	)		30,742
Net impairment losses recognized in (losses) earnings		(3,520	)		(3,944	)		(20,251	)
Other underwriting (loss) income		(3,547	)		(1,636	)		3,914
Total revenues		2,103,034			1,958,379			1,907,358
Expenses
Net losses and loss expenses		1,632,666			1,038,100			866,640
Acquisition expenses		282,911			264,228			267,971
General and administrative expenses		264,152			241,920			237,154
Amortization of intangibles		11,213			10,460			10,463
Net foreign exchange gains		(7,422	)		(2,989	)		(29,740	)
Interest expense		36,254			34,762			30,174
Total expenses		2,219,774			1,586,481			1,382,662
(Loss) income before income taxes		(116,740	)		371,898			524,696
Income tax benefit (expense)		23,006			(7,160	)		11,408
Net (loss) income		(93,734	)		364,738			536,104
Preferred dividends		(24,125	)		(15,500	)		(15,500	)
Net (loss) income (attributable) available to common and participating common shareholders	$	(117,859	)	$	349,238		$	520,604
Comprehensive (loss) income
Net (loss) income	$	(93,734	)	$	364,738		$	536,104
Other comprehensive income
Net unrealized holding gains (losses) on investments arising during the period (net of applicable deferred income taxes in 2011 - ($6,914); 2010 - ($4,482); and for 2009 - ($10,564))		39,805			108,862			221,823
Portion of other-than-temporary impairment losses recognized in other comprehensive income (net of applicable deferred income taxes in 2011 - $69; 2010 - Nil; 2009 - $1,198)		792			1,249			(29,545	)
Reclassification adjustment for net realized (gains) losses and net impairment losses included in net (loss) income		(27,438	)		(18,544	)		13,948
Foreign currency translation adjustments		(1,268	)		(5,232	)		11,746
Reclassification adjustment for net losses on derivatives designated as cash flow hedge included in net (loss) income		88			88			88
Other comprehensive income		11,979			86,423			218,060
Comprehensive (loss) income	$	(81,755	)	$	451,161		$	754,164
Per share data
Basic (losses) earnings per common share	$	(2.95	)	$	6.73		$	9.14
Diluted (losses) earnings per common share	$	(2.95	)	$	6.38		$	8.69
Dividend per common share	$	1.20		$	1.00		$	1.00

See accompanying notes to the consolidated financial statements.

102

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(In thousands of United States dollars)

		September 30,			September 30,			September 30,
	2011			2010			2009
Preferred shares
Balance, beginning of year		8,000			8,000			8,000
Issuance of series B, non-cumulative preferred shares		9,200			—			—
Balance, end of year	$	17,200		$	8,000		$	8,000
Common shares
Balance, beginning of year		47,218			55,116			57,203
Issuance of common shares		3,360			775			680
Repurchase of common shares		(7,491	)		(8,673	)		(2,767	)
Balance, end of year		43,087			47,218			55,116
Additional paid-in capital
Balance, beginning of year		613,915			929,577			1,029,363
Issuance of common shares		23,329			6,606			4,730
Issuance of series B, non-cumulative preferred shares		214,822			—			—
Issuance of restricted share units in lieu of dividends		—			(65	)		(12	)
Public offering and registration costs		(586	)		63			(81	)
Repurchase of common shares and share equivalents		(333,313	)		(329,394	)		(113,624	)
Settlement of equity awards		(6,074	)		(5,209	)		(4,010	)
Stock-based compensation expense		14,817			12,337			13,211
Balance, end of year		526,910			613,915			929,577
Accumulated other comprehensive income
Cumulative foreign currency translation adjustments:
Balance, beginning of year		10,877			16,109			4,363
Foreign currency translation adjustments		(1,268	)		(5,232	)		11,746
Balance, end of year		9,609			10,877			16,109
Unrealized holding gains on investments, net of deferred taxes:
Balance, beginning of year		129,814			38,247			(134,732	)
Cumulative effect of a change in accounting principle		—			—			(33,247	)
Net unrealized holding gains arising during the period, net of reclassification adjustment		12,367			90,318			235,771
Other-than-temporary impairment losses during the year		792			1,249			(29,545	)
Balance, end of year		142,973			129,814			38,247
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of year		(2,120	)		(2,208	)		(2,296	)
Net change from current period hedging transactions, net of reclassification adjustment		88			88			88
Balance, end of year		(2,032	)		(2,120	)		(2,208	)
Total accumulated other comprehensive income		150,550			138,571			52,148
Retained earnings
Balance, beginning of year		2,040,449			1,742,442			1,245,382
Cumulative effect of a change in accounting principle, net of deferred tax		—			—			33,247
Net (loss) income		(93,734	)		364,738			536,104
Issuance of restricted share units in lieu of dividends		—			65			12
Dividends on preferred shares		(24,125	)		(15,500	)		(15,500	)
Dividends on common shares		(49,172	)		(51,296	)		(56,803	)
Balance, end of year		1,873,418			2,040,449			1,742,442
Total shareholders’ equity	$	2,611,165		$	2,848,153		$	2,787,283

See accompanying notes to the consolidated financial statements.

103

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(In thousands of United States dollars)

		September 30,			September 30,			September 30,
	2011			2010			2009
Cash flows provided by operating activities:
Net (loss) income	$	(93,734	)	$	364,738		$	536,104
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization of net premium on investments		17,878			9,365			340
Amortization of other intangibles and depreciation		24,023			20,565			21,548
Net realized and unrealized gains		(31,671	)		(22,488	)		(6,303	)
Net impairment losses recognized in earnings		3,520			3,944			20,251
Deferred taxes		(9,324	)		(20,707	)		(6,555	)
Stock-based compensation expense		14,817			12,337			13,211
Equity in losses (earnings) of other investments		694			(40,281	)		(98,106	)
Premiums receivable, net		190,882			(262,261	)		44,039
Deferred acquisition costs		(11,565	)		(7,505	)		13,891
Prepaid reinsurance premiums		(41,693	)		12,964			28,650
Losses recoverable		(347,579	)		148,315			90,170
Accrued investment income		3,226			(2,567	)		505
Other assets		5,690			7,918			(17,708	)
Reserve for losses and loss expenses		504,297			162,901			(78,430	)
Reserve for unearned premiums		89,954			9,593			(52,927	)
Deposit liabilities		(5,618	)		(10,133	)		(15,984	)
Reinsurance balances payable		(39,904	)		8,425			(13,126	)
Other liabilities		7,392			12,051			(7,665	)
Net cash flows provided by operating activities		281,285			407,174			471,905
Cash flows provided by (used in) investing activities
Proceeds from sales of available for sale investments		3,034,880			3,422,539			2,587,482
Proceeds from maturities and calls on available for sale investments		1,086,854			1,302,183			788,433
Proceeds from the redemption of other investments		14,493			15,183			31,016
Purchases of available for sale investments		(3,870,547	)		(4,733,421	)		(4,224,215	)
Purchases of other investments		(71,193	)		(202	)		—
Net settlements of other assets		(457	)		—			—
Purchases of fixed assets		(11,254	)		(6,160	)		(9,781	)
Change in securities lending collateral received		59,886			7,027			46,027
Net cash paid for subsidiary acquisition		(4,557	)		(964	)		(1,123	)
Net cash flows provided by (used in) investing activities		238,105			6,185			(782,161	)
Cash flows used in financing activities
Issuance of common shares		26,489			7,209			5,246
Issuance of series B, non-cumulative preferred shares		224,022			—			—
Repurchase of common shares		(344,272	)		(338,510	)		(112,480	)
Change in securities lending payable		(59,886	)		(7,082	)		(48,635	)
Settlement of equity awards		(6,074	)		(5,209	)		(4,011	)
Offering and registration costs paid		(586	)		(2,064	)		(1,500	)
Proceeds from issuance of debt		847			81,872			601
Repayments of debt		(1,345	)		(1,277	)		(501	)
Dividends on preferred shares		(24,125	)		(15,500	)		(15,500	)
Dividends on common shares		(49,172	)		(51,301	)		(57,074	)
Net cash flows used in financing activities		(234,102	)		(331,862	)		(233,854	)
Effect of exchange rate changes on cash and cash equivalents		(4,226	)		(589	)		11,060
Net increase (decrease) in cash and cash equivalents		281,062			80,908			(533,050	)
Cash and cash equivalents, beginning of year		609,852			528,944			1,061,994
Cash and cash equivalents, end of year	$	890,914		$	609,852		$	528,944

See accompanying notes to the consolidated financial statements.

104

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

1. Organization

Endurance Specialty Holdings Ltd. (“Endurance Holdings”) was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its wholly-owned operating subsidiaries:

Operating Subsidiaries	Domicile
Endurance Specialty Insurance Ltd.	Bermuda
Endurance Worldwide Insurance Limited	England
Endurance Reinsurance Corporation of America	Delaware
Endurance American Insurance Company	Delaware
Endurance American Specialty Insurance Company	Delaware
Endurance Risk Solutions Assurance Co.	Delaware
American Agri-Business Insurance Company	Texas

2. Summary of significant accounting policies

The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Endurance Holdings and its wholly-owned subsidiaries, which are collectively referred to herein as the “Company.” All intercompany transactions and balances have been eliminated in consolidation. The following are significant accounting and reporting policies adopted by the Company:

(a) Premiums and related expenses

The Company’s insurance premiums are earned pro rata over the terms of the applicable risk period specified in the insurance policy. The Company’s insurance policies cover losses occurring or claims made during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will only adjust if the underlying insured values adjust. Accordingly, the Company monitors the underlying insured values and records additional or return premiums in the period in which amounts are reasonably determinable.

The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the terms of the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24-month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period.

In addition to the applicable risk period, the Company’s estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract’s written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. For proportional reinsurance contracts, the Company estimates premium, commissions and related expenses based on ceding company estimates and also utilizes judgment in establishing proportional reinsurance contract estimates.

105

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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) Premiums and related expenses, cont’d.

Premiums on the Company’s excess of loss and proportional reinsurance contracts are estimated by management at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the reinsurance contract is underwritten. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustments to these estimates are recorded in the period in which they become known.

Acquisition expenses are costs that vary with and are directly related to the successful production of new and renewal business, and consist principally of commissions and brokerage expenses. Acquisition and general and administrative expenses are shown net of commissions, other fees and expense allowances associated with and earned on ceded business. These costs are deferred and amortized over the periods in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums. Anticipated net investment income is considered in determining the recoverability of deferred acquisition costs.

(b) Reserve for losses and loss expenses

The Company’s reserve for losses and loss expenses includes case reserves and reserves for losses incurred but not reported (referred to as “IBNR reserves”). Case reserves are established for losses that have been reported, but not yet paid. IBNR reserves represent the estimated ultimate cost of events or conditions that have not been reported to or specifically identified by the Company, but have occurred. Case reserves and IBNR reserves are established by management based on reports from reinsurance intermediaries, ceding companies and insureds, and consultations with independent legal counsel. In addition, reserves for IBNR losses and loss expenses are established by management based on reported losses and loss expenses, and actuarially determined estimates of ultimate losses and loss expenses.

The Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company. One actuarial method used by the Company to estimate reserves for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). Another actuarial method used by the Company to estimate reserves for losses and loss expenses is known as the Bornhuetter-Ferguson method. The Bornhuetter-Ferguson method involves the application of selected loss ratios to the Company’s earned premiums to determine estimates of ultimate expected unpaid claims and claims expenses for each underwriting year. When the IBNR reserves are added to the losses and loss expense amounts with respect to claims that have been reported to date, an estimated ultimate expected loss results. The Company believes that this method provides a more stable estimate of IBNR reserves that is insulated from wide variations in reported losses. A third actuarial method used by the Company to estimate reserves for losses and loss expenses is known as the loss development method. The loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. Management uses these multiple actuarial methods, supplemented with professional judgment, to establish the best estimate of reserves for losses and loss expenses.

The Company’s loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company’s financial condition for any particular period. While management believes the Company’s estimate of loss and loss expense reserves is reasonable, the ultimate loss experience may not be

106

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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) Reserve for losses and loss expenses, cont’d.

as reliably predicted as may be the case with other insurance and reinsurance companies, and it is possible losses and loss expenses may be materially different than the total reserve for losses and loss expenses recorded by the Company.

(c) Reinsurance

Losses recoverable represent estimates of losses and loss expenses that will be recovered from reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreements and consistent with the establishment of the Company’s reserve for losses and loss expenses. Ceding commissions earned on ceded business are classified as an offset to acquisition and general and administrative expenses.

(d) Investments

The Company currently classifies its fixed maturity investments, short-term investments and equity securities, as “available for sale” and accordingly, they are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive income. The Company determines the fair value of its available-for-sale investments 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 use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. Current accounting guidance establishes three levels as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Quoted prices for similar assets in markets that are active, quoted prices for identical or similar assets in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own views about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Transfers between levels are assumed to occur at the end of each period.

If the Company determines that a decision to sell an available for sale security has been made or that it is more likely than not that the Company will be required to sell the security, the Company deems the security to be other-than-temporarily impaired and writes down the value to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other-than-temporary impairment (“OTTI”) loss.

107

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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.

(d) Investments, cont’d.

For fixed maturity and short-term investments in an unrealized loss position for which a decision to sell has not been made and it is not more likely than not that the Company will be required to sell the security, the Company performs additional reviews to determine whether the investment will recover its amortized cost.

If the amortized cost of the Company’s fixed maturity and short-term investments is, based upon the judgment of management, unlikely to be recovered, the Company writes down the investment by the amount representing the credit related portion of the decline in value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an OTTI loss. The new cost basis is not changed for subsequent recoveries in fair value.

To the extent the Company determines that the amortized cost of the Company’s fixed maturity and short-term investments is likely to be recovered and the decline in value is related to non-credit factors (such as interest rates, market conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive income in the shareholders’ equity section of the Company’s balance sheet.

For equity securities in an unrealized loss position for which a decision to sell has not been made and it is not more likely than not that the Company will be required to sell the equity security, the Company considers its ability and intent to hold the equity security in an unrealized loss position for a reasonable period of time to allow for a full recovery. When the Company determines that the decline in value of an equity security is other-than-temporary, the Company reduces the cost of the equity security to its fair value and recognizes the loss in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. The new cost basis is not changed for subsequent recoveries in fair value.

Other Investments within the Company’s investment portfolio, which are comprised of (i) hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan and convertible debt funds (“specialty funds”) are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. The carrying values of these investments are increased or decreased to reflect the Company’s share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by the managers of certain of our alternative and specialty funds, our investments in those funds are estimated based on the most recently available information including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.

The Company participated in a securities lending program until July 2011. Under this program fixed maturity investments were loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The Company retained all economic interest in the securities it lent, retained the earnings and cash flows associated with the loaned securities and received a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit was required at a rate of 102% – 105% of the market value of the loaned securities and was monitored and maintained by the lending agent. The securities lending collateral, excluding letters of credit, was reported as a separate line item with a corresponding liability related to the Company’s obligation to return the collateral.

108

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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.

(e) Cash equivalents

Cash equivalents include highly liquid short-term deposits and securities with maturities of ninety days or less at the time of purchase. Cash equivalents are valued at amortized cost, which approximates fair value due to the short-term, liquid nature of these securities.

(f) Intangible assets

Identifiable intangible assets are amortized in accordance with their useful lives. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually or more often if impairment indicators arise. In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations.

Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company’s stock price relative to both its book value and its net income.

(g) Offering and registration costs

Offering and registration costs incurred in connection with equity offerings, including investment banking fees and legal fees, are deducted from the proceeds of the offerings.

(h) Foreign exchange

Assets and liabilities of foreign operations whose functional currency is not the United States dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at weighted average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income, net of applicable deferred income taxes. Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.

(i) Derivatives

Current accounting guidance requires the recognition of all derivative financial instruments including embedded derivative instruments, as either assets or liabilities in the Consolidated Balance Sheets at fair value.

The Company may use various derivative instruments such as foreign exchange forward contracts, foreign currency option contracts, futures, options, interest rate swaps, total return swaps, swaptions, credit default swaps and foreign currency forward contracts and commodity futures and options to enhance the efficiency of the investment portfolio and economically hedge certain risks. These contracts do not qualify, and are not designated, as hedges. Thus, changes in fair value and any realized gains (losses) are recognized in net realized and unrealized gains or net foreign exchange gains (losses) in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. Margin balances required of counterparties are included in cash and cash equivalents. Where the Company has entered into master netting agreements with counterparties, or the Company has the legal and contractual right to offset positions, the derivative positions are generally netted by the counterparty and are reported accordingly in other assets and other liabilities.

109

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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.

(j) Income taxes

The Company accounts for income taxes for its subsidiaries operating in taxable jurisdictions. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The accounting guidance allows for the recognition of tax benefits of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is established for any tax benefit claimed in a tax return in excess of this threshold. Income tax related interest and penalties are included as income tax expense.

(k) Stock compensation and other stock plans

The Company has a stock-based employee and non-employee director equity incentive plan (“2007 Equity Incentive Plan”) and other stock plans which are described more fully in Note 15. The fair value of the compensation cost incurred under these plans is measured at the grant date and is expensed over the period for which the employee is required to provide services in exchange for the award. Forfeiture benefits are estimated at the time of grant and incorporated in the determination of share-based compensation costs. Awards under the 2007 Equity Incentive Plan vest over four years for employees and one year for non-employee directors.

(l) Earnings per share

Earnings per share is calculated using the two-class method, which 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 according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted shares, which receive cash dividends, are considered participating common shares. Net (loss) income (attributable) available to 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. The 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 (losses) earnings per common share are calculated by dividing net (loss) income (attributable) 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 warrants, options and convertible securities such as unvested restricted shares.

Diluted (losses) earnings per common share are based on the weighted average number of common shares and assumes the exercise of all dilutive stock warrants and options and the vesting or conversion of all convertible securities such as unvested restricted shares using the two-class method described above.

(m) Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

110

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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.

(n) Variable interest entity

Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities (“VIE”). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. 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. See also Note 3.

(o) Reclassifications

Certain comparative information has been reclassified to conform to current year presentation.

(p) Recent accounting pronouncements

In October 2010, the FASB issued ASU 2010-26, which modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new or renewal insurance contracts. The amended guidance specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts should be charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should also be charged to expense as incurred. ASU 2010-26 will be effective for fiscal periods beginning on or after December 15, 2011 with prospective or retrospective application permitted. The Company will adopt this standard prospectively on January 1, 2012. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

111

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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.

(p) Recent accounting pronouncements, cont’d.

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends Accounting Standards Codification Topic 820, “Fair Value Measurement” (“ASC 820”) to change several requirements for measuring fair value and disclosing information about fair value measurements. Among the more significant changes, ASU 2011-04 amends ASC 820 to clarify certain existing fair value measurement and disclosure requirements as follows:

• The “highest-and-best-use” and “valuation-premise” concepts only apply to measuring the fair value of nonfinancial assets. The previous guidance permitted the application of these concepts to financial assets and liabilities.

• A reporting entity is required to measure the fair value of its own equity instruments from the perspective of a market participant that holds that instrument as an asset.

• Reporting entities are required to disclose quantitative information about inputs used in estimating Level 3 fair value measurements.

ASU 2011-04 will be effective for interim and annual periods beginning after December 15, 2011, with early adoption prohibited. The Company will adopt this standard on January 1, 2012. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option in current GAAP to permit the presentation of other comprehensive income in the statement of changes in shareholders’ equity. The remaining two options are:

• A single continuous statement of net income and comprehensive income; or

• Two separate, but consecutive, statements of net income and other comprehensive income

ASU 2011-05 is effective for interim and annual reporting periods beginning after December 15, 2011. Early adoption is permitted and full retrospective application is required. The Company will adopt ASU 2011-05 on January 1, 2012. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08 “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. In addition, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.

ASU 2011-08 will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

112

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments

Composition of Net Investment Income and Invested Assets

The components of net investment income for the years ended December 31, 2011, 2010 and 2009 are as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
Available for sale investments	$	160,580		$	174,491		$	195,295
Other investments		(694	)		40,281			98,106
Cash and cash equivalents		924			490			2,214
	$	160,810		$	215,262		$	295,615
Investment expenses		(13,773	)		(14,904	)		(11,415	)
Net investment income	$	147,037		$	200,358		$	284,200

The following table summarizes the composition of the investment portfolio by investment type at December 31, 2011 and 2010:

		September 30,		September 30,			September 30,		September 30,
	December 31, 2011					December 31, 2010
Type of Investment	Fair Value		Percentage			Fair Value		Percentage
Fixed maturity securities	$	4,831,966		76.6	%	$	5,116,702		82.7	%
Cash and cash equivalents(1)		913,492		14.5	%		610,454		9.9	%
Other investments(2)		432,658		6.9	%		376,652		6.1	%
Short term investments		67,802		1.1	%		70,444		1.1	%
Equity securities		59,767		0.9	%		13,565		0.2	%
Total	$	6,305,685		100.0	%	$	6,187,817		100.0	%

(1) Includes net receivable on sales of investments and net payable on purchases of investments.

(2) Consists of investments in alternative funds and specialty funds.

The following table summarizes the composition of the fixed maturity securities and short-term investments, by investment ratings assigned by rating agencies at December 31, 2011 and 2010. In some cases, where bonds are unrated, the rating of the issuer has been applied.

		September 30,		September 30,			September 30,		September 30,
	December 31, 2011					December 31, 2010
Ratings(1)	Fair Value		Percentage			Fair Value		Percentage
U.S. government and agencies securities	$	1,269,123		25.9	%	$	1,010,819		19.5	%
AAA/Aaa		941,500		19.2	%		2,639,682		50.9	%
AA/Aa		1,665,593		34.0	%		465,315		9.0	%
A/A		776,251		15.8	%		793,980		15.3	%
BBB		130,864		2.7	%		50,733		1.0	%
Below BBB		114,716		2.3	%		221,848		4.2	%
Not rated		1,721		0.1	%		4,769		0.1	%
Total	$	4,899,768		100.0	%	$	5,187,146		100.0	%

(1) The credit rating for each asset reflected above was determined based on the rating assigned to the individual security by Standard & Poor’s. If a rating is not supplied by Standard & Poor’s, the equivalent rating supplied by either Moody’s Investors Service or Fitch Ratings is used.

113

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

Contractual maturities of the fixed maturity and short-term investments portion of the investment portfolio are shown below as of December 31, 2011 and 2010. 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,		September 30,		September 30,		September 30,
	December 31, 2011				December 31, 2010
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due within one year	$	517,156	$	520,755	$	390,886	$	393,333
Due after one year through five years		1,732,335		1,773,553		2,240,820		2,279,581
Due after five years through ten years		584,107		612,052		404,322		413,462
Due after ten years		45,837		50,803		64,663		68,988
Residential mortgage-backed securities
Agency mortgage-backed securities		933,479		965,019		855,637		883,948
Non-agency mortgage-backed securities		119,599		114,662		254,138		246,410
Commercial mortgage-backed securities
Agency mortgage-backed securities		28,257		28,807		22,130		22,889
Non-agency mortgage-backed securities		491,810		518,483		578,951		604,820
Asset-backed securities		316,212		315,634		269,055		273,715
Total	$	4,768,792	$	4,899,768	$	5,080,602	$	5,187,146

In addition to the Company’s available for sale investments, the Company invests in (i) hedge funds and private equity funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives and equity long/short strategies (“alternative funds”) and (ii) high yield loan and convertible debt funds (“specialty funds”). The Company’s alternative funds and specialty funds are recorded on the Company’s balance sheet as “Other Investments”. At December 31, 2011 and 2010, the Company had invested, net of capital returned, a total of $336.3 million and $279.6 million, respectively, in Other Investments. At December 31, 2011 and 2010, the carrying value of Other Investments was $432.7 million and $376.7 million, respectively. Certain of Other Investments are subject to redemption restriction provisions (see Note 11).

Net Realized and Unrealized Gains

Realized and unrealized gains and losses are recognized in earnings using the first in and first out method. The analysis of net realized and unrealized gains for the years ended December 31, 2011, 2010 and 2009 are as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
Gross realized gains on investment sales	$	50,884		$	33,788		$	51,121
Gross realized losses on investment sales		(18,500	)		(11,300	)		(44,818	)
Change in fair value of derivative financial instruments(1)		(713	)		—			—
Net realized and unrealized gains	$	31,671		$	22,488		$	6,303

(1) See Note 8.

114

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

Unrealized Gains and Losses and Other-than-temporary Impairments

The amortized cost, fair value and related gross unrealized gains and losses and non-credit other-than-temporary impairment (“OTTI”) losses on the Company’s fixed maturity securities, short-term investments and equity securities at December 31, 2011 and 2010 are as follows:

		September 30,		September 30,		September 30,			September 30,		September 30,
			Gross		Gross
	Amortized		Unrealized		Unrealized					Non-Credit
December 31, 2011	Cost		Gains		Losses			Fair Value		OTTI (2)
U.S. government and agencies securities	$	1,218,069	$	51,140	$	(86	)	$	1,269,123	$	—
U.S. state and municipal securities		52,274		1,262		(19	)		53,517		—
Foreign government securities		73,361		1,820		(184	)		74,997		—
Government guaranteed corporate securities		349,447		2,531		(153	)		351,825		—
Corporate securities		1,118,481		31,526		(10,108	)		1,139,899		—
Residential mortgage-backed securities
Agency mortgage-backed securities		933,479		31,884		(344	)		965,019		—
Non-agency mortgage-backed securities		119,599		1,366		(6,303	)		114,662		(7,932	)
Commercial mortgage-backed securities
Agency mortgage-backed securities		28,257		552		(2	)		28,807		—
Non-agency mortgage-backed securities(1)		491,810		29,741		(3,068	)		518,483		(75	)
Asset-backed securities		316,212		2,336		(2,914	)		315,634		—
Total fixed maturity investments	$	4,700,989	$	154,158	$	(23,181	)	$	4,831,966	$	(8,007	)
Short-term investments		67,803		4		(5	)		67,802		—
Total fixed income investments	$	4,768,792	$	154,162	$	(23,186	)	$	4,899,768	$	(8,007	)
Equity securities	$	56,381	$	4,162	$	(776	)	$	59,767	$	—

(1) Balances include amounts related to collateralized debt obligations held with total fair values of $17.2 million.

(2) Represents total OTTI recognized in accumulated other comprehensive income. It does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2011, the gross unrealized loss related to fixed income investments for which a non-credit OTTI was recognized in accumulated other comprehensive income was $1.5 million.

115

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

		September 30,		September 30,		September 30,			September 30,		September 30,
			Gross		Gross
	Amortized		Unrealized		Unrealized					Non-Credit
December 31, 2010	Cost		Gains		Losses			Fair Value		OTTI (2)
U.S. government and agencies securities	$	993,667	$	23,576	$	(6,424	)	$	1,010,819	$	—
U.S. state and municipal securities		29,472		745		(238	)		29,979		—
Foreign government securities		138,157		2,557		(253	)		140,461		—
Government guaranteed corporate securities		663,709		7,806		(365	)		671,150		—
Corporate securities		1,205,231		31,174		(3,894	)		1,232,511		—
Residential mortgage-backed securities
Agency mortgage-backed securities		855,637		30,946		(2,635	)		883,948		—
Non-agency mortgage-backed securities		254,138		4,457		(12,185	)		246,410		(29,495	)
Commercial mortgage-backed securities
Agency mortgage-backed securities		22,130		761		(2	)		22,889		—
Non-agency mortgage-backed securities(1)		578,951		28,673		(2,804	)		604,820		(109	)
Asset-backed securities		269,055		6,168		(1,508	)		273,715		—
Total fixed maturity investments	$	5,010,147	$	136,863	$	(30,308	)	$	5,116,702	$	(29,604	)
Short-term investments		70,455		3		(14	)		70,444		—
Total fixed income investments	$	5,080,602	$	136,866	$	(30,322	)	$	5,187,146	$	(29,604	)
Equity securities	$	8,000	$	5,583	$	(18	)	$	13,565	$	—

(1) Balances include amounts related to collateralized debt obligations held with total fair values of $13.1 million.

(2) Represents total OTTI recognized in accumulated other comprehensive income. It does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2010, the gross unrealized loss related to fixed income investments for which a non-credit OTTI was recognized in accumulated other comprehensive income was $6.2 million.

116

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

The following tables summarize, for all available for sale securities in an unrealized loss position at December 31, 2011 and 2010, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

		September 30,			September 30,		September 30,			September 30,		September 30,			September 30,
	Less than 12 months					12 months or greater					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
December 31, 2011	Losses(1)			Value		Losses(1)			Value		Losses(1)			Value
U.S. government and agencies securities	$	(86	)	$	23,488	$	—		$	—	$	(86	)	$	23,488
U.S. state and municipal securities		(19	)		6,146		—			—		(19	)		6,146
Foreign government securities		(114	)		12,565		(70	)		4,592		(184	)		17,157
Government guaranteed corporate securities		(70	)		25,157		(83	)		8,232		(153	)		33,389
Corporate securities		(9,949	)		233,894		(159	)		5,784		(10,108	)		239,678
Residential mortgage-backed securities
Agency mortgage-backed securities		(272	)		52,240		(72	)		32,320		(344	)		84,560
Non-agency mortgage-backed securities		(462	)		24,839		(5,841	)		60,850		(6,303	)		85,689
Commercial mortgage-backed securities
Agency mortgage-backed securities		(2	)		138		—			—		(2	)		138
Non-agency mortgage-backed securities		(2,379	)		45,018		(689	)		10,624		(3,068	)		55,642
Asset-backed securities		(2,361	)		165,455		(553	)		10,235		(2,914	)		175,690
Total fixed maturity investments	$	(15,714	)	$	588,940	$	(7,467	)	$	132,637	$	(23,181	)	$	721,577
Short-term investments		(5	)		6,740		—			—		(5	)		6,740
Total fixed income investments	$	(15,719	)	$	595,680	$	(7,467	)	$	132,637	$	(23,186	)	$	728,317
Equity securities	$	(707	)	$	10,993	$	(69	)	$	776	$	(776	)	$	11,769

(1) Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2011.

As of December 31, 2011, 556 available for sale securities were in an unrealized loss position aggregating $24.0 million. Of those, 94 securities with aggregated unrealized losses of $7.5 million at December 31, 2011 had been in a continuous unrealized loss position for twelve months or greater.

117

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

		September 30,			September 30,		September 30,			September 30,		September 30,			September 30,
	Less than 12 months					12 months or greater					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
December 31, 2010	Losses(1)			Value		Losses(1)			Value		Losses(1)			Value
U.S. government and agencies securities	$	(6,424	)	$	368,452	$	—		$	—	$	(6,424	)	$	368,452
U.S. state and municipal securities		(238	)		9,301		—			—		(238	)		9,301
Foreign government securities		(253	)		22,585		—			—		(253	)		22,585
Government guaranteed corporate securities		(356	)		131,980		(9	)		4,714		(365	)		136,694
Corporate securities		(3,556	)		243,307		(338	)		5,429		(3,894	)		248,736
Residential mortgage-backed securities
Agency mortgage-backed securities		(2,635	)		160,532		—			19		(2,635	)		160,551
Non-agency mortgage-backed securities		(473	)		26,205		(11,712	)		172,646		(12,185	)		198,851
Commercial mortgage-backed securities
Agency mortgage-backed securities		(2	)		455		—			—		(2	)		455
Non-agency mortgage-backed securities		(1,227	)		75,626		(1,577	)		10,590		(2,804	)		86,216
Asset-backed securities		(555	)		70,218		(953	)		13,218		(1,508	)		83,436
Total fixed maturity investments	$	(15,719	)	$	1,108,661	$	(14,589	)	$	206,616	$	(30,308	)	$	1,315,277
Short-term investments		(14	)		30,178		—			—		(14	)		30,178
Total fixed income investments	$	(15,733	)	$	1,138,839	$	(14,589	)	$	206,616	$	(30,322	)	$	1,345,455
Equity securities	$	(18	)	$	640	$	—		$	—	$	(18	)	$	640

(1) Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2010.

As of December 31, 2010, 376 available for sale securities were in an unrealized loss position aggregating $30.3 million. Of those, 112 securities with aggregated unrealized losses of $14.6 million at December 31, 2010 had been in a continuous unrealized loss position for twelve months or greater.

The analysis of OTTI for the years ended December 31, 2011, 2010 and 2009 is as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
Total other-than-temporary impairment losses	$	(2,659	)	$	(2,695	)	$	(50,993	)
Portion of loss recognized in other comprehensive income		(861	)		(1,249	)		30,742
Net impairment losses recognized in (losses) earnings	$	(3,520	)	$	(3,944	)	$	(20,251	)

118

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

3. Investments, cont’d.

The $3.5 million (2010—$3.9 million) of OTTI losses recognized by the Company for the year ended December 31, 2011, relating to specific credit events occurred primarily due to reductions in expected recovery values on mortgage and asset-backed securities during the period, along with certain credit related downgrades in corporate securities. At December 31, 2011, the Company had not made any decisions to sell securities in an unrealized loss position and determined that it was unlikely that the Company would be required to sell securities in an unrealized loss position

The following table provides a roll-forward of the amount related to credit losses for the Company’s fixed income investments recognized in (losses) earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income for the years ended December 31, 2011, 2010 and 2009:

		September 30,			September 30,			September 30,
	2011			2010			2009
Beginning balance	$	(10,214	)	$	(13,122	)		(10,751	)
Addition for the amount related to the credit loss for which an other-than- temporary impairment was not previously recognized		(46	)		—			(2,247	)
Addition for the amount related to the credit loss for which an other-than- temporary impairment was previously recognized		(1,226	)		(1,249	)		(492	)
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security		—			—			—
Reductions for securities sold during the year		9,261			4,157			368
Ending balance at December 31	$	(2,225	)	$	(10,214	)	$	(13,122	)

For the year ended December 31, 2009, the Company recorded $20.3 million of OTTI losses in earnings. Such amounts included a portion related to credit losses and a portion related to non-credit factors.

Securities Lending

The Company participated in a securities lending program until July 2011. Under this program fixed maturity investments were loaned by the Company to third parties, primarily major brokerage firms and commercial banks. The borrowers of the Company’s securities provided the Company with collateral, typically cash, which the Company separately maintained. The Company typically invested such collateral in overnight repurchase agreements. Securities with an estimated fair value of $58.7 million were on loan under the program at December 31, 2010. The Company was liable for collateral under the Company’s control of $59.9 million at December 31, 2010. As of December 31, 2010, the fair value of the investments purchased with the cash collateral received from the borrower was $59.9 million. All securities on loan were issued on a term or overnight basis and were subject to daily recall at the Company’s discretion. Upon the termination of the securities lending program, the Company recalled all securities on loan and refunded all collateral previously held as part of the program.

Variable Interest Entities

The Company is involved in the normal course of business with VIEs primarily as a passive investor in residential and commercial mortgage-backed securities and through its interests in other investments in alternative and specialty funds that are structured as limited partnerships considered to be third party VIEs. The Company determined that it was not the primary beneficiary for any of these investments as of December 31, 2011 and 2010. 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 consolidated balance sheet and any unfunded investment commitments.

119

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

4. Fair value measurement

The Company determines the fair value of the fixed maturity, short-term and equity securities in its investment portfolio 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.

• Preferred equity 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 preferred equity securities in Level 2.

• Common equity securities – These securities primarily consist of exchange traded funds. These securities are generally priced by pricing services based on quoted market prices in active markets. The Company generally classifies the fair values of its common equity securities in Level 1.

• Structured securities including agency and non-agency, residential and commercial mortgage and asset-backed securities – 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.

120

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 set forth the Company’s available for sale investments and derivative instruments categorized by the level within the hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2011 and 2010:

		September 30,			September 30,		September 30,			September 30,
				Fair Value Measurements at December 31, 2011
				Quoted
				Prices in
				Active		Significant
				Markets for		Other			Significant
	Total at			Identical		Observable			Unobservable
	December 31,			Assets		Inputs			Inputs
	2011			(Level 1)		(Level 2)			(Level 3)
Assets
U.S. government and agencies securities	$	1,269,123		$	—	$	1,269,123		$	—
U.S. state and municipal securities		53,517			—		53,517			—
Foreign government securities		74,997			—		74,997			—
Government guaranteed corporate securities		351,825			—		351,825			—
Corporate securities		1,139,899			—		1,139,899			—
Residential mortgage-backed securities
Agency mortgage-backed securities		965,019			—		965,019			—
Non-agency mortgage-backed securities		114,662			—		114,153			509
Commercial mortgage-backed securities
Agency mortgage-backed securities		28,807			—		28,807			—
Non-agency mortgage-backed securities		518,483			—		508,598			9,885
Asset-backed securities		315,634			—		315,634			—
Total fixed maturity investments	$	4,831,966		$	—	$	4,821,572		$	10,394
Short term investments		67,802			9,800		58,002			—
Equity securities		59,767			34,681		25,086			—
Other assets (see Note 8)		513			—		513			—
Total assets	$	4,960,048		$	44,481	$	4,905,173		$	10,394
Liabilities
Other liabilities (see Note 8)	$	(891	)	$	—	$	(891	)	$	—

As of December 31, 2011, short-term investments were classified within Level 1 as they represented current issue or on the run U.S. treasury securities.

During the year ended December 31, 2011, exchange traded equities were acquired and classified within Level 1.

During the year ended December 31, 2011, fixed maturity and short-term investments were transferred from Level 1 to Level 2 as they no longer qualified as on the run U.S. treasury securities.

During the year ended December 31, 2011, fixed maturity investments were transferred from Level 2 to Level 3. The reclassifications were largely related to high yield commercial mortgage-backed and collateralized debt obligation securities. At times during the year, the market activity for these securities decreased and therefore observable inputs were no longer available at December 31, 2011 and the fair value of these securities was based on pricing models.

121

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 year ended December 31, 2011, fixed maturity investments and short-term investments were transferred from Level 3 to Level 2. The reclassifications were largely related to high yield commercial mortgage-backed securities. At times during the year, the market activity for these securities increased and therefore the fair value of these securities was based on observable inputs.

		September 30,		September 30,		September 30,		September 30,
			Fair Value Measurements at December 31, 2010
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
	Total at		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. government and agencies securities	$	1,010,819	$	38,275	$	972,544	$	—
U.S. state and municipal securities		29,979		—		29,979		—
Foreign government securities		140,461		—		140,461		—
Government guaranteed corporate securities		671,150		—		671,150		—
Corporate securities		1,232,511		—		1,232,511		—
Residential mortgage-backed securities
Agency mortgage-backed securities		883,948		—		883,948		—
Non-agency mortgage-backed securities		246,410		—		245,325		1,085
Commercial mortgage-backed securities
Agency mortgage-backed securities		22,889		—		22,889		—
Non-agency mortgage-backed securities		604,820		—		597,512		7,308
Asset-backed securities		273,715		—		272,469		1,246
Total fixed maturity investments	$	5,116,702	$	38,275	$	5,068,788	$	9,639
Short term investments		70,444		—		70,444		—
Equity securities		13,565		—		13,565		—
Other assets		—		—		—		—
Total assets	$	5,200,711	$	38,275	$	5,152,797	$	9,639
Liabilities
Other liabilities	$	—	$	—	$	—	$	—

Level 3 securities are primarily comprised of non-agency commercial mortgage-backed securities. Level 3 assets represented 0.21% and 0.19% of the Company’s total available for sale assets at December 31, 2011 and 2010, respectively. Net impairment losses recognized in earnings for the year ended December 31, 2011 included losses on Level 3 securities in the amount of $0.6 million (2010—$1.1 million), representing realized losses due to OTTI.

There were no material changes in the Company’s valuation techniques for the year ended December 31, 2011.

122

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 the securities lending collateral reinvested by the Company in connection with its securities lending program, categorized by the level within the hierarchy in which the fair value measurements fall, on a recurring basis at December 31, 2011 and 2010, respectively. The Company participated in a securities lending program until July 2011.

		September 30,		September 30,		September 30,		September 30,
			Fair Value Measurements at December 31, 2011
			Quoted Prices		Significant
			in Active		Other		Significant
	Total at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
Securities lending collateral	$	—	$	—	$	—	$	—

		September 30,		September 30,		September 30,		September 30,
			Fair Value Measurements at December 31, 2010
			Quoted Prices		Significant
			in Active		Other		Significant
	Total at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Securities lending collateral	$	59,886	$	—	$	59,886	$	—

The following tables present a reconciliation of the beginning and ending balances for all available for sale securities measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2011 and 2010. Level three assets included below are related to our fixed maturity investments including corporate debt securities, non-agency residential and non-agency commercial mortgage-backed securities.

		September 30,			September 30,
	2011			2010
Level 3, beginning of year	$	9,639		$	5,554
Total net realized gains included in earnings		41			466
Total net realized and unrealized losses included in earnings		(497	)		(1,239	)
Change in unrealized gains included in other comprehensive income		2,484			4,202
Change in unrealized losses included in other comprehensive income		(2,477	)		(747	)
Purchases		—			3,022
Sales		(3,287	)		(4,190	)
Transfers into Level 3		39,057			16,962
Transfers out of Level 3		(34,566	)		(14,391	)
Level 3, end of year	$	10,394		$	9,639

At December 31, 2011 and 2010, the carrying value of the Company’s other investments was $432.7 million and $376.7 million, respectively, which approximates fair value.

At December 31, 2011 and 2010, the carrying value of the Company’s senior notes was $528.0 million and $528.3 million, respectively, and the fair value was $535.3 million and $536.9 million, respectively.

123

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

5. Reserve for losses and loss expenses

Activity in the reserve for losses and loss expenses for the years ended December 31, 2011, 2010 and 2009 is summarized as follows:

		September 30,			September 30,			September 30,
	2011			2010			2009
Net reserve for losses and loss expenses, January 1	$	3,000,578		$	2,689,362		$	2,677,622
Incurred related to:
Current year		1,812,644			1,164,902			1,017,529
Prior years		(179,978	)		(126,802	)		(150,889	)
Total incurred		1,632,666			1,038,100			866,640
Paid related to:
Current year		(850,132	)		(299,560	)		(436,964	)
Prior years		(620,131	)		(417,696	)		(413,432	)
Total paid		(1,470,263	)		(717,256	)		(850,396	)
Foreign currency translation		(5,685	)		(9,628	)		(4,504	)
Net reserve for losses and loss expenses, December 31		3,157,296			3,000,578			2,689,362
Losses and loss expenses recoverable		666,928			319,349			467,664
Reserve for losses and loss expenses, December 31	$	3,824,224		$	3,319,927		$	3,157,026

During 2011, the Company’s estimated ultimate losses for prior accident years were reduced by $180.0 million (2010 – $126.8 million; 2009 – $150.9 million) due to lower claims emergence than originally estimated by the Company. During 2011, the Company experienced favorable development in the Reinsurance segment of $109.2 million in the short tail, long tail and other reserve categories. In the Insurance segment, the Company experienced $70.8 million of favorable development across the long tail, short tail and other reserve categories. During 2010, the Company experienced favorable development in the Reinsurance segment of $79.9 million in the short tail, long tail and other reserve categories. In the Insurance segment, the Company experienced $46.9 million of favorable development across the long tail, short tail and other reserve categories. During 2009, the Company experienced favorable development in the Reinsurance segment of $58.8 million in the short tail, long tail and other reserve categories. In the Insurance segment, the Company experienced $92.1 million of favorable development across the long tail, short tail and other reserve categories during 2009.

Reserves for losses and loss expenses are based in part upon the estimation of losses resulting from catastrophic events. Estimation of these losses and loss expenses are based upon the Company’s historical claims experience and is inherently difficult because of the Company’s short operating history and the possible severity of catastrophe claims. Therefore, the Company uses both proprietary and commercially available models, as well as historical reinsurance industry catastrophe claims experience in addition to its own historical data for purposes of evaluating trends and providing an estimate of ultimate claims costs.

A significant portion of the Company’s contracts and policies cover excess layers for high severity exposures. Underwriting results and ultimate claims payments for this type of coverage are therefore not typically reported to the Company until later in the contract and policy lives. As a result, the level of losses paid to date is not necessarily indicative of expected future results.

124

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

6. Reinsurance

The effects of reinsurance on premiums earned and written during the years ended December 31, 2011, 2010 and 2009 are as follows:

	Year Ended						Year Ended						Year Ended
	December 31, 2011						December 31, 2010						December 31, 2009
	Earned			Written			Earned			Written			Earned			Written
Direct	$	1,408,230		$	1,469,798		$	1,116,559		$	1,112,192		$	1,260,439		$	1,152,150
Assumed		968,773			997,316			926,812			941,044			817,798			869,300
Ceded		(445,610	)		(487,293	)		(302,258	)		(289,492	)		(445,045	)		(415,400	)
	$	1,931,393		$	1,979,821		$	1,741,113		$	1,763,744		$	1,633,192		$	1,606,050

The Company purchases reinsurance to reduce its exposure to risk of loss in certain insurance and reinsurance lines of business. Loss recoverables are recorded as assets if the reinsurer is deemed able to meet its obligations. Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains primarily liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements.

During the year ended December 31, 2011, the Company recorded ceded losses of $667.0 million (2010 – $139.1 million; 2009 – $299.0 million). At December 31, 2011, the Company has an allowance for estimated uncollectible premiums receivable of $3.4 million (2010 – $4.9 million) and an allowance for estimated uncollectible losses recoverable of $0.1 million (2010 – Nil).

7. Debt and financing arrangements

On May 8, 2007, Endurance Holdings amended its credit facility among Endurance Holdings, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A. as Administrative Agent, to, among other things; increase the size of the facility to $1,175.0 million from $925.0 million and to extend the maturity of the facility to May 8, 2012 (the “Credit Agreement”). On July 18, 2007, the Company entered into the First Amendment to the Credit Agreement, to, among other things; modify the restrictive covenants in the Credit Agreement to permit the Company to pay dividends on its preference shares following the occurrence of certain defaults as defined pursuant to the terms of the Credit Agreement. As amended, the credit facility is referred to as the “2007 Credit Facility.”

The full amount of the 2007 Credit Facility is available for revolving credit borrowings and for the issuance of letters of credit. The proceeds of the facility may be used for general corporate and working capital purposes, to finance potential acquisitions and for the repurchase of Endurance Holdings’ outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the facility, the Company may request that the size of the facility be increased by $500.0 million, provided that no participating lender is obligated to increase its commitments under the facility.

Up to $675.0 million of borrowings or letter of credit issuances under the 2007 Credit Facility may be collateralized by a portion of the investment portfolio of such subsidiary borrowing under the facility. The facility allows for the issuance of up to $200.0 million in multicurrency letters of credit and up to $300.0 million of fronted letters of credit that may also be multicurrency letters of credit. Endurance Holdings guarantees the obligations of its subsidiaries that are parties to the 2007 Credit Facility.

125

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

7. Debt and financing arrangements, cont’d.

The interest rate for revolving loans under the 2007 Credit Facility is either (i) the higher of (a) the Federal Funds Effective Rate plus 0.5% and (b) the prime commercial lending rate of JPMorgan Chase Bank or (ii) LIBOR plus additional interest ranging from 0.165% to 0.375% depending on the Company’s leverage ratio and if the loan is collateralized or uncollateralized. For letters of credit issued on a collateralized basis, the Company is required to pay a fee ranging from 0.165% to 0.29% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis, the Company is required to pay a fee ranging from 0.275% to 0.375% on the daily stated amount of such letters of credit. In addition, the 2007 Credit Facility requires the Company to pay to the lenders a facility fee and a utilization fee.

The 2007 Credit Facility requires the Company’s compliance with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a leverage ratio (no greater than 0.35:1.00 at any time) and a consolidated tangible net worth (no less than $1.4 billion at any time). In addition, each of the Company’s regulated insurance subsidiaries that have a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the facility generally restrict the declaration or payment of dividends on the Company’s common shares if the Company is already in default or the payment or declaration would cause a default under the terms of the facility.

The 2007 Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 2007 Credit Facility, the lenders can terminate their commitments under the credit facility, require repayment of any outstanding revolving loans, give notice of termination 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 security held by the lenders under the 2007 Credit Facility. See Note 11 for details related to outstanding letters of credit.

On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior Notes due July 15, 2034 (the “7% Senior Notes”), $250.0 million of which were initially issued on July 15, 2004 at a price of 94.976% of their principal amount, providing an effective yield to investors of 7.449%. On the closing of the additional issuance, the Company had a total par value of $335.0 million of the 7% Senior Notes outstanding. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than the date of issue, the initial purchase price to the public and the first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with the previously issued 7% Senior Notes. The Company used the proceeds from the additional 7% Senior Notes for general corporate purposes.

On October 17, 2005, Endurance Holdings issued $200.0 million principal amount of 6.15% Senior Notes due 2015 (the “6.15% Senior Notes”). The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%, and, unless previously redeemed, will mature on October 15, 2015. Endurance Holdings used the net proceeds from the offering to repay the $143.5 million then outstanding under Endurance Holdings’ revolving credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes.

The 6.15% Senior Notes and the 7% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings’ existing and future unsecured and unsubordinated debt. The Senior Notes are also effectively junior to claims of creditors of Endurance Holdings’ subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.

126

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

7. Debt and financing arrangements, cont’d.

The indentures governing each of the Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2011.

The Company made aggregate interest payments of $35.8 million during the year ended December 31, 2011 (2010 – $32.8 million, 2009 – $29.8 million).

8. Derivatives

In 2004, prior to the issuance of the 7% Senior Notes, the Company entered into an interest rate lock on a notional amount of $125 million to protect against interest rate increases before the anticipated issuance of the Senior Notes. The objective of the interest rate lock was to protect 50% of the forecasted receipt of proceeds from the issuance of the 7% Senior Notes offering, which was subject to change prior to issuance due to fluctuations in the benchmark 30 year U.S. Treasury rate. Upon issuance of the 7% Senior Notes, the interest rate lock was settled through payment by the Company of $2.7 million. The interest rate lock agreement was designated as a “cash flow hedge” under the current accounting guidance and accordingly, the fair value of the derivative was recorded in other comprehensive income and is being recognized as a component of interest expense in the statement of income as the interest expense related to the 7% Senior Notes affects earnings. The net income effect of the interest rate lock was not material.

During 2011, the Company invested a portion of its fixed maturity assets with a third party investment manager with investment guidelines that permit the use of derivative instruments. The Company’s derivative instruments are recorded in the Consolidated Balance Sheets at fair value, with changes in fair value and gains and losses generally recognized in net realized and unrealized gains and net foreign exchange gains in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

None of the Company’s derivatives are designated as hedges under current accounting guidance, with the exception of the interest rate lock. The Company’s objectives for holding these derivatives are as follows:

Interest Rate Futures, Swaps, Swaptions and Options

The Company may use interest rate futures, swaps, swaptions and options within its portfolio of fixed maturity investments to manage its exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk through modification of the portfolio composition and duration.

Foreign Exchange Forwards, Futures and Options

The Company may utilize foreign exchange forward contracts and options as part of its overall currency risk management and investment strategies.

Credit Default Swaps

The Company may purchase protection through credit default swaps to mitigate the risk associated with its underwriting operations, most notably in the surety line of business, and 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.

Commodity Futures and Options

The Company may utilize commodity futures and options to economically hedge certain underwriting risks.

127

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

8. Derivatives, cont’d.

The fair values and the related notional values of derivatives included in the Company’s Consolidated Balance Sheets at December 31, 2011 are noted below. The Company began entering into derivative transactions during the first quarter of 2011.

		September 30,			September 30,
	December 31, 2011
				Notional
	Fair			Principal
	Value			Amount
Foreign exchange forward contracts	$	216		$	8,412
Credit default swaps		15			850
Interest rate swaps		223			3,000
Interest rate swaptions		36			1,100
Interest rate futures		23			200,000
Total recorded in other assets	$	513		$	213,362
Foreign exchange forward contracts	$	199		$	8,216
Credit default swaps		71			1,800
Interest rate swaps		594			2,000
Interest rate swaptions		27			5,500
Total recorded in other liabilities	$	891		$	17,516
Net derivative liability	$	(378	)	$	230,878

The fair values of all derivatives at December 31, 2011 were recorded in other assets or other liabilities in the Company’s Consolidated Balance Sheet. None of the above derivatives have been designated as hedges under current accounting guidance.

The gains and losses on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for derivatives for the year ended December 31, 2011 were as follows:

		September 30,
	2011
Total included in net foreign exchange gains from foreign exchange forward contracts	$	(122	)
Futures contracts	$	817
Credit default swaps		(51	)
Interest rate swaps		(1,531	)
Interest rate swaptions		52
Total included in net realized and unrealized gains	$	(713	)
Total included in other underwriting (loss) income from commodity put options	$	(3,365	)
Total losses from derivatives	$	(4,200	)

128

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

9. Segment reporting

The Company is currently organized into two business segments, Insurance and Reinsurance, which are based on how the Company monitors the performance of its underwriting operations.

• Insurance – This segment is comprised of six lines of business: agriculture, professional lines, casualty, property, healthcare liability and surety and other specialty. The agriculture line of business is comprised of multi-peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products. The casualty lines of business are comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty, healthcare liability, workers’ compensation, and professional lines. The property line of business is comprised of the insurance and facultative reinsurance of commercial properties. The types of risks insured are generally properties with sufficiently large values to require multiple insurers and reinsurers to accommodate their insurance capacity needs. The surety and other specialty line includes coverages of workers’ compensation insurance which the Company exited in 2009 and contract and commercial surety business.

• Reinsurance – This segment is comprised of five lines of business: catastrophe, casualty, property, aerospace and marine and surety and other specialty. Catastrophe coverages include reinsurance for catastrophic perils on a treaty basis. The casualty line of business is comprised of third party liability exposures and workers’ compensation coverages. The property line of business includes proportional and excess of loss reinsurance of personal and commercial exposures. The aerospace and marine line coverages include the reinsurance of aviation and space business and proportional and non-proportional reinsurance of hull and cargo insurance business. Surety and other specialty coverages include proportional and excess of loss coverages of contract and commercial surety business, personal accident coverages and agriculture coverages for weather related perils as well as protection from yield and price risks.

Because the Company does not manage its assets by segment, investment income and total assets are not allocated to the individual segments. Management measures segment results on the basis of the combined ratio that is obtained by dividing the sum of the net losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. General and administrative expenses incurred by segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the segment to which they apply. Group reinsurance protection purchased and any subsequent recoveries are allocated to segments based on the underlying exposures covered.

129

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 year ended December 31, 2011, reserve for losses and loss expenses as of December 31, 2011 and the carrying value of goodwill as of December 31, 2011:

		September 30,			September 30,			September 30,
	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	1,469,798		$	997,316		$	2,467,114
Ceded premiums written		(464,308	)		(22,985	)		(487,293	)
Net premiums written		1,005,490			974,331			1,979,821
Net premiums earned		981,592			949,801			1,931,393
Other underwriting loss		(3,368	)		(179	)		(3,547	)
		978,224			949,622			1,927,846
Expenses
Net losses and loss expenses		765,119			867,547			1,632,666
Acquisition expenses		71,295			211,616			282,911
General and administrative expenses		146,115			118,037			264,152
		982,529			1,197,200			2,179,729
Underwriting loss	$	(4,305	)	$	(247,578	)	$	(251,883	)
Net loss ratio		77.9	%		91.3	%		84.6	%
Acquisition expense ratio		7.3	%		22.3	%		14.6	%
General and administrative expense ratio		14.9	%		12.4	%		13.7	%
Combined ratio		100.1	%		126.0	%		112.9	%
Reserve for losses and loss expenses	$	1,937,543		$	1,886,681		$	3,824,224
Goodwill	$	47,925		$	42,529		$	90,454

130

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 year ended December 31, 2010, reserve for losses and loss expenses as of December 31, 2010 and the carrying value of goodwill as of December 31, 2010:

		September 30,			September 30,			September 30,
	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	1,112,192		$	941,044		$	2,053,236
Ceded premiums written		(282,328	)		(7,164	)		(289,492	)
Net premiums written		829,864			933,880			1,763,744
Net premiums earned		821,828			919,285			1,741,113
Other underwriting income (loss)		475			(2,111	)		(1,636	)
		822,303			917,174			1,739,477
Expenses
Net losses and loss expenses		558,040			480,060			1,038,100
Acquisition expenses		63,556			200,672			264,228
General and administrative expenses		123,335			118,585			241,920
		744,931			799,317			1,544,248
Underwriting income	$	77,372		$	117,857		$	195,229
Net loss ratio		67.9	%		52.2	%		59.6	%
Acquisition expense ratio		7.7	%		21.8	%		15.2	%
General and administrative expense ratio		15.0	%		12.9	%		13.9	%
Combined ratio		90.6	%		86.9	%		88.7	%
Reserve for losses and loss expenses	$	1,729,593		$	1,590,334		$	3,319,927
Goodwill	$	45,217		$	41,831		$	87,048

131

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 year ended December 31, 2009, reserve for losses and loss expenses as of December 31, 2009 and the carrying value of goodwill as of December 31, 2009:

		September 30,			September 30,			September 30,
	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	1,152,150		$	869,300		$	2,021,450
Ceded premiums written		(411,840	)		(3,560	)		(415,400	)
Net premiums written		740,310			865,740			1,606,050
Net premiums earned		823,703			809,489			1,633,192
Other underwriting income		3,533			381			3,914
		827,236			809,870			1,637,106
Expenses
Net losses and loss expenses		553,008			313,632			866,640
Acquisition expenses		84,724			183,247			267,971
General and administrative expenses		119,766			117,388			237,154
		757,498			614,267			1,371,765
Underwriting income	$	69,738		$	195,603		$	265,341
Net loss ratio		67.1	%		38.8	%		53.1	%
Acquisition expense ratio		10.3	%		22.6	%		16.4	%
General and administrative expense ratio		14.6	%		14.5	%		14.5	%
Combined ratio		92.0	%		75.9	%		84.0	%
Reserve for losses and loss expenses	$	1,679,990		$	1,477,036		$	3,157,026
Goodwill	$	45,217		$	40,974		$	86,191

The following table reconciles total segment results to (loss) income before income tax benefit (expense) for the years ended December 31, 2011, 2010 and 2009:

		September 30,			September 30,			September 30,
	2011			2010			2009
Total underwriting (loss) income	$	(251,883	)	$	195,229		$	265,341
Net investment income		147,037			200,358			284,200
Net foreign exchange gains		7,422			2,989			29,740
Net realized and unrealized gains		31,671			22,488			6,303
Net impairment losses recognized in (losses) earnings		(3,520	)		(3,944	)		(20,251	)
Amortization of intangibles		(11,213	)		(10,460	)		(10,463	)
Interest expense		(36,254	)		(34,762	)		(30,174	)
(Loss) income before income taxes	$	(116,740	)	$	371,898		$	524,696

132

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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 premiums written by line of business for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,			September 30,
Business Segment	2011		2010			2009
Insurance
Agriculture	$	901,746	$	567,461		$	572,096
Professional lines		169,319		170,146			193,799
Casualty		205,950		167,549			152,580
Property		109,312		122,110			124,621
Healthcare liability		82,519		87,593			82,955
Surety and other specialty		952		(2,667	)		26,099
Total Insurance		1,469,798		1,112,192			1,152,150
Reinsurance
Catastrophe		346,021		309,886			303,404
Casualty		277,495		294,030			255,142
Property		266,562		224,544			215,085
Aerospace and marine		54,591		48,761			44,696
Surety and other specialty		52,647		63,823			50,973
Total Reinsurance		997,316		941,044			869,300
Total	$	2,467,114	$	2,053,236		$	2,021,450

The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
	2011		2010		2009
United States	$	2,001,117	$	1,598,335	$	1,637,649
Worldwide		259,707		239,912		243,105
Europe		106,070		102,574		75,985
Japan		37,610		40,608		27,926
Canada		17,103		17,674		13,741
Australasia		15,364		19,325		6,566
Other		30,143		34,808		16,478
Total gross premiums written	$	2,467,114	$	2,053,236	$	2,021,450

The Company attributes gross premiums written to the geographic region in which the risks originate.

133

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

10. Goodwill and intangible assets

The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2011 and 2010:

		September 30,		September 30,		September 30,			September 30,
			Intangible
			assets with		Intangible
	Goodwill		indefinite lives		assets with finite lives			Total
Net balance at December 31, 2009	$	86,191	$	17,229	$	88,030		$	191,450
Additions		857		—		107			964
Amortization		—		—		(10,460	)		(10,460	)
Net balance at December 31, 2010	$	87,048	$	17,229	$	77,677		$	181,954
Additions		3,406		—		7,681			11,087
Amortization		—		—		(11,213	)		(11,213	)
Net balance at December 31, 2011	$	90,454	$	17,229	$	74,145		$	181,828
Gross balance	$	90,454	$	17,229	$	137,956		$	245,639
Accumulated Amortization		—		—		(63,811	)		(63,811	)
Net balance	$	90,454	$	17,229	$	74,145		$	181,828

On January 21, 2011, ARMtech Insurance Services, Inc., a wholly-owned subsidiary of Endurance Holdings, acquired all outstanding stock of American Omni Crop LLC (“AOC”). AOC is a managing general agency located in Florida. In connection with the acquisition of AOC, the Company recorded a total of $2.7 million of goodwill and $7.6 million of intangible assets. The intangible assets acquired consisted of a non-compete agreement and customer relationships with expected lives of four and fifteen years, respectively.

No impairment of the Company’s goodwill or intangible assets was noted following the annual impairment review for the years ended December 31, 2011 and 2010. No changes were made in the methodologies and assumptions used in the Company’s application of its impairment testing. The Company expects the amortization of the intangible assets with finite lives to approximate $10.3 million in 2012, $7.0 million in 2013, $6.5 million for 2014, $6.3 million in each of 2015 and 2016 and $37.8 million in all years thereafter.

11. Commitments and contingencies

Concentrations of credit risk. The areas where significant concentrations of credit risk may exist include loss recoverables, investments and cash and cash equivalents. The Company’s reinsurance recoverables at December 31, 2011 and 2010 amounted to $666.9 million and $319.3 million, respectively, and resulted from reinsurance arrangements entered into in the normal course of operations. A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of cash, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. As of December 31, 2011, $299.7 million of losses recoverable (2010 – $206.6 million) was due from reinsurers rated A- or better by A.M. Best or Standard & Poor’s. An additional $364.8 million (2010 – $111.7 million) of losses recoverable was due from a U.S. government sponsored reinsurance program as of December 31, 2011.

As of December 31, 2011, substantially all the Company’s cash and investments were held by three custodians.

134

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

11. Commitments and contingencies, cont’d

The Company’s investment guidelines limit the amount of credit exposure to any one issuer other than the U.S. Treasury and certain other foreign government obligations rated AAA.

Major production sources. The following table shows the percentage of net premiums written generated through the Company’s largest brokers for the years ended December 31, 2011, 2010 and 2009:

		September 30,			September 30,			September 30,
Broker	2011			2010			2009
Aon Benfield		18.2	%		21.3	%		20.7	%
Marsh & McLennan Companies, Inc.		16.1	%		20.2	%		19.8	%
Willis Companies		12.7	%		12.6	%		15.3	%
Total of largest brokers		47.0	%		54.1	%		55.8	%

Letters of credit. As of December 31, 2011, the Company had issued letters of credit of $447.3 million (2010 – $439.3 million) under its credit facility in favor of certain ceding companies to collateralize obligations.

Investment commitments. As of December 31, 2011 and 2010, the Company had pledged cash and cash equivalents and fixed maturity investments of $171.4 million and $143.6 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2011 and 2010, the Company had also pledged $517.2 million and $500.9 million of its cash and fixed maturity investments as required to meet collateral obligations for $447.3 million and $439.3 million in secured letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2011 and 2010, cash and fixed maturity investments with fair values of $370.4 million and $369.1 million were on deposit with U.S. state regulators, respectively, and cash and fixed maturity investments with fair values of $7.6 million and $10.7 million were on deposit with Canadian regulators, respectively.

The Company is subject to certain commitments with respect to Other Investments at December 31, 2011 and 2010. The Company is generally subject to redemption restriction provisions of between one to five years from the date of the original commitment and rolling redemption restrictions on a one or two year basis thereafter. Due to redemption restrictions, the Company is prohibited from requesting redemptions during 2012 of $83.6 million of its Other Investments held at December 31, 2011. In addition, as of December 31, 2011 the Company was committed to investing a further $18.1 million (2010 – $11.7 million) in various investment funds classified as Other Investments.

Reinsurance commitments. In the ordinary course of business, the Company enters into reinsurance agreements that may include terms which 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.

135

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

11. Commitments and contingencies, cont’d

Operating leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2011 are as follows:

		September 30,
Year ending December 31,	Amount
2012	$	13,701
2013		12,806
2014		8,346
2015		7,412
2016		5,163
2017 and thereafter		23,429
	$	70,857

Total lease expense under operating leases for the year ended December 31, 2011 was $12.2 million (2010 – $11.1 million; 2009 – $11.4 million).

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, results of operations or business. Pursuant to the Company’s insurance and reinsurance agreements, disputes are generally required to be finally settled by arbitration.

12. Shareholders’ equity

The Company’s share capital at December 31, 2011 and 2010 is comprised as follows:

		September 30,		September 30,
	2011		2010
Preferred shares
Authorized – $1.00 par value each		17,200,000		8,000,000
Issued, outstanding and fully paid:
Series A preferred shares – $1.00 par value each; aggregate liquidation preference $200,000 (2010 - $200,000)		8,000,000		8,000,000
Series B preferred shares – $1.00 par value each; aggregate liquidation preference $230,000 (2010 - Nil)		9,200,000		—
		17,200,000		8,000,000
Common shares
Authorized – $1.00 par value each		120,000,000		120,000,000
Issued, outstanding and fully paid:
Ordinary common shares – $1.00 par value each		43,086,834		47,218,468

During 2011, the Company issued restricted shares under its equity compensation plans (Note 15). The common shares, issued, outstanding and fully paid for 2011 includes 719,961 restricted shares.

136

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

12. Shareholders’ equity, cont’d.

On October 10, 2005, Endurance Holdings issued 8,000,000 shares of its 7.75% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”) and on June 1, 2011, Endurance Holdings issued 9,200,000 shares of its 7.5% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”). The Series A Preferred Shares and Series B Preferred Shares sold were registered under the Securities Act of 1933, as amended, and are traded on the New York Stock Exchange. The Series A Preferred Shares and Series B Preferred Shares were both issued at a price to the public of $25.00 per share. Endurance Holdings received net proceeds of $193.5 million from its offering of Series A Preferred Shares and $224.0 million from its offering of Series B Preferred Shares, in each case after expenses and underwriting discounts. The proceeds from both offerings were used to provide additional capital to Endurance Holdings’ subsidiaries and for other general corporate purposes.

The Series A Preferred Shares and Series B Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after December 15, 2015 (in the case of the Series A Preferred Shares) and after June 1, 2016 (in the case of the Series B Preferred Shares) in each case at a redemption price of $25.00 per share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series A Preferred Shares or Series B Preferred Shares before their respective redemption dates at a redemption price of $26.00 per share, plus any declared and unpaid dividends, to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series A Preferred Shares or Series B Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction or change in Bermuda law.

Dividends on the Series A Preferred Shares and Series B Preferred Shares, when, as and if declared by the Board of Directors of Endurance Holdings or a duly authorized committee of the board, accrue and are payable on the liquidation preference amount from the original issue date, quarterly in arrears on each dividend payment date, at an annual rate of 7.75% in the case of the Series A Preferred Shares and an annual rate of 7.5% in the case of the Series B Preferred Shares. Dividends on the Series A Preferred Shares and Series B Preferred Shares are not cumulative.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of Endurance Holdings, holders of the Series A Preferred Shares, Series B Preferred Shares and any parity shares are entitled to receive out of Endurance Holdings’ assets available for distribution to shareholders, before any distribution is made to holders of Endurance Holdings’ common equity securities, a liquidating distribution in the amount of $25 per Series A Preferred Share and Series B Preferred Share, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Distributions will be made pro rata as to the Series A Preferred Shares, Series B Preferred Shares and any parity shares and only to the extent of Endurance Holdings’ assets, if any, that are available after satisfaction of all liabilities to creditors.

In conjunction with the issuance by the Company of the Series A Preferred Shares, the Company entered into a “Declaration of Covenant” for the benefit of the holders of the 7% Senior Notes. The Covenant states that the Company will redeem its Series A Preferred Shares only if the total redemption price is less than or equal to the proceeds Endurance Holdings or its subsidiaries have received during the six months prior to the date of such redemption from the sale of certain qualifying securities that, among other things, are, with limited exceptions, pari passu with or junior to the Series A Preferred Shares upon the Company’s liquidation, dissolution or winding-up; perpetual, or have a mandatory redemption or maturity date that is not less than sixty years after the initial issuance of such securities; and provide for dividends or other income distributions that are non-cumulative.

Holders of the Series A Preferred Shares and the Series B Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares or the Series B Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings’ bye-laws.

137

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

12. Shareholders’ equity, cont’d.

On November 9, 2011, the Company’s Board of Directors authorized for repurchase up to 7.0 million ordinary shares or share equivalents through November 30, 2013. This authorization superseded previous authorizations. During 2011 and 2010, under programs authorized by the Company’s Board of Directors, the Company repurchased 7,563,469 and 8,677,828 of its ordinary shares and share equivalents in open market and privately negotiated transactions at an average price of $45.06 and $38.96 per share, respectively. Common shares repurchased by the Company are not cancelled and are classified as treasury shares. The Company’s treasury shares are recorded at cost as a reduction in common shares and additional paid-in capital within shareholders’ equity. Total authorized repurchases remaining at December 31, 2011 was 7,000,000 shares (2010 – 2,808,354).

On June 18, 2010, Endurance Holdings, Deutsche Bank AG, London Branch and Deutsche Bank Securities Inc. entered into an agreement to terminate the variable delivery equity forward sale agreement. Prior to its termination, the equity forward sale agreement gave Endurance Holdings the ability to sell its ordinary shares to an affiliate of Deutsche Bank Securities, Inc. for proceeds of approximately $150.0 million. The equity forward sale agreement was originally scheduled to be settled or terminate commencing on July 20, 2010. The Company did not issue any of its ordinary shares in connection with the equity forward sale agreement, nor has the Company incurred any early termination penalties in connection with the termination of the agreement.

At December 31, 2010, 2,985,527 warrants were outstanding. At December 31, 2011, no warrants were outstanding. Such warrants were exercisable for ordinary and class A shares as follows:

		September 30,		September 30,
	2011		2010
Ordinary shares		—		2,438,482
Class A shares		—		547,045
		—		2,985,527

During 2011, the Company repurchased 90,000 (2010 – 10,000) outstanding warrants at an average price of $36.72 (2010 – $26.04), net of the average warrant strike price of $12.87 (2010 – $13.37) per warrant. During 2011, 2,895,527 (2010 –Nil) warrants with an exercise price of $11.97 were exercised for the purchase of the Company’s ordinary shares at an average price of $36.44. The holders of 2,308,482 warrants elected the net settlement option, and thus the Company delivered 2,143,396 ordinary shares in settlement of all exercises.

138

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

13. Earnings per share

The following table sets forth the computation of basic and diluted (losses) earnings per share for the years ended December 31, 2011, 2010 and 2009:

		September 30,			September 30,			September 30,
	2011			2010			2009
Numerator:
Net (loss) income (attributable) available to common and participating common shareholders	$	(117,859	)	$	349,238			520,604
Less amount allocated to participating common shareholders (1)		(961	)		(6,595	)		(9,104	)
Net (loss) income allocated to common shareholders	$	(118,820	)	$	342,643		$	511,500
Denominator:
Weighted average shares – basic
Outstanding		40,214,979			50,880,148			55,908,471
Vested restricted share units		—			1,990			20,210
Weighted average shares – basic		40,214,979			50,882,138			55,928,681
Share equivalents:
Warrants		—			2,004,422			2,047,305
Options		—			830,219			887,249
Restricted share units		—			11,680			10,880
Weighted average shares – diluted		40,214,979			53,728,459			58,874,115
Basic (losses) earnings per common share	$	(2.95	)	$	6.73		$	9.14
Diluted (losses) earnings per common share	$	(2.95	)	$	6.38		$	8.69

(1) Represents earnings and dividends attributable to holders of unvested restricted shares issued under the Company’s stock compensation plans that are considered participating. In periods of loss, no losses are allocated to participating common shareholders (unvested restricted shares).

The following table sets forth dividends declared in the years ended December 31, 2011, 2010 and 2009, respectively:

		September 30,		September 30,		September 30,
	2011		2010		2009
Dividends declared per Series A preferred share	$	1.94	$	1.94	$	1.94
Dividends declared per Series B preferred share	$	0.94	$	—	$	—
Dividends declared per common share	$	1.20	$	1.00	$	1.00

139

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

14. Related party transactions

Since 2002, subsidiaries of BlackRock Inc. (“BlackRock”) have provided the Company and its subsidiaries with various investment management, investment accounting and risk analysis services. BlackRock owned 4.1 million or 9.5% of Endurance Holdings’ ordinary shares outstanding at December 31, 2011 and were therefore considered a related party. The Company incurred expenses totaling $3.2 million (2010—$3.3 million; 2009—$3.6 million) of which $2.1 million was accrued in relation to investment services rendered by Blackrock at December 31, 2011 (2010—$2.0 million). At December 31, 2011, the Company owned BlackRock common shares with a fair value of $0.5 million.

Pyramis Global Advisors, a subsidiary of FMR, LLC (“Fidelity”), provides investment management services to the Company. Fidelity and its affiliates owned 2.6 million or 6.1% of Endurance Holdings’ ordinary shares outstanding at December 31, 2011 and were therefore considered a related party. The Company incurred investment management fees totaling $1.5 million (2010—$2.0 million; 2009—$0.3 million) to this investment manager of which $0.4 million was accrued at December 31, 2011 (2010—$0.4 million).

Richard C. Perry, a former Director of the Company, is President of Perry Corp. Investment funds managed by Perry Corp. collectively owned 7,143,056 ordinary shares and options to purchase an additional 10,000 ordinary shares or approximately 15% of the Company’s common shares outstanding at December 31, 2010. As a non-employee director of the Company, Mr. Perry received from the Company the customary non-employee director compensation, consisting of $77,500 per annum and $70,000 in restricted shares per annum, in each of 2010 and 2009. The investment funds managed by Perry Corp. sold all of their ordinary shares and options to the Company on January 28, 2011.

On February 28, 2011, the Company entered into an agreement with Robert A. Spass, a Director of the Company, to purchase from Mr. Spass warrants exercisable for 90,000 ordinary shares of the Company having an exercise price on the date of the agreement of $12.87 per ordinary share (the “Warrant Purchase Agreement”). The Warrant Purchase Agreement provided that the Company would purchase the warrants from Mr. Spass at a purchase price of $36.72 per warrant, which represented the closing price for the Company’s ordinary shares on the New York Stock Exchange on February 28, 2011, less the exercise price of the warrants. The transactions contemplated by the Warrant Purchase Agreement closed on March 1, 2011.

15. Stock-based employee compensation and other stock plans

At its meeting on February 28, 2007, the Company’s Board of Directors adopted the 2007 Equity Incentive Plan (“2007 Plan”) to allow for the issuance of equity incentives to non-employee directors of the Company and eligible employees of the Company and its subsidiaries. The 2007 Plan was approved by the Company’s shareholders at the Annual General Meeting of Shareholders held on May 9, 2007. At that time, the Company’s existing Amended and Restated 2002 Stock Option Plan and the Amended and Restated 2003 Non-Employee Director Incentive Plan were merged into the new 2007 Plan.

140

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

15. Stock-based employee compensation plans, cont’d.

The 2007 Plan allows the Company to grant to employees and non-employee directors restricted shares, restricted share units, stock appreciation rights, share bonuses, options to purchase the Company’s ordinary shares and other forms of equity incentive awards, as determined by the Compensation Committee of the Company’s Board of Directors.

Under the terms of the 2007 Plan as amended, and after the consolidation of the Company’s previous plans, a total of 2,100,000 ordinary shares were reserved for issuance. At a meeting on February 11, 2010, the Company’s Board of Directors adopted a resolution to add 1,795,000 ordinary shares to the 2007 Plan. The addition of 1,795,000 ordinary shares to the 2007 Plan was approved by the Company’s shareholders at the Annual General Meeting of Shareholders held on May 13, 2010. After the approval of the additional shares, a total of 3,895,000 ordinary shares were reserved for issuance. The Company issues new ordinary shares upon the issuance of share based equity incentives, such as restricted shares, or the exercise or settlement of outstanding derivative equity incentives, such as options or restricted share units. As of December 31, 2011, 2,592,134 (2010—3,789,012) ordinary shares remained available for issuance under the 2007 and prior Plans.

Stock Options

The Company issued stock options to employees and non-employee directors, with exercise prices equal to the fair market values of the Company’s ordinary shares on the grant dates. Options generally vest at a rate of 20% per year over a five-year term. Option awards have a 10-year contractual life.

A summary of option activity, including options held by employees and non-employee directors, during the year ended December 31, 2011 is presented below:

		September 30,		September 30,		September 30,		September 30,
	For the year ended December 31, 2011
					Weighted Average
			Weighted		Remaining
	Number of		Average		Contractual Life		Aggregate
Options Outstanding	Options		Exercise Price		(years)		Intrinsic Value
Beginning of year		1,277,651	$	16.41
Granted		—		—
Exercised		1,152,850		15.19
Forfeited		10,000		28.03
Outstanding, end of year		114,801	$	23.14		1.38	$	1,734
Exercisable and vested options, end of year		114,801	$	23.14		1.38	$	1,734

No options were granted, expired or vested during the years ended December 31, 2011, 2010 and 2009. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $32.5 million, $9.9 million, and $4.2 million, respectively. The Company received proceeds of $17.6 million from the exercise of options during the year ended December 31, 2011. The Company issued new ordinary shares in connection with the exercise of the above options.

141

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

15. Stock-based employee compensation plans, cont’d.

There were no unrecognized stock-based compensation expenses related to unvested stock options at December 31, 2011.

Restricted Shares and Restricted Share Units

The Company issued restricted shares and restricted share units to employees and non-employee directors. The fair value of the restricted shares and restricted share units granted is equal to the fair market value of the Company’s ordinary shares on the grant date. Compensation equal to the fair market value of the restricted shares and restricted share units at the measurement date is amortized and charged to income over the vesting period. Restricted shares granted to employees vest pro rata over a four-year period and are forfeited upon departure from the Company for any reason prior to the applicable vesting date.

Restricted shares granted to non-employee directors vest twelve months following the date of grant and are forfeited upon departure from the Board of Directors for any reason prior to the applicable vesting date.

The Company grants restricted share units in an amount equal to the dividends that would have been paid on the notional amount of certain options held by employees of the Company. These restricted share units vest and settle on the first March 1^st following the six-month anniversary of the date of issuance of the unit.

The Company generally withholds an amount sufficient to satisfy any federal, state or local withholding tax requirements associated with the vesting of the restricted shares and the restricted share units held by employees.

A summary of the restricted share and restricted share unit activity during the year ended December 31, 2011, is presented below:

		September 30,			September 30,
	Number of			Aggregate
	Shares/Units			Intrinsic Value
Unvested, beginning of year		980,212
Granted		305,806
Settled		(401,005	)
Forfeited		(154,959	)
Unvested, end of year		730,054
Outstanding, end of year		730,054		$	27,925

During the years ended December 31, 2011, 2010 and 2009, the Company granted an aggregate of 305,806, 532,964 and 326,671 restricted shares and restricted share units with weighted average grant date fair values of $14.8 million, $20.4 million and $7.6 million. During the years ended December 31, 2011, 2010 and 2009, the aggregate fair value of restricted shares and restricted share units that vested was $14.4 million, $13.5 million and $15.1 million, respectively.

For the years ended December 31, 2011, 2010 and 2009, compensation costs recognized in earnings for all restricted shares and restricted share units were $14.8 million, $12.9 million, and $13.3 million, respectively. At December 31, 2011, compensation costs not yet recognized related to non-vested awards was $9.9 million (2010 – $11.6 million). This expense is expected to be recognized between 2012 and 2015, with approximately 63.9% expected to be recognized during 2012.

142

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

15. Stock-based employee compensation plans, cont’d.

Employee Share Purchase Plan

On October 26, 2005, Endurance Holdings’ shareholders approved the Employee Share Purchase Plan (the “ESPP”). The ESPP is not subject to any provisions of the Employee Retirement Income Security Act of 1974 as amended, and is not a qualified plan within the meaning of Section 402(a) of the Internal Revenue Code of 1986, as amended (the “Code”). The ESPP is a qualified plan under 423 of the Code.

Following approval by the Company’s shareholders in 2005, 200,000 of Endurance Holdings’ ordinary shares were reserved for issuance under the ESPP. At a meeting on February 23, 2011, the Company’s Board of Directors adopted a resolution to add 200,000 ordinary shares to the ESPP. The addition of 200,000 ordinary shares to the ESPP was approved by the Company’s shareholders at the Annual General Meeting of Shareholders held on May 11, 2011. After approval of the additional ordinary shares, a total of 400,000 ordinary shares were reserved for issuance under the ESPP.

Under the terms of the ESPP, employees of Endurance Holdings and certain of its subsidiaries may purchase Endurance Holdings’ ordinary shares at a 15% discount to the closing market price on the purchase date. Participants are eligible to receive dividends on the shares purchased in the ESPP and are entitled to vote such shares at any Annual General or Special Meeting of Shareholders. These shares are restricted from sale, transfer or certification for one year from the purchase date.

Total expenses related to this plan for the year ended December 31, 2011 was approximately $200,000 (2010 – $172,000; 2009– $100,000).

16. Pension Plan

The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company’s defined contribution plans, the Company makes contributions to its employees’ accounts in amounts ranging from 4% to 10% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Company contributions for the year ended December 31, 2011 resulted in an expense of $7.5 million being recorded in earnings (2010 – $8.4 million; 2009 – $9.2 million).

17. Statutory requirements and dividend restrictions

Our insurance and reinsurance operations are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate, including Bermuda, the United States and the United Kingdom. These regulations include certain restrictions on the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities.

143

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

17. Statutory requirements and dividend restrictions, cont’d.

The combined statutory capital and surplus and combined statutory net (loss) income for our principal operating subsidiaries in their respective jurisdictions were as follows:

		September 30,			September 30,			September 30,
	Bermuda			United States			Other(2)
Statutory capital and surplus
At December 31, 2011	$	2,422,398	(1)	$	620,833			N/A	(3)
At December 31, 2010	$	2,561,532	(1)	$	648,410		$	210,447
Statutory net income (loss)
For the year ended December 31, 2011	$	51,101		$	(77,374	)		N/A	(3)
For the year ended December 31, 2010		370,136			27,544		$	(16,664	)
For the year ended December 31, 2009		583,394			(4,206	)		(74	)

(1) Bermuda statutory capital and surplus includes an investment in affiliate asset, which represents its interest in the remaining insurance and reinsurance operations of the Company included in the United States and Other columns above.

(2) Includes Endurance U.K. and the Company’s Singapore branch.

(3) Endurance U.K. and the Company’s Singapore branch are currently completing 2011 statutory profit and loss statements. The Company’s Zurich branch had no statutory filing requirement at or for the years ended December 31, 2011, 2010 and 2009.

As a holding company, Endurance Holdings relies on dividends from Endurance Bermuda to provide cash flow required for debt service and dividends to shareholders. Endurance Bermuda’s ability to pay dividends and make capital distributions is subject to certain regulatory restrictions based on the enhanced capital requirement calculated using the Bermuda standard model in addition to limits on the amount of Endurance Bermuda’s premiums written and net reserves for losses and loss expenses, subject to an overall minimum capital and surplus requirement of $100.0 million. The Bermuda Solvency Capital Requirement (“BSCR”) employs a standard mathematical model that correlates the risk underwritten to the capital that is dedicated to the business. The regulatory requirements are designed to have insurers operate at or above a threshold capital level, which exceeds the BSCR. The Company is currently completing the 2011 BSCR for Endurance Bermuda and believes that Endurance Bermuda will exceed the target level of required capital as of December 31, 2011. At December 31, 2011, Endurance Bermuda can pay $605.6 million (2010—$640.4 million) to Endurance Holdings without prior approval under Bermuda law. In addition, Endurance Bermuda is required to maintain a minimum statutory liquidity ratio and solvency margin.

Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the Delaware Department of Insurance. ARMtech is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2011, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions, and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2012 without the prior approval of the applicable insurance regulator. If the parent company is also an insurer, as is the case with Endurance American, Endurance American Specialty and Endurance Risk Solutions, the parent company or companies must also meet their own dividend eligibility requirements in order to pass along any dividends received from subsidiary insurance companies. At December 31, 2011, ARMtech (with notice to the Texas Department of Insurance) could pay dividends of $3.9 million (2010—$2.8 million) without prior regulatory approval.

144

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

17. Statutory requirements and dividend restrictions, cont’d.

Under the jurisdiction of the United Kingdom’s Financial Services Authority (“FSA”), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The FSA regulatory requirements impose no explicit restrictions on Endurance U.K.’s ability to pay a dividend, but Endurance U.K. would have to notify the FSA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distribution. At December 31, 2011 Endurance U.K likely will not have profits available for distribution.

18. Taxes

The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland, Singapore and Canada, which are subject to the relevant taxes in those jurisdictions. In February 2012, the IRS notified the Company that it would be conducting an audit of the Company’s U.S. subsidiaries’ 2010 tax return. In addition, the Canada Revenue Agency has commenced an examination of income tax returns for 2008 and 2009 for the Canadian branch of one of the Company’s U.S. subsidiaries. Due to the uncertainty of the outcome of these audits, the Company cannot estimate the range of reasonably possible changes to its unrecognized tax benefits at this time. However, the Company does not expect to receive any adjustments that would result in a material change to its financial position. The Company’s other operating subsidiaries and branch operations are not under examination in any jurisdictions. The Company remains subject to examination for tax years 2007 – 2011.

The Company is not required to pay any income or capital gains taxes in Bermuda. The Company has received written assurance dated May 17, 2011 from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966 of Bermuda, as amended, that in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not be applicable to the Company until March 31, 2035 provided that the assurance is subject to the condition that it will not prevent the application of any taxes payable by the Company in respect of real property or leasehold interests in Bermuda held by it. Endurance’s Bermuda affiliates intend to operate in a manner such that they will owe no United States tax other than premium excise tax and withholding taxes on certain investments.

The income tax benefit (expense) was as follows for the years ended December 31, 2011, 2010 and 2009, respectively:

		September 30,		September 30,			September 30,
	2011		2010			2009
Current income tax benefit (expense)	$	13,518	$	(28,556	)	$	6,081
Deferred income tax benefit		9,488		21,396			5,327
Income tax benefit (expense)	$	23,006	$	(7,160	)	$	11,408

Of the 2011 current income tax benefit (expense), $12.7 million related to taxes incurred in the United States (2010 – $(27.7) million; 2009 – $6.5 million). Of the deferred income tax benefit, $9.6 million related to deferred income tax benefits in the United States (2010 – $21.4 million; 2009 – $5.3 million). A full valuation allowance has been recorded against the net asset position of Endurance Bermuda’s foreign branches and Endurance U.K.

145

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

18. Taxes, cont’d.

The actual income tax benefit (expense) attributable to income for the years ended December 31, 2011, 2010 and 2009 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income before income tax benefit (expense), as a result of the following:

		September 30,			September 30,			September 30,
	2011			2010			2009
Computed expected tax expense	$	—		$	—		$	—
Tax benefit (expense) effect on foreign taxes		40,808			(3,169	)		5,308
Change in valuation allowance		(17,802	)		(3,991	)		6,100
	$	23,006		$	(7,160	)	$	11,408

Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following as of December 31, 2011, and 2010:

		September 30,			September 30,
	2011			2010
Deferred income tax assets:
Unearned premiums	$	21,446		$	17,726
Loss reserves		31,927			35,064
Net operating loss carry forward		41,645			24,054
Deferred compensation		11,537			11,989
Deferred interest		36,071			28,075
Start up costs		126			550
Realized investment losses		1,266			2,302
Other		6,125			4,358
Total deferred income tax assets		150,143			124,118
Deferred income tax liabilities:
Deferred acquisition costs		(18,727	)		(15,055	)
Unrealized investment gains		(16,902	)		(10,029	)
Unrealized foreign exchange gain		(12,048	)		(12,747	)
Temporary differences related to acquisition		(26,437	)		(26,814	)
Other		(11,306	)		(12,223	)
Total deferred income tax liabilities		(85,420	)		(76,868	)
Valuation allowance		(31,368	)		(13,566	)
Net deferred income tax asset	$	33,355		$	33,684

Net income tax refunds received in 2011 totaled $15.7 million. The Company paid net income taxes and received net refunds totaling $24.3 million and $6.8 million for the years ended December 31, 2010 and 2009, respectively. Net operating loss carryforwards in the amount of $45.5 million, $59.1 million, $41.6 million and $26.7 million are available for application against future taxable income in the United States, United Kingdom, Singapore and Switzerland, respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carry forwards expire through 2018 and 2031, respectively. There were no income taxes payable in the United Kingdom as of December 31, 2011 or 2010.

146

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

18. Taxes, cont’d.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 2011, management has established a valuation allowance of $31.4 million (2010 – $13.6 million) against net operating loss carryforwards in the Company’s United States subsidiaries, United Kingdom subsidiary and non-U.S. branches. The valuation allowance in 2010 was established against net operating loss carryforwards in the United Kingdom and non-U.S. branches.

The Company’s (loss) income before income taxes was distributed as follows for the years ended December 31, 2011, 2010 and 2009, respectively:

		September 30,			September 30,		September 30,
	2011			2010		2009
U.S. (domestic)	$	(125,752	)	$	88,147	$	26,832
Non-U.S. (foreign)(1)		9,012			283,751		497,864
(Loss) income before income taxes	$	(116,740	)	$	371,898	$	524,696

(1) The Company’s non-U.S. (foreign) operating subsidiaries write business that is exposed to risks originating in the United States.

As of December 31, 2011 and 2010, the Company had no uncertain tax positions.

19. Condensed unaudited quarterly financial data

The following is a summary of the unaudited quarterly data for the year ended December 31, 2011:

		September 30,			September 30,			September 30,			September 30,
	Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2011			2011			2011			2011
Net premiums earned	$	382,833		$	486,578		$	561,493		$	500,489
Net investment income		52,501			39,842			14,100			40,594
Net realized and unrealized gains		3,775			21,532			1,033			5,331
Net impairment losses recognized in earnings		(1,647	)		(932	)		(240	)		(701	)
Subtotal	$	437,462		$	547,020		$	576,386		$	545,713
Net losses and loss expenses	$	401,853		$	361,970		$	456,691		$	412,152
Acquisition and general and administrative expenses	$	131,579		$	133,773		$	130,823		$	150,888
Net foreign exchange (gains) losses	$	(6,918	)	$	3,348		$	(4,085	)	$	233
Net (loss) income	$	(87,417	)	$	41,077		$	(20,018	)	$	(27,376	)
Preferred dividends		(3,875	)		(3,875	)		(8,188	)		(8,187	)
Net (loss) income (attributable) available to common and participating common shareholders	$	(91,292	)	$	37,202		$	(28,206	)	$	(35,563	)
Basic (losses) earnings per share	$	(2.25	)	$	0.92		$	(0.71	)	$	(0.88	)
Diluted (losses) earnings per share	$	(2.25	)	$	0.87		$	(0.71	)	$	(0.88	)

147

ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

19. Condensed unaudited quarterly financial data, cont’d.

The following is a summary of the unaudited quarterly data for the year ended December 31, 2010:

		September 30,			September 30,			September 30,			September 30,
	Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2010			2010			2010			2010
Net premiums earned	$	365,189		$	456,395		$	469,793		$	449,736
Net investment income		56,479			33,351			53,654			56,874
Net realized and unrealized gains		3,544			2,657			8,973			7,314
Net impairment losses recognized in earnings		(861	)		(992	)		(1,380	)		(711	)
Subtotal	$	424,351		$	491,411		$	531,040		$	513,213
Net losses and loss expenses	$	232,597		$	292,947		$	266,132		$	246,424
Acquisition and general and administrative expenses	$	122,909		$	122,384		$	126,966		$	133,889
Net foreign exchange losses (gains)	$	5,971		$	129		$	(12,565	)	$	3,476
Net income	$	55,789		$	58,593		$	139,128		$	111,228
Preferred dividends		(3,875	)		(3,875	)		(3,875	)		(3,875	)
Net income available to common and participating common shareholders	$	51,914		$	54,718		$	135,253		$	107,353
Basic earnings per share	$	0.95		$	1.02		$	2.64		$	2.22
Diluted earnings per share	$	0.91		$	0.97		$	2.51		$	2.09

148

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with accountants on accounting and financial disclosure during the course of the year.

Item 9A. Controls and Procedures

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended.

The management of Endurance Specialty Holdings Ltd. (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). This internal control provides monitoring mechanisms, and actions are taken to correct deficiencies identified.

There are inherent limitations in any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, controls may become inadequate or the degree of compliance with policies or procedures may deteriorate over time.

Management assessed the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2011, the Company maintained effective internal control over financial reporting.

Ernst & Young Ltd., an independent registered public accounting firm, has issued their attestation report on the Company’s internal control over financial reporting.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

Information required to be disclosed in a report on Form 8-K during the three months ended December 31, 2011 was so reported.

149

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information called for by Item 10 is incorporated herein by reference to the sections captioned “Board of Directors,” “Management” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Proxy Statement for our 2012 Annual General Meeting of Shareholders.

Our Board of Directors has adopted a code of ethics entitled “Code of Business Conduct and Ethics” which applies to all of our employees, officers and directors, including our chief executive officer and chief financial officer. Copies of this code can be found at www.endurance.bm and may be obtained in print, without cost, by writing Endurance Specialty Holdings Ltd., Attention: Secretary, Wellesley House, 90 Pitts Bay Road, Pembroke HM08, Bermuda.

Item 11. Executive Compensation

The information called for by Item 11 is incorporated herein by reference to the sections captioned “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation” of our Proxy Statement for our 2012 Annual General Meeting of Shareholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information called for by Item 12 relating to the security ownership of certain beneficial owners and management is incorporated herein by reference to the sections captioned “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Directors and Executive Officers” of our Proxy Statement for our 2012 Annual General Meeting of Shareholders.

Information required by this item relating to securities authorized for issuance under the equity compensation plans is included in the following table:

Equity Compensation Plan Information

		September 30,		September 30,		September 30,
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights (1)		Number of securities remaining available for future issuance  under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders		124,893	$	23.14		2,776,558
Equity compensation plans not approved by security holders		—		—		—
Total		124,893	$	23.14		2,776,558

(1) Weighted average exercise price does not include $0 exercise price of 10,093 restricted share units included in the number of securities to be issued upon exercise.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information called for by Item 13 is incorporated herein by reference to the sections captioned “Transactions with Related Persons, Promoters and Certain Control Persons” and “Board of Directors” of our Proxy Statement for our 2012 Annual General Meeting of Shareholders.

Item 14. Principal Accountant Fees and Services

The information called for by Item 14 is incorporated herein by reference to the section captioned “Audit Fees” of our Proxy Statement for our 2012 Annual General Meeting of Shareholders.

150

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following is a list of certain documents filed as a part of this report:

(1) Financial Statements. See Index to Consolidated Financial Statements on page 99 hereof.

(2) Financial Statement Schedules. See Index to Consolidated Financial Statement Schedules on page 152 hereof.

(3) Exhibits. See Exhibit Index beginning on page 164 hereof.

151

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ENDURANCE SPECIALTY HOLDINGS LTD.
Date: February 29, 2012	/s/ David Cash
	Name:   David Cash
	Title:     Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and as on the dates indicated.

Signature	Title	Date
/s/ David Cash
David Cash	Chief Executive Officer and Director (Principal Executive Officer)	February 29, 2012
/s/ Michael J. McGuire
Michael J. McGuire	Chief Financial Officer (Principal Accounting Officer)	February 29, 2012
/s/ William M. Jewett William M. Jewett	President and Director	February 29, 2012
/s/ John T. Baily John T. Baily	Director	February 29, 2012
/s/ Norman Barham Norman Barham	Director	February 29, 2012
/s/ Galen R. Barnes Galen R. Barnes	Director	February 29, 2012
/s/ William H. Bolinder William H. Bolinder	Director	February 29, 2012
/s/ Steven W. Carlsen Steven W. Carlsen	Director	February 29, 2012
/s/ Susan S. Fleming Susan S. Fleming	Director	February 29, 2012
/s/ Scott D. Moore Scott D. Moore	Director	February 29, 2012
/s/ Brendan R. O’Neill Brendan R. O’Neill	Director	February 29, 2012
/s/ William J. Raver William J. Raver	Director	February 29, 2012
/s/ Robert A. Spass Robert A. Spass	Director	February 29, 2012

152

Index to Consolidated Financial Statement Schedules

	Pages
Report of Independent Registered Public Accounting Firm on Schedules		154
I. Summary of Investments other than Investments in Related Parties at December 31, 2011		155
II. Condensed Financial Statement Information of the Registrant		156
III. Supplementary Insurance Information for the years ended December 31, 2011, 2010 and 2009		159
IV. Reinsurance for the years ended December 31, 2011, 2010 and 2009		161
VI. Supplementary Information for Property and Casualty Insurance Underwriters for the years ended December 31, 2011, 2010 and 2009		162

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

153

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ENDURANCE SPECIALTY HOLDINGS LTD.

We have audited the consolidated financial statements of Endurance Specialty Holdings Ltd. as of December 31, 2011 and 2010, and for each of the three years in the period ended December 31, 2011, and have issued our report thereon dated February 29, 2012; such financial statements and our report thereon are included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedules listed in Item 15(a) (2) of this Annual Report on Form 10-K for the year ended December 31, 2011. These schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Ernst & Young Ltd.

Hamilton, Bermuda

February 29, 2012

154

SCHEDULE I

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES

AT DECEMBER 31, 2011

(In thousands of United States dollars)

		September 30,		September 30,		September 30,
	Cost(1)		Market Value		Amount at Which Shown on the Balance Sheet
Type of Investment:
Fixed Maturity Investments
U.S. government and government agencies and authorities	$	1,218,069	$	1,269,123	$	1,269,123
States, municipalities and political subdivisions		52,274		53,517		53,517
Foreign governments		73,361		74,997		74,997
Corporate bonds		1,467,928		1,491,724		1,491,724
Mortgage-backed securities
Agency mortgage-backed securities		961,736		993,826		993,826
Non-agency mortgage-backed securities		611,409		633,145		633,145
Asset-backed securities		316,212		315,634		315,634
Total fixed maturity investments	$	4,700,989	$	4,831,966	$	4,831,966
Short-term investments		67,803		67,802		67,802
Equity securities		56,381		59,767		59,767
Other investments		336,337		432,658		432,658
Total Investments	$	5,161,510	$	5,392,193	$	5,392,193

⁽¹⁾ Investments in fixed maturity investments and short-term investments are shown at amortized cost.

155

SCHEDULE II

ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED FINANCIAL STATEMENT INFORMATION OF THE REGISTRANT

BALANCE SHEETS—PARENT ONLY

DECEMBER 31, 2011 AND 2010

(In thousands of United States dollars except share amounts)

		September 30,		September 30,
	2011		2010
ASSETS
Investment in subsidiary	$	2,932,610	$	3,070,935
Cash and cash equivalents		1,230		6,095
Amounts due from subsidiaries		216,297		314,222
Other assets		8,722		8,698
Total assets	$	3,158,859	$	3,399,950
LIABILITIES
Debt		528,001		528,324
Other liabilities		19,693		23,473
Total liabilities		547,694		551,797
SHAREHOLDERS’ EQUITY
Preferred shares
Series A and Series B, non-cumulative – 17,200,000 issued and outstanding (2010 – 8,000,000)		17,200		8,000
Common shares
Ordinary – 43,086,834 issued and outstanding (2010 – 47,218,468)		43,087		47,218
Additional paid-in capital		526,910		613,915
Accumulated other comprehensive income		150,550		138,571
Retained earnings		1,873,418		2,040,449
Total shareholders’ equity		2,611,165		2,848,153
Total liabilities and shareholders’ equity	$	3,158,859	$	3,399,950

See accompanying notes to the consolidated financial statements.

156

SCHEDULE II

ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED FINANCIAL STATEMENT INFORMATION OF THE REGISTRANT, Cont’d.

STATEMENTS OF (LOSS) INCOME—PARENT ONLY

YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009

(In thousands of United States dollars)

		September 30,			September 30,			September 30,
	2011			2010			2009
Revenues
Net investment loss	$	(6	)	$	—		$	(2	)
Other income		8,303			20,758			—
		8,297			20,758			(2	)
Expenses
General and administrative expenses		22,670			23,945			19,849
Interest expense		36,250			34,762			30,159
Total expenses		58,920			58,707			50,008
Net loss before equity in net income of subsidiaries		(50,623	)		(37,949	)		(50,010	)
Equity in net (loss) income of subsidiaries		(43,111	)		402,687			586,114
Net (loss) income		(93,734	)		364,738			536,104
Preferred dividends		(24,125	)		(15,500	)		(15,500	)
Net (loss) income (attributable) available to common and participating common shareholders	$	(117,859	)	$	349,238		$	520,604

See accompanying notes to the consolidated financial statements

157

SCHEDULE II

ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED FINANCIAL STATEMENT INFORMATION OF THE REGISTRANT, Cont’d.

STATEMENTS OF CASH FLOWS—PARENT ONLY

YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009

(In thousands of United States dollars)

		September 30,			September 30,			September 30,
	2011			2010			2009
Cash flows used in operating activities:
Net (loss) income	$	(93,734	)	$	364,738		$	536,104
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		760			239			185
Stock-based compensation expense		8,292			5,828			6,672
Equity in net losses (earnings) of subsidiary		43,111			(402,687	)		(586,114	)
Other assets		(490	)		55			(391	)
Other liabilities		(307	)		(1,129	)		6,140
Net cash used in operating activities		(42,368	)		(32,956	)		(37,404	)
Cash flows provided by investing activities:
Dividends received from subsidiary		107,100			346,091			520,843
Net amounts received from (loaned to) subsidiaries		104,650			(7,811	)		(281,509	)
Net cash provided by investing activities		211,750			338,280			239,334
Cash flows used in financing activities:
(Repayment) issuance of long term debt		(529	)		80,730			—
Issuance of common shares		26,489			7,209			5,246
Issuance of series B, non-cumulative preferred shares		224,022			—			—
Offering and registration costs paid		(586	)		(2,064	)		(1,500	)
Repurchase of common shares		(344,272	)		(338,510	)		(112,480	)
Settlement of restricted shares		(6,074	)		(5,209	)		(4,011	)
Dividends paid on preferred shares		(24,125	)		(15,500	)		(15,500	)
Dividends paid on common shares		(49,172	)		(51,301	)		(57,074	)
Net cash used in financing activities		(174,247	)		(324,645	)		(185,319	)
Net (decrease) increase in cash and cash equivalents		(4,865	)		(19,321	)		16,611
Cash and cash equivalents, beginning of year		6,095			25,416			8,805
Cash and cash equivalents, end of year	$	1,230		$	6,095		$	25,416

See accompanying notes to the consolidated financial statements

158

SCHEDULE III

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION

YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009

(In thousands of United States dollars)

Year Ended December 31, 2011

		September 30,		September 30,		September 30,
	Insurance		Reinsurance		Total
Deferred Acquisition Costs	$	36,895	$	129,154	$	166,049
Reserve for Losses and Loss Expenses		1,937,543		1,886,681		3,824,224
Unearned Premiums		448,786		483,322		932,108
Net Premiums Earned		981,592		949,801		1,931,393
Net Investment Income (1)		—		—		147,037
Net Losses and Loss Expenses		765,119		867,547		1,632,666
Amortization of Deferred Acquisition Costs		71,295		211,616		282,911
Other Operating Expenses (2)		146,115		118,037		264,152
Net Premiums Written		1,005,490		974,331		1,979,821

⁽¹⁾  Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

⁽²⁾ General and administrative expenses incurred by segments are allocated directly. Remaining corporate overhead is allocated to segments primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses.

Year Ended December 31, 2010

		September 30,		September 30,		September 30,
	Insurance		Reinsurance		Total
Deferred Acquisition Costs	$	32,950	$	121,534	$	154,484
Reserve for Losses and Loss Expenses		1,729,593		1,590,334		3,319,927
Unearned Premiums		386,626		455,528		842,154
Net Premiums Earned		821,828		919,285		1,741,113
Net Investment Income (1)		—		—		200,358
Net Losses and Loss Expenses		558,040		480,060		1,038,100
Amortization of Deferred Acquisition Costs		63,556		200,672		264,228
Other Operating Expenses (2)		123,335		118,585		241,920
Net Premiums Written		829,864		933,880		1,763,744

⁽¹⁾ Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

⁽²⁾  General and administrative expenses incurred by segments are allocated directly. Remaining corporate overhead is allocated to segments primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses.

159

SCHEDULE III

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION, Cont’d

YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009

(In thousands of United States dollars)

Year Ended December 31, 2009

		September 30,		September 30,		September 30,
	Insurance		Reinsurance		Total
Deferred Acquisition Costs	$	31,831	$	115,148	$	146,979
Reserve for Losses and Loss Expenses		1,679,990		1,477,036		3,157,026
Unearned Premiums		390,826		441,735		832,561
Net Premiums Earned		823,703		809,489		1,633,192
Net Investment Income (1)		—		—		284,200
Net Losses and Loss Expenses		553,008		313,632		866,640
Amortization of Deferred Acquisition Costs		84,724		183,247		267,971
Other Operating Expenses (2)		119,766		117,388		237,154
Net Premiums Written		740,310		865,740		1,606,050

⁽¹⁾ Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

⁽²⁾ General and administrative expenses incurred by segments are allocated directly. Remaining corporate overhead is allocated to segments primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses.

160

SCHEDULE IV

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

REINSURANCE

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(In thousands of United States dollars)

		September 30,		September 30,		September 30,		September 30,		September 30,
									Percentage
			Ceded to		Assumed				of Amount
			Other		from Other				Assumed
Premiums Written	Gross		Companies		Companies		Net Amount		to Net
Year ended December 31, 2011:
Property and liability insurance	$	1,469,798	$	487,293	$	997,316	$	1,979,821		50	%
Year ended December 31, 2010:
Property and liability insurance	$	1,112,192	$	289,492	$	941,044	$	1,763,744		53	%
Year ended December 31, 2009:
Property and liability insurance	$	1,152,150	$	415,400	$	869,300	$	1,606,050		54	%

161

SCHEDULE VI

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY

INSURANCE UNDERWRITERS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009

(In thousands of United States dollars)

Year Ended December 31, 2011

		September 30,			September 30,			September 30,
	Insurance			Reinsurance			Total
Deferred Acquisition Costs	$	36,895		$	129,154		$	166,049
Reserve for Losses and Loss Expenses		1,937,543			1,886,681			3,824,224
Discount if any, Reserve for Losses and Loss Expenses		—			—			—
Unearned Premiums		448,786			483,322			932,108
Net Premiums Earned		981,592			949,801			1,931,393
Net Investment Income (1)		—			—			147,037
Net Losses and Loss Expenses
Current Year		835,898			976,746			1,812,644
Prior Year		(70,779	)		(109,199	)		(179,978	)
Amortization of Deferred Acquisition Costs		71,295			211,616			282,911
Paid Losses and Loss Expenses		889,521			580,742			1,470,263
Net Premiums Written		1,005,490			974,331			1,979,821

(1) Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

Year Ended December 31, 2010

		September 30,			September 30,			September 30,
	Insurance			Reinsurance			Total
Deferred Acquisition Costs	$	32,950		$	121,534		$	154,484
Reserve for Losses and Loss Expenses		1,729,593			1,590,334			3,319,927
Discount if any, Reserve for Losses and Loss Expenses		—			—			—
Unearned Premiums		386,626			455,528			842,154
Net Premiums Earned		821,828			919,285			1,741,113
Net Investment Income (1)		—			—			200,358
Net Losses and Loss Expenses
Current Year		604,911			559,991			1,164,902
Prior Year		(46,871	)		(79,931	)		(126,802	)
Amortization of Deferred Acquisition Costs		63,556			200,672			264,228
Paid Losses and Loss Expenses		358,584			358,672			717,256
Net Premiums Written		829,864			933,880			1,763,744

(1) Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

162

SCHEDULE VI

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY

INSURANCE UNDERWRITERS, Cont’d.

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(In thousands of United States dollars)

Year Ended December 31, 2009

		September 30,			September 30,			September 30,
	Insurance			Reinsurance			Total
Deferred Acquisition Costs	$	31,831		$	115,148		$	146,979
Reserve for Losses and Loss Expenses		1,679,990			1,477,036			3,157,026
Discount if any, Reserve for Losses and Loss Expenses		—			—			—
Unearned Premiums		390,826			441,735			832,561
Net Premiums Earned		823,703			809,489			1,633,192
Net Investment Income(1)		—			—			284,200
Net Losses and Loss Expenses
Current Year		645,086			372,443			1,017,529
Prior Year		(92,078	)		(58,811	)		(150,889	)
Amortization of Deferred Acquisition Costs		84,724			183,247			267,971
Paid Losses and Loss Expenses		440,678			409,718			850,396
Net Premiums Written		740,310			865,740			1,606,050

(1) Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

163

EXHIBIT INDEX

Exhibit Number	Description of Document
3.1	Memorandum of Association. Incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed on January 28, 2003.
3.2	Certificate of Deposit of Memorandum of Increase of Share Capital. Incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the Year Ended December 31, 2004.
3.3	Amended and Restated Bye-laws. Incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended June 30, 2008.
4.1	Specimen Ordinary Share Certificate. Incorporated herein by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form S-1 filed on February 10, 2003.
4.2	Certificate of Designations of 7.75% Non-Cumulative Preferred Shares, Series A. Incorporated herein by reference to Exhibit 4.1 to Form 8-A filed on October 12, 2005.
4.3	Specimen 7.75% Non-Cumulative Preferred Share, Series A Certificate. Incorporated herein by reference to Exhibit 4.2 to Form 8-A filed on October 12, 2005.
4.4	Certificate of Designations of 7.50% Non-Cumulative Preferred Shares, Series B. Incorporated herein by reference to Exhibit 4.1 to Form 8-A filed on June 1, 2011.
4.5	Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on July 15, 2004.
4.6	First Supplemental Indenture, dated as of July 15, 2004, to the Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on July 15, 2004.
4.7	Form of 7% Senior Note due July 15, 2034 (included in Exhibit 4.2 to the Current Report on Form 8-K on July 15, 2004). Incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K filed on July 15, 2004.
4.8	Second Supplemental Indenture, dated as of October 17, 2005, to the Indenture, dated as of July 15, 2004, between the Company, as Issuer, and The Bank of New York, as Trustee. Incorporated herein by reference to Exhibit 1.2 to the Current Report on Form 8-K filed on October 18, 2005.
4.9	Form of 6.15% Senior Note due October 15, 2015 (included in Exhibit 1.2 to the Current Report on Form 8-K on July 15, 2004). Incorporated herein by reference to Exhibit 1.2 to the Current Report on Form 8-K filed on October 18, 2005.
4.10	Third Supplemental Indenture, by and between Endurance Specialty Holdings Ltd. and The Bank of New York Mellon, formerly known as the Bank of New York, dated March 26, 2010. Incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on March 29, 2010.
10.1	Amended and Restated Credit Agreement, dated as of May 8, 2007, among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarter ended March 31, 2007.
10.2	First Amendment dated July 18, 2007 to the Amended and Restated Credit Agreement, among the Company, various designated subsidiary borrowers, various lending institutions and JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 19, 2007.
10.3	Amended and Restated Pledge and Security Agreement, dated as of May 8, 2007, by and among the Company, various designated subsidiary borrowers, The Bank of New York, as Collateral Agent, The Bank of New York, as Custodian and JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the Quarter ended March 31, 2007.

164

Exhibit Number	Description of Document
10.4	Amended and Restated Account Control Agreement, dated as of May 8, 2007, by and among the Company, Endurance Specialty Insurance Ltd., Endurance U.S. Holdings Corp., Endurance Worldwide Holdings Limited, Endurance Worldwide Insurance Limited and The Bank of New York, as Custodian. Incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2007
10.5	Underwriting Agreement, by and between Endurance Specialty Holdings Ltd. and Banc of America Securities LLC, as representative of the several underwriters named therein, dated March 23, 2010. Incorporated herein by reference to Exhibit 1.1 to the Current Report on Form 8-K filed on March 29, 2010.
10.6	Underwriting Agreement, by and among Endurance Specialty Holdings Ltd. and Merrill Lynch Pierce, Fenner & Smith Incorporated and Wells Fargo Securities LLC, as representatives of the several underwriters named herein, dated May 24, 2011. Incorporated herein by reference to Exhibit 1.1 to the Current Report on Form 8-K filed on May 26, 2011.
10.7	Share and Option Purchase Agreement, by and among Perry Partners International, Inc., Perry Partners, L.P., Perry Corp., Richard C. Perry and Endurance Specialty Holdings Ltd., dated as of January 23, 2011. Incorporated herein by reference to Exhibit 1.01 to the Current Report on Form 8-K filed on January 24, 2011.
10.8	Warrant Purchase Agreement, by and between Endurance Specialty Holdings Ltd. and Robert A. Spass, dated as of February 28, 2011. Incorporated herein by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on March 1, 2011.
10.9	2002 Amended and Restated Stock Option Plan. Incorporated herein by reference to Exhibit 10.11 to Amendment No. 3 to the Registration Statement on Form S-1 filed on February 27, 2003.**
10.10	Form of Share Option Agreement No. 2. Incorporated herein by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on July 7, 2007.**
10.11	Form of Option Dividend Restricted Share Unit Agreement. Incorporated herein by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on July 7, 2007.**
10.12	2007 Equity Incentive Plan. Incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the Quarter ended March 31, 2007.**
10.13	Amendment No. 1 to 2007 Equity Incentive Plan. Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.**
10.14	Amendment No. 2 to 2007 Equity Incentive Plan. Incorporated herein by reference to Exhibit 10.12 to the Annual Report on Form 10-K for the year ended December 31, 2010.**
10.15	Form of Restricted Share Agreement. Incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the Quarter ended March 31, 2007.**
10.16	Form of Long-Term Incentive Agreement. Incorporated herein by reference to Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2010.**
10.17	Employee Share Purchase Plan. Incorporated herein by reference to Exhibit 4.2 of Registration Statement on Form S-8 filed on September 9, 2005.**
10.18	Non-Executive Chairman Employment Agreement, dated March 11, 2011, by and between Endurance Specialty Holdings Ltd. and William H. Bolinder. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March 14, 2011. **
10.19	Amended and Restated Employment Agreement, dated February 18, 2010, by and between the Company and Mr. David Cash. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March 1, 2010. **
10.20	Amended and Restated Employment Agreement, Dated February 18, 2010, by and between the Company and Mr. William Jewett. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 1, 2010. **
10.21	Form of Executive Employment Agreement. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on October 1, 2007. **
10.22	Form of Executive Indemnification Agreement. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on October 1, 2007. **

165

Exhibit Number	Description of Document
10.23	Form of Director Indemnification Agreement. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on December 23, 2008.**
21.1	Subsidiaries of the Registrant
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
32	Certifications Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** Management contract or compensatory plan or arrangement.

166