Endurance Specialty Holdings Ltd.

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Endurance Specialty Holdings Ltd.


Wellesley House
90 Pitts Bay Road
Pembroke, HM 08
Bermuda
Telephone: (441) 278-0400
Fax: (441) 278-0401
Web site: http://www.endurance.bm

Public Company
Incorporated: 2001
Employees: 396
Total Assets: $6.35 billion (2005)
Stock Exchanges: New York
Ticker Symbol: ENH
NAIC: 524126 Direct Property and Casualty Insurance Carriers; 551112 Offices of Other Holding Companies

Endurance Specialty Holdings Ltd. underwrites specialty lines of reinsurance (policies purchased from other insurers) and insurance, focusing its business on personal and commercial property and casualty coverage. The company operates globally through subsidiaries based in Bermuda, the United Kingdom, and the United States. Endurance Worldwide Insurance Limited, a U.K.-based subsidiary, concentrates on commercial property risks and international treaty (groups of risks) business. In the United States, Endurance Reinsurance Corporation of America focuses on the North American broker market for reinsurance.

ORIGINS

In the days following the terrorist attacks of September 11, 2001, the need for reinsurance increased substantially, creating fertile ground for the formation of new companies that would spread the risk policies sold by insurers. A slew of new reinsurance companies were formed in the last months of 2001, and Endurance was one of those companies, an entity organized in November that drew its initial financial support from a consortium of insurers and private equity funds.

Endurance was provided with $1.2 billion in funding from insurers Aon Corp. and Zurich Financial Services Group and equity firms Thomas H. Lee Partners, L.P., and Texas Pacific Group, among others. Aon, the second largest insurance brokerage firm in the world, took the lead in assisting with Endurance's formation, drawing from its own management ranks to provide the leadership for the new company. Kenneth J. LeStrange was appointed to the positions of chairman, chief executive officer, and president upon Endurance's inception, and given full control over the company's day-to-day management and long-term strategy. LeStrange began his insurance career with Hartford Insurance Group more than 20 years before he took command of Endurance. After gaining experience as an underwriter at Hartford, LeStrange joined Swiss Reinsurance Company, where he held several underwriting management positions. Next, LeStrange was hired by American Re Corporation in 1984, beginning a 13-year stay at the company that included stints as the company's executive vice-president and as president of its alternative market subsidiary, Am Re Managers, Inc. LeStrange left American Re in December 1997 to join Aon, where he was appointed chairman and chief executive officer of its alternative market operations. He later served as chairman and chief executive officer of Aon's retail brokerage operations for the Americas, a position he held until he was selected to lead Endurance.

Under LeStrange's command, Endurance entered the fray for insurers' business, establishing its headquarters in Pembroke, Bermuda. The company was well funded by established entities in the insurance business, thereby receiving the support it would need as it battled against competitors. In Bermuda alone, Endurance faced a plethora of rivals, reinsurers such as Partner Re, XL Capital, Quanta Capital Holdings, Montpelier Re Holdings, Platinum Underwriters, AXIS Capital, Arch Capital Group, and White Mountains Insurance Group, among others. The road ahead promised to offer challenges to the new start-up, but LeStrange and his management team (as well as Endurance's financial backers) were confident the company could distinguish itself as a competitor of note. LeStrange positioned his company with a portfolio of specialty business lines that addressed both the reinsurance and insurance markets. Endurance, as the company developed during its first years in business, applied its reinsurance underwriting skills to property catastrophe, property per risk treaty, and casualty treaty. Its insurance business segments comprised property and casualty, with an emphasis on catastrophe policies.

200204: CREATION OF A CORPORATE STRUCTURE

During its first five years in business, Endurance established the infrastructure through which it would underwrite and purchase policies. The company built its framework of operating subsidiaries through both internal and external means, creating entities and acquiring the insurance and reinsurance assets of other companies. The first major move to lay the company's foundation occurred in April 2002, when Endurance Worldwide Insurance Limited was established as a London, England-based subsidiary. Endurance Worldwide, which received authorization from the United Kingdom Financial Services Authority to write certain lines of insurance and reinsurance in the United Kingdom in December 2002, represented the Bermuda-based holding company's first step toward establishing itself as an international force. The subsidiary was permitted to operate throughout the European Union. In September 2002, Endurance set up shop across the Atlantic Ocean, forming Endurance Reinsurance Corporation of America. Like Endurance's English subsidiary, Endurance Reinsurance received regulatory approval in December when the New York State Department of Insurance granted the subsidiary a license to operate as a property and casualty reinsurer.

Endurance's expansion through internal means was complemented by the holding company's efforts on the acquisition front. Acquisitions delivered growth quickly, enabling the company to build a business platform within months of its founding. The company's operations in Bermuda, which was its sole source of financial support until its international subsidiaries were created, received a substantial infusion of business in May 2002, when an agreement was signed to acquire the property catastrophe reinsurance of LaSalle Reinsurance Limited. Based in Hamilton, near Endurance's main offices, La-Salle was a subsidiary of Trenwick Group Ltd., an insurer and reinsurer also based in Bermuda. The transaction gave Endurance more than $130 million of premiums in force, a deal hailed by LeStrange in an Endurance press release dated May 16, 2002. "We are very pleased to have reached this agreement with Trenwick," LeStrange wrote, "and, in so doing, to have completed the build-out of our property catastrophe and Bermuda platforms within just five months of our founding."

COMPANY PERSPECTIVES


Our technical orientation complements our commitment to underwriting and pricing discipline in each of our business lines. Strict underwriting guidelines and a centralized underwriting process integrated with detailed actuarial analysis are part of the core principles of Endurance.

As Endurance built its business, many in the reinsurance and insurance industry were moving in the other direction. The fertile business climate in the wake of September 11, 2001, gave way to an industry-wide trend that saw numerous established companies divesting or cutting back their reinsurance operations. Several different factors contributed to the emergence of the trend, including poor underwriting performance and the decision by insurers to hold onto their policies. Endurance's acquisition of the LaSalle assets could be traced to the industry-wide phenomenon: The divestiture of the assets by Trenwick represented one step toward the liquidation of the entire company the following year. Endurance's second major acquisition resulted from the same trend. The Hartford Financial Services Group Inc. decided to shed its reinsurance operations, a strategic decision that led to Endurance's acquisition of HartRe Company L.L.C. in mid-2003. The purchase of HartRe's property casualty reinsurance business provided a boost to Endurance's New York-based business, giving the subsidiary a collection of reinsurance policies as it sought to secure its footing.

Endurance became part of another trend at roughly the same time it brokered a deal with Hartford Financial. Several of the reinsurance start-ups founded after September 11, 2001, began converting to public ownership as a way to obtain additional capital and to allow their initial investors the opportunity to cash in on their investments. In February 2003, Endurance joined its rivals on the public market, selling 9.6 million shares at $23 per share to raise slightly more than $200 million in its initial public offering on the New York Stock Exchange.

As Endurance expanded through internal and external means, the company's financial stature increased robustly. In 2002, its first full year of operating, the company recorded $798 million in gross premiums written and $102 million in net income. The following year, its gross premiums rose to $1.6 billion and its net income increased to $263 million. Financial growth would continue as the company progressed toward its fifth anniversary, particularly its net income. LeStrange, in an effort to ensure his growing business operated efficiently, formed Endurance Services Limited in January 2004. The subsidiary's responsibility was to provide administrative support to each of the holding company's operating subsidiaries. One other addition was made to the company's structure before its fifth anniversary arrived: In August 2005, Endurance acquired Traders & Pacific Insurance Company, a Delaware-based property and casualty insurer eligible to write surplus lines of business in 30 states.

HURRICANES IN 2005 DELIVERING FINANCIAL BLOW

Endurance's formative years yielded a geographically diverse insurance and reinsurance operation and involved more than a half-dozen lines of specialty business. The primary fields of its business were related to aerospace, healthcare, surety, marine, agriculture, personal accident, and workers' compensation. The company, as it entered its fifth year of existence, boasted $2.3 billion in capital. One measure of the company's strength was provided by the ratings supplied by credit reporters, companies such as A.M. Best Co. and Standard & Poor's (S&P) that scrutinized insurance companies and offered their opinion of a particular company's financial strength and its ability to meet ongoing obligations to its policyholders. Industry observers used ratings to establish the competitive position of insurance and reinsurance companies, using the letter grades as an important factor in gauging a company's financial strength. In 2005, the devastation caused by Hurricane Katrina, which Endurance officials predicted would lead to $500 million in losses for the company, prompted A.M. Best and S&P to downgrade the Bermuda-based company. A.M. Best, which used a system ranging from "A++" (Superior) to "F" (In Liquidation), lowered Endurance's rating from "A" (Excellent) to "A-" (Strong). S&P, after reviewing Endurance, maintained its rating of "A-" (Strong), the seventh highest of 21 rating levels.

KEY DATES


2001:
Endurance is formed by a group of insurers and private equity funds.
2002:
Endurance forms a subsidiary based in London, England, named Endurance Worldwide Insurance Limited and a White Plains, New York-based subsidiary named Endurance Reinsurance Corporation of America.
2003:
Endurance acquires the reinsurance business of The Hartford Financial Services Group Inc.
2005:
Endurance acquires Traders & Pacific Insurance Company.
2006:
Endurance reports a net loss of $220 million attributable to Hurricanes Katrina, Rita, and Wilma.

As Endurance completed its first five years of business, the progress achieved during the previous years left the company in a strong position to continue expanding its business. During 2005, the company recorded $1.6 billion in gross premiums, but the cumulative impact of Hurricanes Katrina, Rita, and Wilma led to a net loss of $220 million. The loss represented a major blow, particularly after the encouraging $355 million in net income posted the previous year, but the company was able to withstand the catastrophic year and press ahead. In 2006, LeStrange showed his commitment to expanding Endurance's portfolio by completing another acquisition. In August, he authorized the purchase of $235 million in collateralized catastrophe reinsurance from Schackleton Re Limited, a Cayman Islands-based reinsurer. The reinsurance comprised several separate coverages, including $125 million of reinsurance for earthquake risk in California for the ensuing 18 months and $60 million of protection for hurricanes in the northeastern United States and the Gulf Coast for the ensuing two years. In the years ahead, LeStrange was expected to flesh out Endurance's portfolio across the company's three geographic platforms. In Bermuda, the United States, and the United Kingdom, the Endurance name promised to play a prominent role in the insurance and reinsurance markets.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

Endurance Specialty Insurance Ltd.; Endurance U.S. Holding Corp.; Endurance Reinsurance Corporation of America (U.S.A.); Endurance Worldwide Holdings Limited (U.K.); Endurance Worldwide Insurance Limited (U.K.).

PRINCIPAL COMPETITORS

General Re Corporation; Munich Reinsurance America, Inc.; Arch Capital Group Ltd.; AXIS Capital Holdings Ltd.; White Mountains Insurance Group Ltd.

FURTHER READING

Block, Donna, "Reinsurer Gears Up for IPO," Daily Deal, February 28, 2003.

, "Will Endurance Go the Distance?" Daily Deal, February 25, 2003.

"Endurance Specialty Sees Up to $500M in Katrina Losses," America's Intelligence Wire, September 13, 2005.

"In Brief: Hartford Sells Reinsurance Biz," American Banker, May 19, 2003, p. 6.

Lysiak, Fran, "Bermuda's Endurance Specialty Posts Sharp Drop in Second-Quarter Net, Cites '05 Storms," A.M. Best Newswire, July 26, 2006.

McLeod, Douglas, "Face of Market Is Changing As Companies Exit, Enter," Business Insurance, November 10, 2003, p. 10.