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, 2013,

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, a non-accelerated filer or a smaller reporting company. See definition of ‘‘accelerated filer,’’ ‘‘large accelerated filer’’ and “smaller reporting company” 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 28, 2013, was $1,891,876,388.

As of February 20, 2014, 44,376,627 ordinary shares were outstanding.

Certain portions of the registrant’s definitive proxy statement relating to its 2014 Annual General Meeting of Shareholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		32
Item 1B.	Unresolved Staff Comments		50
Item 2.	Properties		50
Item 3.	Legal Proceedings		50
Item 4.	Mine Safety Disclosures		50
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		51
Item 6.	Selected Financial Data		54
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		56
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		97
Item 8.	Financial Statements and Supplementary Data		103
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		161
Item 9A.	Controls and Procedures		161
Item 9B.	Other Information		161
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		162
Item 11.	Executive Compensation		162
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		162
Item 13.	Certain Relationships and Related Transactions, and Director Independence		162
Item 14.	Principal Accountant Fees and Services		163
PART IV
Item 15.	Exhibits and Financial Statement Schedules		163

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 for the year ended December 31, 2013 (the “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 or as a result of changing climate conditions, than our underwriting, reserving or investment practices have anticipated;

• 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 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. or Endurance Specialty Insurance Ltd. 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 the 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;

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• 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 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 Specialty Holdings Ltd. (“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. For us, specialty lines are 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 Specialty Insurance Ltd. 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’ ordinary shares are traded on the New York Stock Exchange under the symbol “ENH”. Endurance Holdings’ seven wholly-owned operating subsidiaries as of December 31, 2013 are as follows:

• Endurance Specialty Insurance Ltd. (“Endurance Bermuda”), domiciled in Bermuda with branch offices in Switzerland 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 (“American Agri-Business”), domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together with American Agri-Business, “ARMtech”).

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

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 for our shareholders.

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 seek to deploy capital and resources to the most attractive business lines at the most opportune times. The Company strategically balances its participation between insurance policies and reinsurance contracts as well as balances risk exposures across product lines and geographic locations.

• Utilize Specialized 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 supplement the management of our portfolio of risks with 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 we use to manage 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, we also use reinsurance to ensure businesses in our Insurance segment are of sufficient size to be considered a lead market for their products. For the agriculture insurance business line, we utilize reinsurance protection provided by the Federal Crop Insurance Program, as well as selective use of third party reinsurance, to manage risks on a policy by policy basis. In our Reinsurance segment, we strategically review and underwrite our business, managing our reinsurance portfolio risk through underwriting analysis and portfolio diversification. We 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 seeking value through the disciplined management of investment risk to earn superior risk adjusted returns against our internally established benchmarks.

• Proactively Manage Our Capital Base. Our underwriting, actuarial, risk, 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 that 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.

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BUSINESS SEGMENTS

The Company 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, 2013, 2012 and 2011 are as follows:

	2013				2012				2011
Business Segments	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Insurance	$	1,475,429	$	932,510	$	1,429,930	$	942,357	$	1,469,798	$	1,005,490
Reinsurance		1,189,815		1,116,423		1,119,096		1,087,138		997,316		974,331
Total	$	2,665,244	$	2,048,933	$	2,549,026	$	2,029,495	$	2,467,114	$	1,979,821

Insurance

Our Insurance segment is comprised of four lines of business: agriculture, casualty and other specialty, professional lines, and property. Gross and net premiums written for the lines of business in the Insurance segment for the years ended December 31, 2013, 2012 and 2011 are as follows:

	2013				2012				2011
Lines of Business	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Agriculture	$	954,389	$	570,738	$	903,730	$	553,762	$	901,746	$	586,659
Casualty and other specialty		316,609		229,087		296,325		216,780		289,421		215,939
Professional lines		148,537		95,101		169,815		137,885		169,319		137,962
Property		55,894		37,584		60,060		33,930		109,312		64,930
Total	$	1,475,429	$	932,510	$	1,429,930	$	942,357	$	1,469,798	$	1,005,490

A description of each of these lines of business follows:

Agriculture. Our agriculture insurance line of 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.

Casualty and other specialty. Our casualty and other specialty insurance line of business includes casualty insurance, healthcare liability insurance, contract and commercial surety insurance, inland marine and ocean marine insurance. Our casualty insurance business provides third party liability insurance for a wide range of industry groups. Our healthcare liability insurance business is focused on excess hospital medical professional liability insurance. Our inland marine insurance business provides indemnification of loss related to movable or specialized types of property, which may include construction equipment, medical diagnostic equipment, fine arts, jewelry, solar panels and wind turbines, cameras and movie equipment, musical instruments, and a wide variety of other types of property. Our ocean marine insurance business covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination. Our surety insurance business provides contract and commercial surety insurance in the U.S. Our casualty and other specialty line of business also includes workers’ compensation insurance, which the Company ceased writing as of February 2009.

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.

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Property. Our property insurance line of business provides difference in conditions coverage which is primarily earthquake and flood coverage. 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. During 2012, the Company discontinued writing working layer commercial property coverages in its U.S. insurance entities.

Reinsurance

Our Reinsurance segment is comprised of five lines of business: catastrophe, property, casualty, professional lines, and other specialty. Gross and net premiums written for the lines of business in the Reinsurance segment for the years ended December 31, 2013, 2012 and 2011 are as follows:

	2013				2012				2011
Lines of Business	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Catastrophe	$	355,751	$	294,260	$	378,387	$	351,140	$	346,021	$	329,081
Property		297,806		292,872		349,579		349,586		266,562		266,562
Casualty		252,163		250,330		224,237		222,997		217,584		216,786
Professional lines		163,594		163,594		59,076		59,076		59,911		59,911
Other specialty		120,501		115,367		107,817		104,339		107,238		101,991
Total	$	1,189,815	$	1,116,423	$	1,119,096	$	1,087,138	$	997,316	$	974,331

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 primarily for 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.

Property. Our property reinsurance line of business reinsures property insurance policies issued by our ceding company clients including personal lines, commercial exposures and engineering (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.

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

Professional lines. Our professional lines reinsurance line of business reinsures third party professional liability policies issued by our ceding company clients for exposures such as directors’ and officers’ liability, directors’ and officers’ and management liability, errors and omissions, employment practices liability, fiduciary, and pension trust liability insurance and includes both non-profit and for-profit entities representing a wide range of industry groups.

Other specialty. Our other specialty line of business includes primarily aerospace, agriculture, marine and energy, and trade credit and surety, all of which are underwritten on either a proportional or non-proportional basis. This business line also includes our weather risk management products. Our aerospace business is comprised of the reinsurance of aviation and space risks. Our agriculture business includes reinsurance of multi-peril crop insurance policies, hail policies and other types of crop insurance. Our marine business consists of the reinsurance of river and ocean vessels and cargo risks and is underwritten on a proportional and non-proportional basis. Our trade credit and surety business includes the reinsurance of trade credit and political risk, contract surety and commercial surety on a worldwide basis. We also provide surety reinsurance for contract and commercial surety insurers, as well as for fidelity insurers. 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.

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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, 2013, Marsh & McLennan Companies, Inc. was the largest single broker in our Insurance segment, and Aon Benfield was the largest single broker in our Reinsurance segment. A breakdown of our distribution by broker and by business segment for the years ended December 31, 2013, 2012 and 2011 is provided in the tables below:

Insurance

	Percentage of Net Premiums Written
Broker/Agent	2013			2012			2011
Marsh & McLennan Companies, Inc.		8.5	%		7.6	%		7.5	%
Aon Benfield		4.2	%		3.7	%		3.8	%
Willis companies		2.2	%		2.0	%		2.0	%
Independent agents		61.2	%		58.8	%		58.3	%
All others		23.9	%		27.9	%		28.4	%
Total		100.0	%		100.0	%		100.0	%
Reinsurance
	Percentage of Net Premiums Written
Broker	2013			2012			2011
Aon Benfield		29.0	%		29.2	%		33.0	%
Marsh & McLennan Companies, Inc.		28.7	%		25.0	%		25.0	%
Willis companies		19.9	%		27.9	%		23.7	%
All others		22.4	%		17.9	%		18.3	%
Total		100.0	%		100.0	%		100.0	%

CLAIMS MANAGEMENT

Claims are managed by our experienced, technical claims teams working closely with each of our operating subsidiaries. Our claims staff reviews and responds to initial loss reports, administers claims databases, 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 audits of our significant 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.

RESERVE FOR LOSSES AND LOSS EXPENSES

We are required by applicable 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 that have been incurred 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 valuation date.

We use statistical and actuarial methods to make a reasonable estimate of 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 many years. During this period, additional facts and trends may be revealed. As these factors become apparent, estimated reserves will be adjusted, sometimes requiring an increase or decrease in our overall reserves, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves.

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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, historical reinsurance industry property catastrophe claims experience and other data and estimates provided by our clients to supplement our own historical claims experience for purposes of evaluating future trends and providing an estimate of ultimate claims costs on large catastrophes.

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, loss trends, 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, 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

The Company has established various processes and controls to monitor and manage the Company’s risk exposures. Our enterprise risk management (“ERM”) activities are led by our Chief Risk Officer and are critical to the organization’s sustained profitability and financial integrity. The goals of our ERM framework that drive our corporate risk management strategy are as follows:

• identify, assess, monitor 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 certain areas of our business. It is our overall 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.

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 monitor and govern our risk exposures. The Company’s primary risk exposure areas are: underwriting risk, including certain key underwriting risks associated with the pricing and exposure evaluation process; catastrophe correlation/aggregation risk; risk embedded in the loss reserve estimation process; investment risk (including liquidity risk); counterparty 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.

Underwriting Risk Management

Internal underwriting controls are established by our Chief Risk Officer and management’s Risk Management Committee, which includes our Chief Executive Officer and the Chief Executive Officers of Global Insurance and Global Reinsurance. 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 include, as appropriate, referral requirements specific to each line of business, terms, conditions, risk exposures, transactional situations, limits and premium capacity. Our pricing guidelines are distributed to all business units and each individual underwriter and are stated in terms of maximum combined ratio targets and minimum returns on risk based capital, by line of business, with exceptions permitted only upon approvals as noted in the guidelines.

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Our pricing guidelines are regularly reviewed by our Chief Executive Officer, Chief Executive Officers of Global Insurance and Global Reinsurance, Chief Risk Officer and Group Actuary in order to ensure the guidelines 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 Risk Committee. 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 establish pricing parameters, set our own independent pricing or conduct a risk review on risks we accept; and

• we generally accept 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 prefer those proposals that include significant information on the nature of the perils to be underwritten 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 and tolerances.

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 perform actuarial and risk analysis on 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 professionals 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 written and 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, improving the balance of the Company’s portfolio, 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.

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 a commercial catastrophe model, providing feedback to the modeling company to improve the effectiveness of their model. We also supplement the model output in certain territories with the results of our proprietary models and experience from actual catastrophe events. We use modeling not just for the underwriting of individual transactions but also to optimize the total return and manage the aggregate risk of our underwriting portfolio. We have specific requirements as to the quality and levels of detailed exposure data to be provided by our

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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 surcharged for increased uncertainty, where appropriate. 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.

Data output from the software described above is incorporated in our proprietary models. Our proprietary systems include those for modeling a variety of insurance and reinsurance risks including those associated with property, catastrophe, agriculture, and other specialty risks, 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 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, charges 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 losses and loss expenses are estimated to 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. At December 31, 2013, the Company’s largest single line of business based on premiums written represented 8.6% of the Company’s reserve for losses and loss expenses. Second, where loss development uncertainty exists, the Company makes use of purchased reinsurance to reduce the Company’s exposure to such loss development uncertainty. Finally, in its reinsurance business, the Company conducts active, regular audits of its ceding company clients with the intent of identifying quickly and thoroughly losses 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, inflation 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 excessive 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 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 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 exposure to 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.

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The Company uses a number of capital-at-risk models, which include volatility-scenario based measures, value-at-risk (“VaR”) and credit impairment calculations to evaluate its investment portfolio risk. Additionally, 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, succession planning, disaster recovery planning and business continuity planning. The Company’s internal audit department 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, regulations or internal guidelines and inadequate service to our clients. 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 as well as monitoring 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 risk management, 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 and reports regularly to the Board of Directors on its activities.

The Risk Committee reviews with management and monitors the Company’s risk tolerances as well as the methods utilized by the Company to assess, quantify, monitor and manage these risks. The Risk Committee also evaluates the Company’s business plans, projections and performance relative to the level of risk associated with such plans, projections and performance. The Risk Committee reviews and approves on a periodic basis:

• the Company’s framework for the assessment and management of risk, including the definition of applicable categories of risk, standards in relation to each category of risk and the appropriate risk tolerances;

• the policies and guidelines governing the Company’s framework for the assessment and management of risk; and

• the level of risk assumed by the Company in its underwriting, investment and operational activities, including the methods by which such risk is measured.

INVESTMENTS

We follow an investment strategy designed to protect book value and generate appropriate risk adjusted returns to grow book value, while providing sufficient liquidity to meet the operating cash 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 and risk management. Our investment team uses specialized analytical tools to evaluate risk and opportunity in 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 and compliance with the Company’s Investment Policy. We use quoted values and other data provided by nationally recognized independent pricing sources as inputs to our process for determining the value of our investment portfolio that is carried at fair value in the Company’s financial statements. A small portion of our investment portfolio is managed internally.

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, including the establishment of risk limits, which is reviewed and revised by the Finance Committee of the Board of Directors based on market conditions and developing needs of the Company and includes estimates of the maximum and

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expected levels of risk relative to the Company’s shareholders’ equity that will be taken over a 12 month 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. 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 issuer 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.

FINANCIAL STRENGTH RATINGS

Financial strength ratings have become an increasingly important factor in evaluating the competitive position of insurance and reinsurance companies. Endurance Holdings and certain of its operating subsidiaries maintain a financial strength rating at A.M. Best of “A” (Excellent), with a stable outlook, an S&P rating of “A” (Strong) with a stable outlook and a Moody’s Investors Service, Inc. (“Moody’s”) rating of A3, with a stable outlook. All three ratings agencies conducted reviews of Endurance Holdings during 2013.

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. These ratings may be changed, suspended, or withdrawn at the discretion of S&P, A.M. Best and Moody’s.

S&P maintains a letter rating system ranging from “AAA” (Extremely Strong) to “R” (Under Regulatory Supervision). The rating “A” (Strong) by S&P is the sixth highest of twenty-one rating levels. Publications of S&P indicate that the “A” rating is 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.

A.M. Best maintains a letter scale rating system ranging from “A++” (Superior) to “F” (In Liquidation). The rating “A” (Excellent) by A.M. Best is the third highest of 16 rating levels. Publications of A.M. Best indicate that the “A” rating is assigned to those companies that, in A.M. Best’s opinion, have demonstrated an excellent ability to meet their obligations to policyholders.

Moody’s maintains a letter rating system ranging from “Aaa” (highest quality, subject to the lowest level of credit risk) to “C” (lowest rated, typically in default, with little prospect for recovery of principal or interest). Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. The rating “A3” by Moody’s is the seventh highest of twenty-one rating levels. Publications of Moody’s indicate that the “A” rating is assigned to those companies that, in Moody’s opinion, are judged to be upper-medium grade and are subject to low credit risk.

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 can effect transactions 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.

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, 2013, we had 920 full-time employees. We believe that our employee relations are satisfactory. None of our employees are subject to collective bargaining agreements.

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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 rules and regulations, as amended (the “Insurance Act”), regulates the insurance and reinsurance businesses 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. The BMA, in deciding whether to grant registration, has broad discretion to act as it thinks fit in the public interest. The BMA is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and, in particular, whether it has, or has available to it, adequate knowledge and expertise. 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 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, insurers carrying on general business and insurers carrying on special purpose business. There are six classifications of insurers carrying on general business, ranging from Class 1 insurers (pure captives) to Class 4 insurers (very large commercial underwriters) subject to the strictest regulation. There is only one classification of special purpose insurer. Endurance Bermuda, which is licensed 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 or special purpose business. A Class 4 insurer must (i) at the time of its application for registration, or before it carries on insurance business, have a total statutory capital and surplus of not less than $100,000,000; and (ii) intend to carry on general insurance business, including excess liability business or property catastrophe reinsurance business. Class 4 insurers are required to maintain fully paid-up share capital of $1,000,000.

Cancellation of Insurer’s Registration

An insurer’s registration may be canceled by 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, 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. The principal representative has statutory reporting duties under the Insurance Act for certain reportable events, such as threatened insolvency or non-compliance with the Insurance Act or with a condition or restriction imposed on an insurer.

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 appoint and maintain a loss reserve specialist who is required to submit an opinion with Endurance Bermuda’s statutory financial return in respect of Endurance Bermuda’s 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. Jeffrey Dollinger, Chief Reserving Actuary for the Company, has been appointed by the Board of Directors and has been approved by the BMA to act as Endurance Bermuda’s loss reserve specialist.

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Group Supervision

The BMA may, in respect of an insurance group, determine whether it is appropriate for it to act as its group supervisor. An insurance group is defined as a group of companies that conducts exclusively, or mainly, insurance business. The BMA may make such determination where it ascertains that (i) the group is headed by a “specific insurer”, which is a Class 3A, Class 3B or Class 4 general business insurer or a Class C, Class D or Class E long-term insurer or another class of insurer designated by order of the BMA); (ii) where the insurance group is not headed by a specified insurer, where it is headed by a parent company which is incorporated in Bermuda; or (iii) where the parent company of the group is not a Bermuda company, in circumstances where the BMA is satisfied that the insurance group is directed and managed from Bermuda or the insurer with the largest balance sheet total is a specified insurer.

Where the BMA determines that it should act as the group supervisor, it shall designate a specified insurer that is a member of the insurance groups to be the designated insurer (the “Designated Insurer”) and it shall give to the Designated Insurer and other competent authorities written notice of its intention to act as group supervisor. 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.

Pursuant to its powers under the Insurance Act, the BMA will maintain a register of particulars for every insurance group for which it acts as the group supervisor detailing, among other things, the names and addresses of the Designated Insurer; each member company of the insurance group falling within the scope of group supervision; the principal representative of the insurance group in Bermuda; other competent authorities supervising other member companies of the insurance group; and the insurance group auditors.

The specific duties of the Designated Insurer include reporting obligations, the establishment of key group functions, and notification to the BMA of material changes, certain specified events generally related to impairment to the group financial condition or breaches by the group, the appointment of auditors and actuaries and duties related to the financial condition of the group.

In addition, the BMA has issued group supervision 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, supervisory reporting and disclosures of the insurance group, the capital and solvency reporting requirements for the insurance group and capital requirements for an insurance group.

Annual Statutory and GAAP Financial Statements

Endurance Bermuda, as a Class 4 insurer, must prepare and file annual statutory financial statements with the BMA. The Company, as a Bermuda insurance group, must prepare and file annual statutory financial statements with the BMA. 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 or group is required to give detailed information and analyses regarding premiums, claims, reinsurance and investments.

Endurance Bermuda, as a Class 4 insurer, and the Company, as a Bermuda insurance group, are also required to prepare and file with the BMA audited annual financial statements prepared in accordance with GAAP or International Financial Reporting Standards.

Annual Statutory Financial Return

Endurance Bermuda, as a Class 4 insurer, is required to file with the BMA an annual statutory financial return. 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 and the minimum liquidity ratio have been met and must further certify whether the insurer has complied with the conditions attached to its certificate of registration. The statutory financial statements and the statutory financial return do not form part of the public records maintained by the BMA.

The Company, as a Bermuda insurance group, is required to file with the BMA an annual group statutory financial return. The group statutory financial return includes, among other matters, a group solvency certificate, particulars of ceded reinsurance, a list of non-insurance financial regulated entities owned by the group and particulars of qualifying members as defined within the Group Supervision Rules. The group statutory financial return is not subject to independent audit.

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Bermuda Insurer Capital Requirements

In order to demonstrate compliance with required capital levels, the BMA requires Class 4 insurers and related insurance groups prepare and file a capital and solvency return, which sets out the calculation of applicable capital, as well as the risk management practices and other information used to calculate applicable capital.

The Bermuda risk-based regulatory capital adequacy and solvency requirements implemented with effect from December 31, 2008 (termed the Bermuda Solvency Capital Requirement or “BSCR”), provide 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 and reinsurers 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 or reinsurer’s assets, liabilities and premiums, including a formula to take account of the catastrophe risk exposure. Where an insurer or reinsurer believes that its own internal model for measuring risk and determining appropriate levels of capital better reflects the inherent risk of its business, it may apply to the BMA for approval to use its internal capital model in substitution for the BSCR model. The BMA may approve an insurer’s or reinsurer’s internal model, provided certain conditions have been established, and may revoke approval of an internal model in the event that the conditions are no longer met or where it feels that the revocation is appropriate. The BMA reviews the internal model regularly to confirm that the model continues to meet the conditions. Endurance Bermuda utilizes the BMA’s standard model for calculating BSCR.

The BMA seeks that insurers or reinsurers operate at or above a threshold capital level (termed the Target Capital Level or “TCL”), which exceeds the BSCR or approved internal model minimum amounts. The BMA’s prudential standards in relation to the Enhanced Capital Requirement (“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 minimum solvency margin described below. The CSR is the return setting out the insurer’s or reinsurer’s risk management practices and other information used by the insurer or reinsurer to calculate its approved internal model ECR. The 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. In circumstances where an insurer or reinsurer has failed to comply with and ECR given by the BMA, such insurer or reinsurer is prohibited from declaring or paying any dividends until the failure is rectified.

The Insurance Act also provides that the value of the statutory assets of a Class 4 insurer must exceed the value of its statutory liabilities by an amount greater than its prescribed minimum margin of solvency (“MSM”). The MSM that must be maintained at all times by a Class 4 insurer, such as Endurance Bermuda, with respect to its general business is the greater of: (a) $100,000,000; (b) 50% of net premiums written (with a credit for reinsurance ceded not exceeding 25% of gross premiums written); and (c) 15% of net loss and loss expense provisions and other general business insurance reserves.

The BMA requires each Class 4 insurer and insurance group to perform an assessment of their own risk and solvency requirements, referred to as a Commercial Insurer’s Solvency Self Assessment (“CISSA”). The CISSA provides the BMA with an entity’s view of the capital resources required to achieve its business objectives and to assess the insurer or insurance group’s governance, risk management and controls surrounding this process. In addition, Class 4 insurers and insurance groups are required to prepare and file with the BMA a catastrophe risk return which assesses an insurer’s reliance on vender models in assessing catastrophe exposure.

Restrictions on Dividends, Distributions and Reduction of Capital

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.

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.

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 and any application for such approval must include an affidavit stating that it will continue to meet the required margins, including the MSM.

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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 and report on the affairs of Endurance Bermuda or the Endurance group if the BMA believes that such an investigation is in the best interests of its policyholders or persons who may become policyholders. Such an inspector also has the power to investigate the business of any person who is or at any relevant time was a member of the group of which the person under investigation is a part or a partnership of which the person under investigation is part. 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.

If it appears to the BMA that there is a significant 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; (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; (x) to remove a controller or officer; and (xi) to maintain in, or transfer to and keep in the custody of, a specified bank, assets of the insurer of such value and description as the BMA may direct.

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 the power to assist other regulatory authorities, including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies 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.

The Insurance Code of Conduct

The BMA has implemented the Insurance Code of Conduct, which establishes duties, requirements and compliance standards to be adhered to by all insurers registered under the Insurance Act, including procedure and sound principles to be observed by insurers. Failure to comply with the requirements of the Insurance Code of Conduct will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner as prescribed by the Insurance Act. Endurance Bermuda is required to file annually a statutory declaration confirming its compliance with the Insurance Code of Conduct.

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Notifications to the BMA

The BMA maintains supervision over the controllers of all registered insurers in Bermuda. A controller includes (i) the managing director of the registered insurer or its parent company; (ii) the chief executive of the registered insurer or of its parent company; (iii) a shareholder controller; and (iv) any person in accordance with whose directions or instructions the directors of the registered insurer or of its parent company 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 the insurer.

The definition of “shareholder controller” is set out in the Insurance Act but generally refers to (i) a person who holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or its parent company, or (ii) a person who is entitled to exercise 10% or more of the voting power at any shareholders’ meeting of such registered insurer or its parent company, or (iii) a person who is able to exercise significant influence over the management of the registered insurer or its parent company by virtue of its shareholding or its entitlement to exercise, or control the exercise of, the voting power at any shareholders’ meeting.

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.

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.

No insurer, or designated insurer, in respect of the group of which it is a member, may effect or allow another member of the group to effect a material change unless notice in writing of the material changes has been served on the BMA and the BMA has not before the end of fourteen days from the date of service of the notice notified it in writing that it has objected to the effecting of the material change. A “material change” includes (i) an 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, (ii) an amalgamation with or acquisition of another firm, engaging in non-insurance business and activities related thereto, where such business or related activity is not ancillary to the insurance business of the insurer and (iv) engaging in unrelated business that is retail business. 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.

Winding-up

The BMA may present a petition for the winding-up of an insurer on the ground that the insurer (a) is unable to pay its debts within the meaning of sections 161 and 162 of the Companies Act, or (b) has failed to satisfy an obligation to which it is or was subject by virtue of the Insurance Act, or (c) has failed to satisfy the obligation imposed upon it by section 15 as to the preparation of accounts or to produce or file statutory financial statements in accordance with section 17 (save where the appropriate waivers have been obtained), and that the BMA is unable to ascertain the insurer’s financial position. In addition, if it appears to the BMA that it is expedient in the public interest that an insurer should be wound up, it may present a petition for it to be so wound up if a court thinks it just and equitable for it to be so wound up.

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.

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Although Endurance Holdings and Endurance Bermuda are incorporated in Bermuda, they are classified as a non-resident of Bermuda for exchange control purposes by the BMA. Pursuant to their non-resident status, Endurance Holdings and 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, in the case of Endurance Holdings, to pay dividends to United States residents who are holders of its ordinary shares.

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 Bermuda Minister of Education and Economic Development, 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 of Education and Economic Development, 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 and reinsurance business. While an insurer is permitted to reinsure risks undertaken by any company incorporated in Bermuda and permitted to engage in the insurance and reinsurance business, generally it is not permitted without a special license granted by the Minister of Education and Economic Development to insure Bermuda domestic risks or risks of persons of, in or based in Bermuda.

Securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003, and the 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 of Finance, 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.

Bermuda Work Permit Considerations

Generally, under Bermuda law, non-Bermudians (other than spouses of Bermudians and individuals holding permanent resident’s certificates or working resident’s certificates) may not engage in any gainful occupation in Bermuda without the appropriate governmental standard work permit.

Standard work permits can be obtained for a one-, two-, three-, four- or five-year period. Ten year permits are also available but these are generally only applicable where a company meets various criteria, including at least 10 Bermudian staff, development programs for Bermudians, entry level position and equal pay between Bermudans and non-Bermudians. Where a standard work permit is being applied for, it is a requirement that the job must be advertised for three days (within an eight-day period) in a local Bermuda newspaper.

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U.K. Regulation

General

On April 1, 2013, under the terms of the Financial Services Act 2012, the United Kingdom Financial Services Authority (“FSA”) was abolished and a new regulatory structure was put in place, with the following three new regulators established in place of the FSA: the Prudential Regulation Authority (“PRA”); the Financial Conduct Authority (“FCA”) and the Financial Policy Committee.

The PRA oversees and is responsible for the micro-prudential regulation of banks, insurers and some investment firms. The FCA, which is a separate entity, is responsible for the conduct of business regulation in relation to all authorized forms and the prudential regulation of firms not regulated by the PRA as well as the majority of the market regulatory functions previously conducted by the FSA. The Financial Policy Committee (which sits within the Bank of England) is responsible for the macro-prudential regulation of the entire financial services sector. Under this new regulatory structure Endurance U.K. is supervised by both the FCA and the PRA and is therefore a dual regulated firm.

Insurance business in the United Kingdom is divided between two main categories: long-term insurance (which is primarily investment-related) and general insurance. These two categories are both further divided into “classes” of business. Under the Financial Services and Markets Act 2000 as amended (“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.

Endurance U.K. is authorized 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 United Kingdom regulation.

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

As an authorized insurer, the insurance and reinsurance businesses of Endurance U.K. are subject to close supervision by the PRA and the FCA. There are a number of specific requirements for senior management arrangements, systems and controls of insurance and reinsurance companies, 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.

Supervision

The PRA’s approach to supervision of insurance companies is forward looking and judgment based. In taking a forward looking approach, the PRA looks at the current risks faced by a firm, and also possible future risks that may impact on the safety and soundness of a firm’s business. By using quantitative and qualitative analysis, the PRA will use its risk assessment framework to form a judgment about the level and type of supervision required for a firm based on how great a risk the firm poses to the stability of the United Kingdom financial system.

The FCA’s supervisory focus is on good market conduct and takes a risk-based approach to supervision. The FCA makes judgments and takes action based on the risks posed by firms to the FCA meeting its objectives. There are three elements to the FCA’s supervision framework:

• The firm systematic framework. This is designed to assess a firm’s conduct risk by reference to the firm’s business model and assessment of how it embeds fair treatment of customers and ensures market integrity in its conduct of business;

• Event-driven work to enable the FCA to respond quickly to identified risks in the market; and

• Issues and product focused work to enable the FCA to deal promptly with emerging issues that might put customers at risk.

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Solvency Requirements

The PRA’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 PRA may be exercised. 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 PRA (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 PRA gives individual capital guidance regularly to insurers and reinsurers following receipt of individual capital assessments, prepared by firms themselves. The PRA’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 PRA and has agreed with the PRA the bases and methodology for this calculation. This calculation is used along with other tools by the PRA to help establish Endurance U.K.’s individual capital guidance. Endurance U.K.’s capital exceeded the Enhanced Capital Requirement for December 31, 2013.

In addition, an insurer (other than a pure reinsurer) that is part of a group, is required to perform and submit to the PRA a solvency margin calculation return in respect of its ultimate parent undertaking, in accordance with the PRA’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 PRA 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 PRA 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, which is expected to be adopted during 2014) (together the “Solvency II Directive”). The legislation implementing the final version of the Solvency II Directive will replace the current solvency requirements described above and was due to take effect in the U.K. and the other E.U. member states on January 1, 2014. However, because of delays to the Solvency II implementation timetable, it is expected that implementation in Member States will occur on or about January 1, 2016. The PRA has updated its implementation plans to reflect a new “planning horizon” of December 31, 2015, and is continuing its program of preparatory work 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 reconcile insurers’ internal models for calculating all or part of the new solvency capital requirements with existing individual capital assessments. Endurance U.K. is fully co-operating with the PRA 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 PRA strictly controls the maintenance of each insurance company’s solvency margin within its jurisdiction. The PRA’s rules require Endurance U.K. to notify the PRA of any proposed or actual payment of a dividend. Any such payment or proposal could result in regulatory intervention. In addition, the PRA requires authorized insurance companies to notify the PRA in advance of any significant dividend payment.

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Reporting Requirements

U.K. insurance companies must prepare their financial statements under the Companies Act 2006 (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 prepare and submit annual returns to the PRA, together with audited annual financial statements. The PRA uses the annual return to assist it in monitoring the solvency of an insurance company. The directors of an insurance company are required to sign a certificate to be submitted with the annual return, which includes a statement that the directors are satisfied that the company has complied in all material respects with certain parts of the PRA Handbook, in particular, the parts dealing with systems and controls and principles for businesses.

Supervision of Management

The PRA and the FCA closely supervise 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 regulators. Both regulators have responsibility for applications under the approved persons regime and the list of controlled functions has been split between the regulators. Which regulator has responsibility for approving an application will depend on the controlled function position. Following their authorization, there are codes of practice issued by the FCA and PRA with which approved persons are expected to comply.

Change of Control

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 FSMA, any person proposing to acquire control over a U.K. authorized insurance company must give prior notification to the PRA of their intention to do so together with certain prescribed information and obtain the prior approval of the PRA to the change of control. The PRA is required to consult with the FCA and the FCA may require the PRA to reject the application or impose conditions if the FCA has concerns about money laundering or terrorist financing. The PRA has 60 working days to make a decision following its acknowledgement of the complete application. The duration of this period may be stopped by the PRA once, to request further information, for a maximum of 20 days (30 days for non-EU applicants). Although the PRA may make further information requests, this does not “stop the clock”, meaning that the PRA has a maximum of 82 working days to consider a complete application from an EU applicant (92 for a non-EU applicant). The PRA 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 requirements and any suspicion of money laundering or terrorist financing. In addition to these requirements, the U.K. insurer itself is obliged to notify the PRA 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 PRA and the FCA have 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. The FSMA imposes statutory obligations on the PRA and the FCA to monitor compliance with the requirements imposed by the FSMA, and to enforce the provisions of the FSMA related rules made by the PRA and FCA. The PRA and the FCA have the power, among other things, to enforce and take disciplinary measures in respect of breaches of the PRA and FCA Handbooks respectively. The FCA also has the power to prosecute criminal offences arising under the FSMA, and to prosecute insider dealing under Part V of the Criminal Justice Act of 1993, and breaches of money laundering regulations. The FCA’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 its U.K. permissions 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 a company can conduct permitted businesses in the host state without having a physical presence there, while operating on an establishment basis means that the company has a branch or physical presence in the host state.

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In both cases, a company remains subject to regulation by its home state 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.

U.S. Regulation

The Company’s U.S. operating subsidiaries are domiciled in the State of Delaware, with the exception of American Agri-Business, which is domiciled in the State of Texas. In addition, one of the Company’s U.S. operating subsidiaries, Endurance Risk Solutions, is commercially domiciled in the State of California.

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 model laws and regulations have been enacted in very few states and some model laws and regulations have been enacted in all states in some form or another.

Insurance Holding Company Regulation of Endurance Holdings

Endurance Holdings, Endurance U.S. Holdings Corp., and the Company’s U.S. operating subsidiaries are subject to the insurance holding company laws of the States of Delaware, Texas and California, the states in which the Company’s U.S. operating subsidiaries are organized and domiciled or commercially domiciled. These laws generally require, among other things, each insurance company directly or indirectly owned by the holding company to register with the insurance regulator in the insurance company’s state of domicile and state, of any, in which it is commercially domiciled 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 and commercially 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 effect 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.

In January 2013, California adopted the principal components of the amended Model Act. Under the California amendments, the enterprise risk report is to be filed with the lead state commissioner, when applicable, of the insurance holding company system as determined by the procedures within the Financial Analysis Handbook adopted by the NAIC, and if the California Commissioner of Insurance is not the lead state commissioner of the insurance holding company system, a copy is required to be provided to the California Commissioner of Insurance if the insurance holding company system has an insurer domiciled in the State of California. The first annual enterprise risk report is required to be filed with the insurer’s registration statement after July 1, 2013.

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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 further 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 and, when applicable, commercially domiciled, or the acquiror must make a disclaimer of control filing with the insurance department of such state(s) and obtain approval thereon. Prior to granting approval of an application to acquire control of a domestic insurer (or reinsurer), the domiciliary (or commercial 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. This statutory presumption of control may be rebutted by a showing that control does not exist in fact. The state regulators, however, may find that “control” exists in circumstances in which a person owns or controls less than ten percent of voting securities. Because a person acquiring ten percent or more of Endurance 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.

In addition, many state insurance laws require prior notification of state insurance regulators of a change in control of a non-domiciliary insurance company doing business in that state. While these pre-notification statutes do not authorize the state insurance regulators to disapprove the change in control, they authorize regulatory action in the affected state if particular conditions exist such as undue market concentration. Any future transactions that would constitute a change in control of our insurance subsidiaries may require prior notification in those states that have adopted pre-acquisition notification laws.

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 will consider whether it may jeopardize financial stability of the insurer or prejudice the interest of the insurer’s policyholders or other claimants.

Similar to the NAIC Model Act amendments, under the amendments adopted in California, any controlling person of a domestic (or commercially domiciled) insurer must file a confidential notice of proposed divestiture at least 30 days prior to the cessation of control. The California amendments provide that the California Commissioner of Insurance will determine those instances in which the party or parties seeking to divest a controlling interest in an insurer will be required to file for and obtain approval of the transaction.

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.

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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, Texas and California insurance laws, the Company’s U.S. operating subsidiaries may only pay dividends to their respective parent companies out of earned surplus. In Delaware, Texas and California, 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 Company’s U.S. operating subsidiaries may not declare or pay any dividend, together with all dividends declared or distributed by it within the preceding twelve months, if the dividend 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 (under Texas and California insurance laws), not including realized capital gains (under Delaware insurance laws) for the 12-month period ending, for the preceding calendar year (the 31st day of December next preceding).

In addition, the declaration or payment of any dividend may be subject to the prior approval of the applicable domestic (or commercially 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.

The dividend limitations imposed by Delaware, Texas and California 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, 2013, of the Company’s U.S. operating subsidiaries, only ARMtech had earned surplus, and therefore, only ARMtech could declare or distribute dividends in 2013 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 established the Federal Insurance Office (the “FIO”) in the U.S. Department of the Treasury and vested the FIO with have the authority to monitor all aspects of the insurance sector, monitor the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors. In addition, the FIO serves as an advisory member of the Financial Stability Oversight Council, assists the Secretary of the U.S. Department of Treasury with administration of the Terrorism Risk Insurance Program, and advises the Secretary of the U. S. Department of Treasury on important national and international insurance matters. In addition, the FIO has 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.

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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.

Effective with the annual reporting period ended December 31, 2010, the NAIC adopted revisions to the Annual Financial Reporting, or the Model Audit Rule, related to auditor independence, corporate governance and internal control over financial reporting. The adopted revisions required that we file reports with state insurance regulators regarding our assessment of internal control over financial reporting.

Insurance Guaranty Associations

Each state has insurance guaranty association laws that require insurance companies doing business in the state to participate in various types of guaranty associations or other similar arrangements. The laws are designed to protect policyholders from losses under insurance policies issued by insurance companies that become impaired or insolvent. Typically, these associations levy assessments, up to prescribed limits, on member insurers on the basis of the member insurer’s proportionate share of the business in the relevant jurisdiction in the lines of business in which the impaired or insolvent insurer is engaged. Some jurisdictions permit members insurers to recover assessments that they paid through full or partial premium tax offsets, usually over a period of years.

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 generally 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.

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 ceding companies in these states. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the state of domicile of the ceding company is permitted to reflect in the ceding company’s 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 a result of the Dodd-Frank Act, only a ceding company’s state of domicile can dictate the credit for reinsurance requirements. Other states in which a ceding company is licensed will no longer be able to impose their own credit for reinsurance laws on ceding companies domiciled in other states.

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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.

In December 2013, the NAIC placed, on a conditional basis, Bermuda, the United Kingdom, Germany and Switzerland on the NAIC List of Qualified Jurisdictions effective January 1, 2014. The conditional approvals are part of continuing efforts to implement a “certified reinsurer” concept that allows highly rated reinsurers, domiciled in qualified jurisdictions, to take advantage of reduced reinsurance collateral requirements under the NAIC’s revised Credit for Reinsurance Model Law and Regulations. Reinsurers, including Endurance U.K. and Endurance Bermuda, domiciled in any of the four jurisdictions are eligible to apply to be certified for reduced reinsurance collateral requirements in those U.S. states that have adopted the revised Credit for Reinsurance Model Law and Regulations. Eighteen U.S. states have adopted the revised Credit for Reinsurance Model Law and Regulations or some variation thereof. Several additional U.S. states are expected to adopt the revised Credit for Reinsurance Model Law and Regulations or some variation thereof in 2014.

In 2008, prior to the NAIC and state actions described in the above paragraph, the Florida insurance regulator adopted similar type regulations allowing it to establish lower collateral requirements for “eligible” non-U.S.-based reinsurers engaged in the property and casualty insurance business and meeting certain specified standards. Endurance Bermuda was granted eligible reinsurer status in 2012 by the Florida ceding company to take 100% credit in its financial statements for such reinsurance provided by Endurance Bermuda.

We do not believe that Endurance U.K. and Endurance Bermuda are in violation of insurance laws of any jurisdiction in the United States or in any other applicable jurisdiction. 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

Endurance Specialty Insurance Ltd. Singapore Branch (the “Singapore Branch”) has regulatory authorization 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 Singapore Branch is regulated by the Monetary Authority of Singapore pursuant to the Insurance Act. The 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. The 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 underwriting offshore risks for a period of 10 years from April 2010 to March 2020.

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 our shareholders in respect of our ordinary or Preferred Shares.

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. It is possible that after March 31, 2035 we may be subject to Bermuda taxes.

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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 23%, reducing to a rate of 21% as of April 1, 2014 and a rate of 20% as of April 1, 2015. 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%.

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 Internal Revenue Code (“Code”), the regulations promulgated thereunder, rulings and other administrative pronouncements issued by the Internal Revenue Service (“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.

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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.

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, certain shareholders (such as individuals) should be entitled to the maximum preferential federal income tax rate of 20% applicable to “qualified dividends”, 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.

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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 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

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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.

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 20% for individuals 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.

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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 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

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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 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-U.S. 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 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 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.

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UNDERWRITING RISKS

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

Our property, agriculture, catastrophe and other specialty 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.

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 Northeast and mid-Atlantic states and 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.

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We are exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances.

We face exposure to mass tort claims, including claims related to exposure to potentially harmful products or substances. Establishing claims and claim adjustment expense reserves for mass tort claims is subject to uncertainties because of many factors, including expanded theories of liability, disputes concerning medical causation with respect to certain diseases, geographical concentration of the lawsuits asserting the claims and the potential for a large rise in the total number of claims without underlying epidemiological developments suggesting an increase in disease rates. Moreover, evolving judicial interpretations regarding the application of various tort theories and defenses, including application of various theories of joint and several liabilities, as well as the application of insurance coverage to these claims, make it difficult to estimate our ultimate liability for such claims.

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current related reserves. In addition, our estimate of claims and claim adjustment expenses may change, and such change could be material. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could materially and adversely affect our results of operations.

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.

ARMtech currently participates 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”). The U.S. Farm Bill was signed into law February 2014 and fixes the terms of the MPCI program for the next five years. ARMtech’s agriculture insurance premiums, which are primarily driven by MPCI, have become an increasingly larger portion of our business, totaling $954.4 million of gross premiums written in 2013, and representing 64.7% of the total gross premiums written in our Insurance segment in 2013.

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.

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 excess and surplus lines 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.- and U.K.-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

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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, as well as an unexpected accumulation of attritional losses, could have a material adverse effect on our financial condition or on our results of operations.

We seek to limit our loss exposure in a variety of ways, including 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 generally 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.

Our operating results may also be adversely affected by unexpectedly large accumulations of smaller losses. We seek to manage this risk by using appropriate loss limitation methods as noted above. These processes are intended to ensure that premiums received are sufficient to cover the expected levels of attritional loss as well as a contribution to the cost of natural catastrophes and large losses where necessary. It is posssible, however, that our loss limitation methods may not work as intended in this respect and that actual losses, including attritional losses, from a class of risks may be greater than expected, which may have a material adverse effect on our financial condition and our results of operations.

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.

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 and a Moody’s rating of “A3” 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, S&P or Moody’s, 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.

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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.

Inflation could also lead to higher interest rates causing the current unrealized gain position in the Company’s fixed maturity portfolio to decrease.

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 credit ratings for U.S. government securities by various credit rating agencies 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.

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, 2013, our top three brokers represented approximately 49.1% 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.

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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.

We may also be deemed liable for losses arising out of a matter that we had not anticipated or had attempted to contractually exclude. Moreover, irrespective of the clarity and inclusiveness of policy language, there can be no assurance that a court or arbitration panel will limit enforceability of policy language or not issue a ruling adverse to us. Our exposure to these uncertainties could be exacerbated by the increased willingness of some market participants to dispute insurance and reinsurance contract and policy wordings. Alternatively, potential efforts by us to exclude such exposures could, if successful, reduce the market’s acceptance of our related products. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict and could have a material adverse effect 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 effect 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 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 five 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.

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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, investments in foreign subsidiaries, cash and premium receivable balances and reserves. In general, the weakening of foreign currencies versus the U.S. dollar will unfavorably affect net income from foreign operations, investments in foreign subsidiaries, and the value of cash, investments and premium receivable balances offset by reserves held in currencies other than U.S. dollars.

A portion of our investment portfolio is allocated to alternative and specialty investment funds that we expect will have different risk characteristics than our investments in traditional fixed maturity securities, equity securities 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 alternative funds and specialty funds, which we expect to have different risk characteristics than our investments in traditional fixed maturity securities, equity securities and short-term investments. Our alternative funds include investments in hedge funds and private investment funds that generally invest in senior secured bank debt, high yield debt securities, distressed debt, distressed real estate, derivatives, and equity long/short strategies. Our specialty funds currently include investments in high yield loan and convertible debt funds. The amount and timing of net investment income from such alternative and specialty investment funds 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.

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, 2013, the fixed maturity securities of $4.8 billion represented 74.2% 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 investment portfolio and our net income to decline and the default rate of our 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.

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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 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 effect 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.

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.

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We are exposed to equity market 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, which are subject to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices, real estate markets, 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.

We are exposed to 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 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, weather elements such as temperature, precipitation, snowfall and windspeed, 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.

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. The Company attempts to mitigate losses from defaults by our derivative counterparties, where possible, by requiring daily margin postings.

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 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.

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.

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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, 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.

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 $700.0 million in letters of credit under our letter of credit and revolving credit facility that expires on April 19, 2016. 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.

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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. 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.

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, that might 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.

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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.

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. It is possible such scrutiny could include us and it is also possible that 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 insurance business is generally less regulated than the admitted insurance 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.

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 represented a comprehensive overhaul of the financial services industry within the United States and established 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 has 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.

Solvency II could adversely impact our financial results and operations.

Solvency II, a European Union directive concerning 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 will replace the current solvency requirements and was expected to take effect January 1, 2014

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in the European Union Member States. The European Insurance and Occupations Pensions Authority published its final guidelines for the preparation of Solvency II on September 27, 2013. The scheduled effective date for Solvency II is now January 1, 2016 for all European Economic Area member state (re)insurers. 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.

Our international business is subject to applicable laws and regulations relating to sanctions and foreign corrupt practices, the violation of which could adversely affect our operations.

We must comply with all applicable economic and financial sanctions, other trade controls and anti-bribery laws and regulations of the United States and other foreign jurisdictions where we operate, including the United Kingdom and the European Community. United States laws and regulations applicable to us include the economic trade sanctions laws and regulations administered by the United States Department of Treasury’s Office of Foreign Assets Control as well as certain laws administered by the United States Department of State. In addition, we are subject to the Foreign Corrupt Practices Act and other anti-bribery laws such as the U.K. Bribery Act that generally bar corrupt payments or unreasonable gifts to foreign government officials. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is possible that an employee or intermediary acting on our behalf could fail to comply with applicable laws and regulations. In such event, we could be exposed to civil penalties, criminal penalties and other sanctions, including fines or other unintended punitive actions. In addition, such violations could damage our business and/or our reputation. Such criminal or civil sanctions, penalties, other sanctions, and damage to our business and/or reputation could have a material adverse effect on our financial condition and operating results.

OPERATING 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.

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.

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, 2013, approximately 15% 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 effect on our results of operations.

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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, and could adversely affect our financial condition and results of operations.

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.

Our efforts to develop products, expand in targeted markets or modify our business and strategic plans may not be successful and may create enhanced risks.

A number of our planned business initiatives involve developing new products or expanding existing products in targeted markets. To develop new products or markets, we may need to make substantial capital and operating expenditures, which may negatively impact our results in the near term. In addition, the demand for new products or in new markets may not meet our expectations. To the extent we are able to market new products or expand in new markets, our risk exposures may change and the data and models we use to manage such exposures may not be as sophisticated as those we use in existing markets or with existing products. This, in turn, could lead to losses in excess of expectations.

As part of our ongoing efforts to continually improve our performance, we regularly evaluate our business plans and strategies, which may result in changes to our business plans and initiatives, some of which may be material. We are subject to increasing risks related to our ability to successfully implement our evolving plans and strategies. Changing plans and strategies requires significant management time and effort, and may divert management’s attention from our core operations and competencies. Moreover, modifications we undertake to our operations may not immediately result in improved financial performance. Therefore, risks associated with implementing or changing our business strategies and initiatives, including risks related to developing or enhancing the operations, controls and other infrastructure required for these strategies and initiatives, may not have a positive impact on our publicly reported results until many years after implementation. The risk that we may fail to have the ability to carry out our business plans may have an adverse effect on our long-term results of operations and financial condition.

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

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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 our Chief Executive Officer. 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. Generally, under Bermuda law, non-Bermudians (other than spouses of Bermudians, holders of permanent resident certificates and holders of working resident certificates) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. A work permit is normally granted or renewed by the Bermuda government upon showing that, after proper public advertisement, no Bermudian (or spouse of a Bermudian, holder of a permanent resident’s certificate or holders of working resident certificates) is available who meets the minimum standards reasonably required by the employer. In the cases of senior executives, the requirement for advertising for the role can normally be waived on application to immigration, and in some cases, an application can be made for senior executives to be exempted from needing a permit altogether. A work permit is issued with an expiry date (generally up to five years, although in some cases a 10 year permit can be obtained), and no assurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of the relevant term. All of our 29 Bermuda-based professional employees who require work permits have been granted permits by the Bermuda government. 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.

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.

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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 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.

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

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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 Code, regulations or court decisions, the 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.”

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,

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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, 2013. 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 2013 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 have offered 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 prior years, President Obama and members of Congress proposed legislation 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. Members of Congress also have introduced bills 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 proposals may be enacted and whether such proposals, if enacted, would have retroactive effect. Enactment of some versions of prior proposed legislation as well as other changes in U.S. tax laws, regulations and interpretations of any 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.

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.

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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, 2013, 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.

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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:

	High		Low
2013
First quarter	$	47.81	$	40.30
Second quarter	$	51.45	$	47.22
Third quarter	$	53.75	$	49.96
Fourth quarter	$	58.67	$	51.81
2012
First quarter	$	40.77	$	36.69
Second quarter	$	41.89	$	37.83
Third quarter	$	40.54	$	34.09
Fourth quarter	$	42.36	$	38.31

Number of Holders of Ordinary Shares

The approximate number of record holders of our ordinary shares as of February 19, 2014 was 136, not including beneficial owners of shares registered in nominee or street name.

Dividends

We paid a quarterly dividend of $0.32 per ordinary share in each of the four quarters of 2013 (2012 - $0.31). 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, 2013, 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 $654.5 million. As of December 31, 2013, Endurance U.K. was precluded by regulatory restrictions from declaring or distributing dividends in 2014. As of December 31, 2013, 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 2014 without prior regulatory approval. As of December 31, 2013, ARMtech (with notice to the Texas Department of Insurance) could pay $3.9 million of dividends without prior regulatory approval.

Our credit facility prohibits 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.

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Recent Sales of Unregistered Securities

None.

Purchase of Equity Securities by Issuer and Affiliated Purchasers

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased(1)		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) (2)		(d) Maximum Number (or Approximate Dollar Value) of  Shares that May Yet Be Purchased Under the Plans or Programs(1) (2)
October 1 - 31, 2013		—	$	—		—		6,430,439
November 1 - 30, 2013		—	$	—		—		6,430,439
December 1 - 31, 2013		—	$	—		—		—
Total		—	$	—		—		—

⁽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. The repurchase program was not extended in 2013.

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, 2008 to December 31, 2013. During this period, the cumulative total return on the Company’s ordinary shares was 122.49%, the cumulative total return for the S&P 500 Composite Stock Price Index was 128.19% and the cumulative total return for the S&P Property & Casualty Industry Group Stock Price Index was 102.78%.

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	12/08		12/09		12/10		12/11		12/12		12/13
Endurance Specialty Holdings, Ltd.		100.00		126.14		160.04		136.98		146.73		222.49
S&P 500		100.00		126.46		145.51		148.59		172.37		228.19
S&P Property & Casualty Insurance		100.00		112.35		122.39		122.08		146.63		202.78

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, 2013, 2012, 2011, 2010 and 2009 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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For the years ended December 31,	2013			2012			2011			2010			2009
Selected Income Statement Data:
Gross premiums written	$	2,665,244		$	2,549,026		$	2,467,114		$	2,053,236		$	2,021,450
Net premiums written		2,048,933			2,029,495			1,979,821			1,763,744			1,606,050
Net premiums earned		2,016,484			2,013,900			1,931,393			1,741,113			1,633,192
Net investment income		166,216			173,326			147,037			200,358			284,200
Net realized and unrealized gains		15,164			72,139			31,671			22,488			6,303
Net impairment losses recognized in earnings (losses)		(1,616	)		(847	)		(3,520	)		(3,944	)		(20,251	)
Net losses and loss expenses		1,219,684			1,520,995			1,632,666			1,038,100			866,640
Acquisition expenses		304,430			303,179			282,911			264,228			267,971
General and administrative expenses		294,906			235,689			264,152			241,920			237,154
Net income (loss)		311,915			162,516			(93,734	)		364,738			554,871
Preferred dividends		32,750			32,750			24,125			15,500			15,500
Net income (loss) available (attributable) to common and participating shareholders		279,165			129,766			(117,859	)		349,238			539,371
Per Share Data:
Dividends declared and paid per common share	$	1.28		$	1.24		$	1.20		$	1.00		$	1.00
Basic earnings (losses) per common share	$	6.37		$	3.00		$	(2.95	)	$	6.73		$	9.47
Diluted earnings (losses) per common share	$	6.37		$	3.00		$	(2.95	)	$	6.38		$	9.00
Weighted average number of common shares outstanding:
Basic		42,818			42,568			40,215			50,882			55,929
Diluted		42,818			42,602			40,215			53,728			58,874
As of December 31,	2013			2012			2011			2010			2009
Selected Balance Sheet Data:
Cash and investments	$	6,574,787		$	6,638,942		$	6,283,107		$	6,187,215		$	5,974,615
Total assets		8,978,122			8,794,972			8,292,615			7,979,405			7,666,694
Reserve for losses and loss expenses		4,002,259			4,240,876			3,824,224			3,319,927			3,157,026
Reserve for unearned premiums		1,018,851			965,244			932,108			842,154			832,561
Debt		527,478			527,339			528,118			528,411			447,664
Preferred stock, Series A non-cumulative		8,000			8,000			8,000			8,000			8,000
Preferred stock, Series B non-cumulative		9,200			9,200			9,200			—			—
Total shareholders’ equity		2,886,549			2,710,597			2,611,165			2,848,153			2,787,283
Per Share Data:
Book value per common share (a)	$	56.99		$	53.75		$	51.48		$	57.25		$	47.74
Diluted book value per common share (b)	$	55.18		$	52.88		$	50.56		$	52.74		$	44.61
Selected Ratios (based on U.S. GAAP income statement data):
For the years ended December 31,	2013			2012			2011			2010			2009
Net loss ratio(c)		60.5	%		75.5	%		84.6	%		59.6	%		53.1	%
Acquisition expense ratio(d)		15.1	%		15.1	%		14.6	%		15.2	%		16.4	%
General and administrative expense ratio(e)		14.6	%		11.7	%		13.7	%		13.9	%		14.5	%
Combined ratio(f)		90.2	%		102.3	%		112.9	%		88.7	%		84.0	%

^(a)  Book value per share is a non-GAAP measure based on total shareholders’ equity, less the $430.0 million (2009 - 2010: $200.0 million) redemption value of the preferred stock, divided by basic common shares outstanding of 43,107,897 at December 31, 2013, 42,431,589 at December 31, 2012, 42,366,873 at December 31, 2011, 46,258,846 at December 31, 2010 and 54,194,822 at December 31, 2009. Common shares outstanding include 0 vested restricted share units for purposes of the December 31, 2013, 2012, 2011 and 2010, and 12,104 at December 31, 2009 book value per share calculation.

^(b)  Diluted book value per share is a non-GAAP measure based on total shareholders’ equity, less the $430.0 million (2009 - 2010: $200.0 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 44,518,210 at December 31, 2013, 43,130,075 at December 31, 2012, 43,142,277 at December 31, 2011, 50,210,614 at December 31, 2010 and 57,996,331 at December 31, 2009. 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 net 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 Form 10-K.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to the Company’s plans and strategy for its business and statements regarding marketplace conditions and trends, includes forward-looking statements that involve risk and uncertainties. Please see the “Cautionary Statement Regarding Forward-Looking Statements” in this 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 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 Switzerland 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 (“American Agri-Business”), domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together with American Agri-Business, “ARMtech”).

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, casualty and other specialty, professional lines, and property insurance. In the Reinsurance segment, the Company writes catastrophe, property, casualty, professional lines, 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 funds that are accounted for under the equity method of accounting. In accordance with generally accepted accounting principles 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-temporary 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 earnings (losses). 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 2013, we believe operating conditions continued to be competitive. In most classes of property and casualty business, we experienced mixed pricing, with increases in some casualty classes of business due to the continued low interest rate environment and industry loss development. These positive rate trends have been tempered by relatively high levels of underwriting capacity and competition, particularly in catastrophe exposed property insurance and reinsurance. In our agriculture business, pricing was relatively stable across our portfolio, although the underlying exposure base has varied with commodity price movements. We continued to maintain our adherence to underwriting standards by declining business when pricing, terms and conditions did not meet our underwriting criteria.

In 2014, we believe the following four 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, 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 the 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. In addition, increased capital investment and new forms of reinsurance in the industry are likely to have a continuing negative impact on pricing, particularly in catastrophe exposed property insurance and reinsurance. This is likely to result in a continued competitive global insurance and reinsurance market in 2014. Our agriculture insurance business will be influenced by the volatility of agriculture commodity prices, which could lead to decreased premium and risk exposure levels which may be partially offset by higher demand for agriculture insurance due to recent yield and price volatility. Lastly, the current low interest rate environment may result in a lower appetite for longer duration 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.

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If factors such as those described in the “Risk Factors” section in this 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.

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 generally only adjust if the underlying insured values adjust. Accordingly, we monitor the underlying insured values and record additional or return premiums in the period in which amounts are reasonably determinable. For our agriculture line, premiums are determined based on estimated acreage planted combined with the base commodity price for the insured crops. Adjustments are made to the agriculture premium estimates as acreage reporting and claims adjusting occurs. Insurance premiums written accounted for 55%, 56%, and 60% of the Company’s gross premiums written during the years ended December 31, 2013, 2012, and 2011, respectively.

The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over 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%, 22%, and 21% of the Company’s gross premiums written during the years ended December 31, 2013, 2012, and 2011, 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 24%, 22%, and 19% of the Company’s gross premiums written during the years ended December 31, 2013, 2012, and 2011, respectively.

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. Excess of loss reinsurance contracts accounted for approximately 22%, 24%, and 21% of the Company’s gross premiums written during the years ended December 31, 2013, 2012, and 2011, respectively. For proportional reinsurance contracts, the Company estimates premiums, commissions and related expenses based on broker and ceding company estimates. In addition to broker and 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 23%, 20%, and 19% of the Company’s gross premiums written during the years ended December 31, 2013, 2012, and 2011, respectively.

Premiums on the Company’s excess of loss and proportional reinsurance contracts are estimated at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the reinsurance contracts 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. 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.

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The Company’s historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 7%, 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. A 7% variation in the Company’s proportional premiums receivable, net as of December 31, 2013, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $1.2 million on the Company’s net income.

The following summarizes the Company’s net proportional premium estimates within premiums receivable, net on the Company’s Audited Consolidated Balance Sheets as of December 31, 2013 and 2012:

Classes of Coverage	Casualty		Professional lines		Property		Other specialty		Total
	(U.S. dollars in thousands)
As of December 31, 2013
Proportional premiums receivable, net	$	54,557	$	76,562	$	62,623	$	48,579	$	242,321
As of December 31, 2012
Proportional premiums receivable, net	$	56,620	$	23,072	$	103,191	$	41,288	$	224,171

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, 2013, the Company has an allowance for estimated uncollectible premiums receivable of $2.3 million (2012 — $3.4 million).

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 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.

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 a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. 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. 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 reliably predicted, 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, other data and estimates provided by our clients, and, to a limited extent, overall market share assumptions to estimate our loss and loss expense reserves related to specific loss events.

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Actuarial Methods Used to Estimate Loss and Loss Expense Reserves. 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 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 accident year by business line and type of contract. Under this method, IBNR is set equal to the initial loss estimate multiplied by the expected percent of loss yet to be reported at each valuation date. In a given quarter, if reported losses are less than expected, then the difference would result in a decrease in estimated ultimate losses. If losses for the quarter are greater than expected, then the difference would result in an increase in estimated ultimate 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 its own professional judgment, to establish its best estimate of reserves for losses and loss expenses.

For the agriculture insurance line of business, loss reserves are established from initial loss notifications that are provided to our independent agents from insureds. Based on the information provided, the Company’s system establishes a loss reserve amount calculated from a formulaic model which includes historical experience, type of crop, and percent of liability. As actual claims are adjusted, outstanding reserves are adjusted to reflect the actual losses incurred.

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 the case reserves for 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. 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 agriculture, property, catastrophe, and other specialty 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 business. As such, the Company’s actual reporting patterns were considered when determining the reserve for losses and loss expenses in the agriculture and property lines of business in its Insurance segment and the catastrophe, property and other specialty lines of business in its Reinsurance segment for the year ended December 31, 2013. The Company continues to utilize industry loss and development patterns in the establishment of loss and loss expense reserves where appropriate.

Significant Assumptions Employed in the Estimation of Loss and Loss Expense Reserves. The most significant assumptions used as of December 31, 2013 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;

• 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; and

• the terms of the contracts and policies we enter into with our insureds and cedants will be interpreted as intended, including those related to applicable aggregation limits and occurrence definitions.

The above five 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, professional lines,

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catastrophe, 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 and professional lines in the Reinsurance and Insurance segments 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 that 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 delay 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;

• the differing reserving practices among ceding companies;

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

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

• the fact that reinsurance treaties typically cover a disproportionate amount of large and more complicated claims.

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. Findings are communicated as appropriate 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, 2013, 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, 2013, 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 agriculture, 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;

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• 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.

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, 2013 were as follows:

Pricing services	14.8	%
Index providers	71.2	%
Broker/dealers	14.0	%

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, 2013, the Company has not adjusted any pricing provided by independent pricing services and index providers and have classified all such securities as Level 2.

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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, 2013, the Company has not adjusted any pricing provided by broker/dealers and has classified the majority of 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 (consisting of comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated);

• corroborating prices;

• 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.

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 these securities 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.

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 (Loss) and Comprehensive Income (Loss). 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 investment 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.

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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 $91.3 million as of December 31, 2013.

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, 2013.

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.

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 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, 2013, the Company had a net deferred income tax asset of $51.7 million (2012 - $43.5 million), which includes a valuation allowance of $122.7 million (2012 - $85.8 million).

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

Recent Accounting Pronouncements. In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-11 “Disclosures About Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires additional disclosures about financial instruments and derivative instruments relating to netting arrangements. ASU 2011-11 was effective for interim and annual periods beginning on or after January 1, 2013, with retrospective presentation required. The Company adopted this standard effective January 1, 2013. This standard did not have a material impact on the Company’s Audited Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-02 “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires entities to report, in one location, information about reclassifications out of accumulated other comprehensive income (“AOCI”). ASU 2013-02 also requires companies to report changes in AOCI balances. For significant items reclassified out of AOCI into net income in their entirety in the same reporting period, reporting (either on the face of the statement where net income is presented or in the notes to the financial statements) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified into net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under US GAAP is required in the notes. The above information must be presented in one place (parenthetically on the face of the financial statements by income statement line item or in a note to the financial statements). ASU 2013-02 was effective for fiscal years and interim periods beginning after December 15, 2012. The Company adopted this standard prospectively on January 1, 2013. This standard resulted in an additional note to the Company’s Audited Consolidated Financial Statements (see Note 6).

In July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 will be effective for annual and interim reporting periods beginning after December 15, 2013, with both early adoption and retrospective application permitted. The Company does not expect this standard to have a material impact on the Company’s Audited Consolidated Financial Statements.

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Results of Operations

Years Ended December 31, 2013, 2012 and 2011

The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2013, 2012 and 2011:

	2013			2012			2011
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	2,665,244		$	2,549,026		$	2,467,114
Ceded premiums written		(616,311	)		(519,531	)		(487,293	)
Net premiums written		2,048,933			2,029,495			1,979,821
Net premiums earned		2,016,484			2,013,900			1,931,393
Net investment income		166,216			173,326			147,037
Net realized and unrealized gains		15,164			72,139			31,671
Net impairment losses recognized in earnings (losses)		(1,616	)		(847	)		(3,520	)
Other underwriting loss		(2,046	)		(2,183	)		(3,547	)
Total revenues		2,194,202			2,256,335			2,103,034
Expenses
Net losses and loss expenses		1,219,684			1,520,995			1,632,666
Acquisition expenses		304,430			303,179			282,911
General and administrative expenses		294,906			235,689			264,152
Amortization of intangibles		7,012			10,347			11,213
Net foreign exchange losses (gains)		14,214			(15,911	)		(7,422	)
Interest expense		36,188			36,174			36,254
Income tax expense (benefit)		5,853			3,346			(23,006	)
Total expenses		1,882,287			2,093,819			2,196,768
Net income (loss)	$	311,915		$	162,516		$	(93,734	)
Ratios
Net loss ratio		60.5	%		75.5	%		84.6	%
Acquisition expense ratio		15.1	%		15.1	%		14.6	%
General and administrative expense ratio		14.6	%		11.7	%		13.7	%
Combined ratio		90.2	%		102.3	%		112.9	%

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Premiums

Gross premiums written in 2013 increased $116.2 million, or 4.6%, compared to 2012 and increased $198.1 million, or 8.0% compared to 2011. 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, 2013, 2012 and 2011:

	2013		2012		2011
	(U.S. dollars in thousands)
United States	$	2,097,272	$	2,023,082	$	2,001,117
Worldwide		299,076		291,545		259,707
Europe		153,516		121,363		106,070
Japan		33,879		36,392		37,610
Canada		15,403		17,248		17,103
Australasia		25,191		22,497		15,364
Other		40,907		36,899		30,143
Total gross premiums written	$	2,665,244	$	2,549,026	$	2,467,114

Net premiums written in 2013 increased $19.4 million, or 1.0%, compared to 2012 and increased $69.1 million, or 3.5% compared to 2011. The change in net premiums written for 2013 compared to 2012 and 2011 was driven primarily by the following factors:

• An increase in the Reinsurance segment professional line of business resulting from an underwriting team that joined the Company in late 2013 which enabled the Company to participate in several new large quota share contracts;

• An increase in the Reinsurance segment casualty line of business as a result of new international motor and U.S. casualty treaties and improved pricing on renewals partially offset by the non-renewal of business that no longer met profitability targets and a number of negative premium adjustments;

• A decline in the property line of business in the Reinsurance segment compared to 2012 as the Company reduced participation on a few large contracts where pricing was inadequate. Compared to 2011 net premiums written in 2013 were higher as a result of the renewal of new business generated by the Company’s U.S., Zurich and Singapore offices in 2012 partially offset by the reductions noted above;

• A decline in the catastrophe line of business in the Reinsurance segment reflecting the Company’s selective reduction of its limits on some U.S. business, particularly in Florida, increased retrocessional coverage on business in the current year and pricing declines within a competitive environment. In addition, the level of reinstatement premiums recorded in 2013 was lower than in 2012 and 2011 as a result of a lower incidence of major loss events;

• A decrease in the Insurance segment, primarily in the professional line of business driven by the non-renewal of a large program relationship in late 2012, partially offset by new premiums generated by professional liability and financial institutions underwriting teams that joined the Company in 2013; and

• A decline in the property line of business in the Insurance segment compared to 2011 as the Company curtailed the underwriting of several property insurance products in order to reallocate capital to more profitable lines of business.

Ceded premiums written by the Company increased in 2013 as compared to 2012 and 2011 across both business segments. Ceded premiums increased in the Insurance segment principally in the agriculture line as the Company increased the amount of reinsurance placed with the Federal Crop Insurance Corporation and purchased third party reinsurance. In addition, growth in Insurance segment cessions occurred in tandem with new professional liability and financial institution gross premiums written in the year by underwriting teams that joined the Company in 2013. In the Reinsurance segment, ceded premiums increased as the Company chose to purchase increased levels of protection within the catastrophe and property lines of business.

Net premiums earned in 2013 were comparable to 2012 as a result of offsetting trends and timing of net premiums written over the last twelve months. Net premiums earned increased in 2013 compared to 2011 principally due to growth in net premiums written over the last two years in the property and casualty lines of the Reinsurance segment, partially offset by a decline in Insurance segment professional lines net premiums written.

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Net Investment Income

The components of net investment income for the years ended December 31, 2013, 2012 and 2011 are as follows:

	2013			2012			2011
	(U.S. dollars in thousands)
Available for sale investments	$	113,074		$	135,841		$	160,580
Other investments		64,321			49,059			(694	)
Cash and cash equivalents		2,752			1,616			924
	$	180,147		$	186,516		$	160,810
Investment expenses		(13,931	)		(13,190	)		(13,773	)
Net investment income	$	166,216		$	173,326		$	147,037

The Company’s 2013 net investment income decreased 4.1% or $7.1 million as compared to 2012 and increased 13.0% or $19.2 million as compared to 2011. Net investment income during 2013 included net mark to market gains of $64.3 million on other investments, comprised of alternative funds and specialty funds, as compared to mark to market gains of $49.1 million in 2012 and mark to market losses of $0.7 million in 2011. Investment income generated by the Company’s available for sale investments, which consist of fixed maturity investments, short-term investments and equity securities, decreased by $22.8 million in 2013 compared to 2012 and by $47.5 million compared to 2011, primarily from lower reinvestment rates. The value of the investment portfolio (including cash and cash equivalents and pending investment purchases and sales) as of December 31, 2013 decreased 1.0% from 2012 and increased 3.1% from 2011. The decrease in the investment portfolio during 2013 resulted primarily from a decrease in the unrealized gains of the Company’s available for sale securities of $95.8 million and $76.9 million from 2012 and 2011, respectively, due to the impact of the rise in interest rates during 2013. Investment expenses in 2013 were comparable to those of 2012 and 2011.

The annualized net earned yield and total return of the investment portfolio for the years ended December 31, 2013, 2012 and 2011 and market yield and portfolio duration as of December 31, 2013, 2012 and 2011 were as follows:

	2013			2012			2011
Annualized net earned yield(1)		2.59	%		2.75	%		2.41	%
Total return on investment portfolio(2)		1.43	%		4.70	%		3.50	%
Market yield(3)		1.92	%		1.37	%		1.93	%
Portfolio duration(4)		3.11 years			2.49 years			2.39 years

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

⁽²⁾  Net of investment manager fees; 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 income investments managed by the Company’s investment managers.

During 2013, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 67 basis point range, with a high of 0.96% and a low of 0.29%. Trading activity in the Company’s portfolio in 2013 included reductions in corporate securities, government and agency guaranteed corporate securities, residential mortgage-backed securities, municipal securities, asset-backed securities, and short-term investments, and increased allocations to equity securities, U.S. government and government agencies securities, foreign government bonds, commercial mortgage-backed securities, and other investments. The duration of the fixed maturity portfolio held at December 31, 2013 increased to 3.11 years at December 31, 2013 from 2.49 years at December 31, 2012 and 2.39 years at December 31, 2011 due to the increase in interest rates which reduced the estimated rate of prepayments underlying the Company’s mortgage-backed securities portfolio, causing the extension of the average expected maturity of these securities.

Net Realized and Unrealized Gains

The Company’s investment portfolio is actively managed on a fair value basis to generate attractive economic returns and income. 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, 2013 were $3,374.0 million compared to $4,143.5 million for the year ended December 31, 2012 and $3,034.9 million for the year ended December 31, 2011. Net realized and unrealized investment gains decreased in the year ended December 31, 2013 compared to 2012 and 2011 due to the impact of the rise in interest rates during 2013.

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Realized investment gains and losses and the change in the fair value of investment-related derivative financial instruments for the years ended December 31, 2013, 2012 and 2011 were as follows:

	2013			2012			2011
	(U.S. dollars in thousands)
Gross realized gains on investment sales	$	40,018		$	77,474		$	50,884
Gross realized losses on investment sales		(25,521	)		(6,164	)		(18,500	)
Change in fair value of derivative financial instruments		667			829			(713	)
Net realized and unrealized investment gains	$	15,164		$	72,139		$	31,671

Net impairment losses recognized in earnings for the years ended December 31, 2013, 2012 and 2011 as a result of other-than-temporarily impaired securities were $1.6 million, $0.8 million and $3.5 million, respectively.

Net Foreign Exchange Gains

During 2013, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange losses of $14.2 million compared to gains of $15.9 million for 2012 and gains of $7.4 million for 2011. The losses recorded in the current period resulted from the U.S. dollar strengthening in particular against the Japanese Yen and Australian dollar in 2013 which caused the Company’s net asset positions in those currencies to be revalued lower. In contrast, in 2012 the Company was in a net liability position particularly related to the Japanese Yen as the U.S. dollar strengthened against the Yen over the period resulting in foreign exchange gains. In addition, foreign exchange gains were recognized in income as revaluations on investments recorded in other comprehensive income were realized in 2012.

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Net Losses and Loss Expenses

The Company’s reported net losses and loss expenses are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. The following table shows the net losses after adjustment for reinstatement premiums and other loss sensitive accruals recorded by the Company in connection with catastrophes for the years ended December 31, 2013, 2012 and 2011.

2013
Event Date	Event	Net Loss
(U.S. dollars in millions)
June 2013	Floods in Canada	$	6.6
June 2013	Floods in Europe		12.3
May 2013	Windstorms in the United States		8.2
July 2013	Hailstorms in Germany		29.6
October & December 2013	Windstorms in Europe		15.5
		$	72.2
2012
Event Date	Event	Net Loss
(U.S. dollars in millions)
October 2012	Superstorm Sandy	$	158.2
March/April 2012	Windstorms in the U.S.		38.8
May 2012	Earthquake in Italy		9.4
		$	206.4
2011
Event Date	Event	Net Loss
(U.S. dollars in millions)
August 2011	Hurricane Irene	$	22.8
November 2011	Thailand floods		76.5
July 2011	Danish floods		32.0
August 2011	Brushfires in Texas		6.0
March 2011	Tohuko, Japan earthquake and tsunami		114.3
February 2011	Christchurch, New Zealand earthquake		70.8
January 2011	Queensland, Australia floods		18.9
April/May 2011	Midwest U.S. tornadoes		71.6
Summer 2011	Multiple storms in the Midwest		53.8
		$	466.7

For 2013, catastrophe related losses added 3.9 percentage points to the Company’s net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 10.6 percentage points in 2012 and 24.8 percentage points in 2011. Additionally, the Company recorded a lower expected loss ratio in the Insurance segment’s agriculture line of business in the year ended December 31, 2013 compared to 2012 as a result of improved growing conditions experienced in the U.S. compared to the prior year, which was adversely impacted by a severe drought. Compared to the year ended December 31, 2011, the Company recorded a higher expected loss ratio in the agriculture line of the Insurance segment in the current year which reflected modestly lower harvest yields in portions of the Midwest as the U.S. recovered from the 2012 drought and declines in commodity prices in 2013.

During 2013, 2012 and 2011, the Company’s previously estimated ultimate losses for prior accident years were reduced by $222.4 million, $120.2 million and $180.0 million, respectively, as the loss emergence related to prior accident years was lower than expected. The overall net reduction in the Company’s estimated losses for prior accident years experienced in 2013 emerged across all lines of the Company’s Insurance and Reinsurance segments. Favorable prior year loss reserve development in 2013 was significantly higher than in 2012 due to much lower than expected reported losses in the Reinsurance property and catastrophe lines and from reductions in reserve estimates related to the Thailand flood losses of 2011 ($24.4 million) and Superstorm Sandy losses in 2012 ($24.1 million). Comparatively, 2012 included adverse development on some of the major 2011 loss events impacting the Reinsurance property line of business.

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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 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 in 2013 was consistent with 2012 and increased modestly compared to 2011. Compared to 2012, the acquisition expense ratio increased in 2013 in the Reinsurance segment due to growth in property earned premiums, which incurs higher acquisition expenses, and a decline in the catastrophe line, which incurs lower acquisition expenses. This was offset by a decrease in the Insurance segment acquisition expense ratio compared to 2012, driven by a higher proportion of net earned premiums attributed to the agriculture line, which incurs a lower net acquisition expense rate, and the decline in professional lines premiums compared to 2012, which conversely incurs a higher acquisition expense rate. The change in the 2013 acquisition expense ratio compared to 2011 resulted from growth in the proportion of net premiums earned in the Reinsurance segment, which generally incurs a higher acquisition expense rate.

General and Administrative Expenses

The Company’s general and administrative expense ratio for 2013 was higher than that of 2012 and 2011, due to an increase in personnel costs related to the addition of new underwriting teams during 2013, current period costs associated with the Company’s Chief Executive Officer transition, severance costs, and increased annual incentive costs associated with improved corporate operating results in 2013. The prior year also benefited from a lower 2012 payout of the Company’s 2011 annual incentive compensation than was previously accrued. Compared to 2011, the increase in 2013 general and administrative expenses resulting in a higher expense ratio was partially offset by an increase in third party commissions and expense reimbursement offsets in the Insurance segment’s agriculture line of business. At December 31, 2013, the Company had a total of 920 employees as compared to 881 employees at December 31, 2012 and 844 employees at December 31, 2011.

Income Tax Expense (Benefit)

The Company incurred a tax expense for the year ended December 31, 2013 of $5.9 million compared to a tax expense of $3.3 million and benefit of $23.0 million for the years ended December 31, 2012 and 2011. The higher tax expense incurred in 2013 compared to 2012 was due to adjustments to deferred tax valuation allowances related to the Company’s U.S. taxable jurisdictions in 2013. The tax benefit recorded in 2011 was due to higher net losses experienced in the Company’s U.S. taxable jurisdictions.

Net Income (Loss)

The Company generated net income of $311.9 million in 2013 compared to net income of $162.5 million in 2012 and a net loss of $93.7 million in 2011. The increase in 2013 net income compared to 2012 and 2011 was primarily due to lower levels of catastrophe losses and increased favorable prior year loss reserve development, partially offset by an increase in personnel costs, foreign exchange losses and reduced realized gains on investment sales.

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.

One of the key measures used by management in assessing the Company’s underwriting performance is 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, 2013, 2012 and 2011:

	2013			2012			2011
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	1,475,429		$	1,429,930		$	1,469,798
Ceded premiums written		(542,919	)		(487,573	)		(464,308	)
Net premiums written		932,510			942,357			1,005,490
Net premiums earned		946,474			955,089			981,592
Other underwriting loss		—			(2,684	)		(3,368	)
		946,474			952,405			978,224
Expenses
Net losses and loss expenses		774,425			855,941			765,119
Acquisition expenses		64,778			75,597			71,295
General and administrative expenses		157,596			125,108			146,115
		996,799			1,056,646			982,529
Underwriting loss	$	(50,325	)	$	(104,241	)	$	(4,305	)
Ratios
Net loss ratio		81.8	%		89.6	%		77.9	%
Acquisition expense ratio		6.8	%		7.9	%		7.3	%
General and administrative expense ratio		16.7	%		13.1	%		14.9	%
Combined ratio		105.3	%		110.6	%		100.1	%

Premiums. Net premiums written in the Insurance segment decreased in 2013 by 1.0% compared to 2012 and decreased 7.3% compared to 2011. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2013, 2012 and 2011 were as follows:

	2013				2012				2011
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Agriculture	$	954,389	$	570,738	$	903,730	$	553,762	$	901,746	$	586,659
Casualty and other specialty		316,609		229,087		296,325		216,780		289,421		215,939
Professional lines		148,537		95,101		169,815		137,885		169,319		137,962
Property		55,894		37,584		60,060		33,930		109,312		64,930
Total	$	1,475,429	$	932,510	$	1,429,930	$	942,357	$	1,469,798	$	1,005,490

The change in the Insurance business segment net premiums written in 2013 compared to 2012 and 2011 was driven by the following factors:

• Premiums in the agriculture line of business were higher compared to 2012 due to growth in policy counts, partially offset by lower premiums from fall crops because of lower commodity prices and higher cessions to the Federal Crop Insurance Corporation and third parties. Compared to 2011 net premiums written in 2013 decreased due to lower commodity prices, partially offset by a higher policy count;

• A decrease in the professional line of business driven by the non-renewal of a large program relationship in late 2012 and higher cessions to third parties;

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• A decline in the property line of business in 2013 as the Company continued to curtail the underwriting of several property insurance products in order to reallocate capital to more profitable lines of business; and

• An increase in the casualty and other specialty line of business driven primarily by the addition of new underwriting teams and products.

Ceded premiums written by the Company in the Insurance segment increased in 2013 compared to 2012 and 2011 principally in the agriculture line of business as the Company increased the amount of reinsurance placed with the Federal Crop Insurance Corporation and third parties. Ceded premiums also increased against prior years in the casualty and other specialty line in tandem with growth in gross premiums written and in the professional line associated with new business generated by underwriting teams that joined the Company in 2013. These increases in ceded premiums written during 2013 were partially offset by declines in the amount of ceded premium in the property line of business as a result of the reduction in gross premiums in 2013 compared to 2012 and 2011.

Net premiums earned by the Company in 2013 in the Insurance segment decreased compared to net premiums earned in 2012 and 2011 due to a decline in net premiums written over the prior two years in the property and professional lines of business, partially offset by growth in the agriculture and casualty and other specialty lines of business.

Net Losses and Loss Expenses. The decrease in the net loss ratio in the Company’s Insurance segment for the year ended December 31, 2013 compared to 2012 was partly driven by the agriculture line of business that incurred lower levels of losses as a result of improved growing conditions experienced in the U.S. compared to the prior year, which was adversely affected by extreme drought conditions. In addition, an absence of major loss events in 2013 compared to the prior year reduced the accident year loss ratio in the property line of business. The increase in the 2013 net loss ratio compared to 2011 resulted primarily from a higher expected loss ratio in the agriculture line in the current year which reflected declining corn commodity prices and reduced harvest yields in portions of the Midwest as the U.S. recovered from the 2012 drought.

The net loss ratio reflected lower favorable prior year loss reserve development recorded for 2013 as compared to 2012 and 2011. Prior year loss reserves were reduced in 2013 by $33.9 million as compared to reductions of $46.2 million and $70.8 million for the years ended December 31, 2012 and 2011. The Company’s Insurance segment experienced net reductions in the Company’s estimated losses for prior accident years in 2013 as claims have not materialized as originally estimated by the Company.

Acquisition Expenses. The Company’s acquisition expense ratio in the Insurance segment for the year ended December 31, 2013 decreased compared to 2012 and 2011. The change in acquisition expense ratio over both periods was driven by a higher proportion of net earned premiums attributed to the agriculture line of business, which incurs a lower net acquisition expense rate, and the decline in premiums in the professional line of business compared to 2012 and 2011, which conversely incurs a higher acquisition expense rate.

General and Administrative Expenses. The Company’s general and administrative expense ratio in the Insurance segment for 2013 increased compared to both 2012 and 2011. The increase in 2013 was due to higher personnel costs resulting from the addition of new underwriting teams, higher annual incentive costs, and increased levels of allocated expenses primarily from increased personnel expenses associated with the Company’s Chief Executive Officer transition. Compared to 2011, the overall increase in expenses was partially offset by higher third party commissions and expense reimbursements in the current year.

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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, 2013, 2012 and 2011:

	2013			2012			2011
	(U.S. dollars in thousands)
Revenues
Gross premiums written	$	1,189,815		$	1,119,096		$	997,316
Ceded premiums written		(73,392	)		(31,958	)		(22,985	)
Net premiums written		1,116,423			1,087,138			974,331
Net premiums earned		1,070,010			1,058,811			949,801
Other underwriting (loss) income		(2,046	)		501			(179	)
		1,067,964			1,059,312			949,622
Expenses
Net losses and loss expenses		445,259			665,054			867,547
Acquisition expenses		239,652			227,582			211,616
General and administrative expenses		137,310			110,581			118,037
		822,221			1,003,217			1,197,200
Underwriting income (loss)	$	245,743		$	56,095		$	(247,578	)
Ratios
Net loss ratio		41.6	%		62.8	%		91.3	%
Acquisition expense ratio		22.4	%		21.5	%		22.3	%
General and administrative expense ratio		12.8	%		10.4	%		12.4	%
Combined ratio		76.8	%		94.7	%		126.0	%

Premiums. Net premiums written in the Reinsurance segment increased in 2013 by 2.7% over 2012 and 14.6% over 2011, respectively. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2013, 2012 and 2011 were as follows:

	2013				2012				2011
	Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written		Gross Premiums Written		Net Premiums Written
	(U.S. dollars in thousands)
Catastrophe	$	355,751	$	294,260	$	378,387	$	351,140	$	346,021	$	329,081
Property		297,806		292,872		349,579		349,586		266,562		266,562
Casualty		252,163		250,330		224,237		222,997		217,584		216,786
Professional lines		163,594		163,594		59,076		59,076		59,911		59,911
Other specialty		120,501		115,367		107,817		104,339		107,238		101,991
Total	$	1,189,815	$	1,116,423	$	1,119,096	$	1,087,138	$	997,316	$	974,331

The change in the Reinsurance business segment net premiums written during 2013 compared to 2012 and 2011 was driven by the following factors:

• Growth in the professional line of business as a result of a new underwriting team that joined the Company in late 2013 which enabled the Company to participate in several new large quota share contracts;

• An increase in the casualty line of business as a result of new business written on international motor and U.S. casualty treaties and improved pricing on renewals partially offset by the non-renewal of business that no longer met profitability targets and a number of negative premium adjustments;

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• A decline in the property line of business compared to 2012 as the Company reduced participation on a few large contracts where pricing was inadequate. Compared to 2011, net premiums were higher in this line of business as a result of the renewal of new business recorded at the Company’s U.S., Zurich and Singapore offices in 2012 partially offset by the reductions noted above;

• A decline in the catastrophe line of business reflecting the impact of reduced pricing in a more competitive market and the selective reduction by the Company of its limits on some U.S. business, particularly in Florida, as well as the purchase by the Company of increased retrocessional coverage on business in the current year. In addition, the level of reinstatement premiums recorded in 2013 was lower than in the previous years as a result of a lower incidence of major loss events; and

• An expansion of the casualty and other specialty line of business in 2013, primarily due to new business generated by the trade credit and surety team that joined the Company in late 2012, partially offset by an absence of positive premium adjustments compared to 2012 and 2011 and increased retentions by several clients upon renewal of certain treaties.

Ceded premiums written by the Company in the Reinsurance segment amounted to $73.4 million in 2013 as compared to $32.0 million and $23.0 million in 2012 and 2011, respectively. Ceded premium increased in 2013 compared to 2012 and 2011 as the Company has purchased increased levels of protection in the catastrophe and property lines of business.

Net premiums earned increased in 2013 compared to 2012 and 2011 primarily due to the overall increase in premiums written during 2013.

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Net Losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for 2013 decreased compared to 2012 and 2011 as a result of higher levels of favorable prior year loss reserve development and lower levels of catastrophe related activity in 2013. The following table shows the net losses after adjustment for reinstatement premiums and other loss sensitive accruals recorded by the Company in connection with catastrophes in the Reinsurance segment for the years ended December 31, 2013, 2012 and 2011.

2013
Event Date	Event	Net Loss
(U.S. dollars in millions)
June 2013	Floods in Canada	$	6.6
June 2013	Floods in Europe		12.3
May 2013	Windstorms in the United States		8.2
July 2013	Hailstorms in Germany		29.6
October & December 2013	Windstorms in Europe		15.5
		$	72.2
2012
Event Date	Event	Net Loss
(U.S. dollars in millions)
October 2013	Superstorm Sandy	$	123.2
March/April 2012	Windstorms in the U.S.		38.8
May 2012	Earthquake in Italy		9.4
		$	171.4
2011
Event Date	Event	Net Loss
(U.S. dollars in millions)
August 2011	Hurricane Irene	$	13.2
November 2011	Thailand floods		76.5
July 2011	Danish floods		32.0
August 2011	Brushfires in Texas		6.0
March 2011	Tohuko, Japan earthquake and tsunami		114.3
February 2011	Christchurch, New Zealand earthquake		70.8
January 2011	Queensland, Australia floods		18.9
April/May 2011	Midwest U.S. tornadoes		71.6
Summer 2011	Multiple storms in the Midwest		53.8
		$	457.1

For 2013, catastrophe related losses added 7.4 percentage points to the Reinsurance segment’s net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 17.3 percentage points in 2012 and 49.9 percentage points in 2011.

The Company experienced higher favorable prior year loss reserve development in its Reinsurance segment in 2013 compared to 2012 and 2011. The 2013 favorable prior year loss reserve development emerged across all business lines in the segment. During 2013, 2012 and 2011, the Company’s previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $188.5 million, $74.0 million and $109.2 million, respectively. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company. During 2013, the majority of the favorable loss reserve development emanated from the property and catastrophe lines, driven by reductions in the Thailand flood losses of 2011 and Superstorm Sandy losses in 2012, and from lower than expected attritional losses.

Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance segment for the year ended December 31, 2013 was modestly higher than in 2012 and comparable to 2011. The increase over 2012 was a result of the growth in certain property reinsurance earned premiums and a reduction in catastrophe earned premiums which attract lower levels of commission.

General and Administrative Expenses. The general and administrative expense ratio experienced by the Reinsurance segment in 2013, as compared to 2012 and 2011 increased due to an increase in allocated costs associated with higher annual incentive costs and the Company’s Chief Executive Officer transition, partially offset by the impact of higher earned premiums.

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Investment Portfolio

The Company’s investment portfolio was valued at $6.5 billion as of December 31, 2013. The Company’s investment portfolio is comprised of cash and cash equivalents, fixed maturity investments, short-term investments, equity securities and other investments, comprised of alternative funds and specialty funds. Alternative funds include investments in hedge funds and private investment 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 following tables set forth the types of securities, amortized costs, fair values and related gross unrealized gains and losses of our fixed maturity, short-term and equity investment portfolios as of December 31, 2013 and 2012:

December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(U.S. dollars in thousands)
Fixed maturity investments
U.S. government and agencies securities	$	771,227	$	5,735	$	(7,619	)	$	769,343
U.S. state and municipal securities		27,138		111		(395	)		26,854
Foreign government securities		183,650		1,003		(2,006	)		182,647
Government guaranteed corporate securities		34,921		274		(50	)		35,145
Corporate securities		1,217,585		16,225		(6,511	)		1,227,299
Residential mortgage-backed securities		1,176,945		16,530		(21,922	)		1,171,553
Commercial mortgage-backed securities(1)		936,358		24,673		(8,144	)		952,887
Asset-backed securities		454,756		4,377		(897	)		458,236
Total fixed maturity investments	$	4,802,580	$	68,928	$	(47,544	)	$	4,823,964
Short-term investments		35,029		1		(2	)		35,028
Total fixed income investments	$	4,837,609	$	68,929	$	(47,546	)	$	4,858,992
Equity securities
Equity investments	$	152,525	$	24,139	$	(1,995	)	$	174,669
Emerging market debt funds		60,250		594		—			60,844
Preferred equity investments		6,325		1,977		(79	)		8,223
Short-term fixed income fund		8,728		2		—			8,730
Total equity securities	$	227,828	$	26,712	$	(2,074	)	$	252,466

⁽¹⁾  Balances include amounts related to collateralized debt obligations held with total fair values of $18.7 million.

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December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(U.S. dollars in thousands)
Fixed maturity securities
U.S. government and agencies securities	$	718,992	$	18,596	$	(53	)	$	737,535
U.S. state and municipal securities		37,952		1,119		(177	)		38,894
Foreign government securities		106,218		3,264		(145	)		109,337
Government guaranteed corporate securities		62,782		1,682		—			64,464
Corporate securities		1,334,451		40,555		(1,335	)		1,373,671
Residential mortgage-backed securities		1,252,468		30,426		(2,315	)		1,280,579
Commercial mortgage-backed securities(1)		741,178		41,737		(1,536	)		781,379
Asset-backed securities		474,555		8,435		(699	)		482,291
Total fixed maturity investments	$	4,728,596	$	145,814	$	(6,260	)	$	4,868,150
Short-term investments		42,224		6		—			42,230
Total fixed income investments	$	4,770,820	$	145,820	$	(6,260	)	$	4,910,380
Equity securities
Equity investments	$	59,736	$	7,194	$	(620	)	$	66,310
Emerging market debt funds		10,000		576		—			10,576
Preferred equity investments		7,261		2,851		(1	)		10,111
Total equity securities	$	76,997	$	10,621	$	(621	)	$	86,997

⁽¹⁾ Balances include amounts related to collateralized debt obligations held with total fair values of $8.5 million.

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, Freddie Mac and Fannie Mae.

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.

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 approximately 1% of our fixed income investments at December 31, 2013.

Residential Mortgage-Backed Securities. The majority of the residential mortgage-backed securities in our investment portfolio are issued by Freddie Mac and Fannie Mae. 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.

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 and other commercial properties. 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 27%. 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 are received. Non-agency CMBS also have credit risk should losses on the underlying collateral exceed the credit protection provided.

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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, credit card receivables, student loans 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 for these securities.

Short-term Investments

Short-term investments are investments that mature within no more than one year or no less than 90 days at the time of purchase. 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 publicly traded common stocks, preferred stocks, and mutual funds. The majority of the Company’s equity securities are common stocks of companies that have a record of increasing dividends over time. A portion of our equity securities are comprised of shares of institutional mutual funds which are invested in emerging market debt, convertible bonds and other targeted strategies.

Investment Ratings

The investment ratings (provided by major rating agencies) for the fixed income investments held as of December 31, 2013 and 2012 and the percentage of our fixed income investments they represented at such date were as follows:

	December 31, 2013					December 31, 2012
Ratings(1)	Fair Value		Percentage			Fair Value		Percentage
	(U.S. dollars in thousands)
U.S. government and agencies securities	$	769,343		15.8	%	$	737,535		15.0	%
AAA / Aaa		972,820		20.0	%		993,277		20.2	%
AA / Aa(2)		1,771,156		36.5	%		1,821,250		37.1	%
A / A		895,549		18.4	%		993,307		20.2	%
BBB		363,722		7.5	%		219,017		4.5	%
Below BBB		66,791		1.4	%		143,198		2.9	%
Not rated		19,611		0.4	%		2,796		0.1	%
Total	$	4,858,992		100.0	%	$	4,910,380		100.0	%

⁽¹⁾  The credit rating for each security 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 or Fitch is used.

⁽²⁾  Includes agency mortgage-backed securities of $1,165.9 million and $1,223.5 million at December 31, 2013 and 2012, respectively.

The contractual maturity distribution for our fixed maturity portfolio held as of December 31, 2013 and 2012 was as follows:

	December 31, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(U.S. dollars in thousands)
Due within one year	$	144,814	$	145,653	$	136,283	$	137,567
Due after one year through five years		1,808,001		1,815,240		1,725,927		1,765,662
Due after five years through ten years		290,391		288,486		410,755		429,099
Due after ten years		26,344		26,937		29,654		33,803
Residential mortgage-backed securities		1,176,945		1,171,553		1,252,468		1,280,579
Commercial mortgage-backed securities		936,358		952,887		741,178		781,379
Asset-backed securities		454,756		458,236		474,555		482,291
Total	$	4,837,609	$	4,858,992	$	4,770,820	$	4,910,380

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Other Investments

The Company’s other investments are comprised of (i) hedge funds and private investment 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, 2013, our Board of Directors had approved investments in alternative funds at the time of commitment of capital of up to the lesser of (x) 20% of total shareholders’ equity, or (y) $600 million. This restriction does not apply to investments in specialty funds that are typically long only structures. As of December 31, 2013, the Company’s other investments totaled $617.5 million and represented 9.5% of the Company’s investment portfolio. As of December 31, 2013, the Company had invested, net of capital returned, a total of $440.9 million in alternative funds and specialty funds. As of December 31, 2013, the market value of alternative funds represented $461.1 million or approximately 74.7% of other investments, and specialty funds represented $156.3 million or approximately 25.3% of other investments.

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 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 other investments are included in net investment income and totaled $64.3 million of gains, $49.1 million of losses and $0.7 million of gains for the years ended 2013, 2012 and 2011, respectively.

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, 2013, 2012 and 2011 were as follows:

Investment Returns	2013			2012			2011
	(U.S. dollars in thousands)
Net investment income (loss) from other investments	$	64,321		$	49,059		$	(694	)
Net investment income from available for sale investments and cash and cash equivalents (net of investment expenses)		101,895			124,267			147,731
Net investment income included in net income (loss)		166,216			173,326			147,037
Net realized and unrealized gains included in net income (loss)		15,164			72,139			31,671
Net impairment losses recognized in earnings (losses)		(1,616	)		(847	)		(3,520	)
Net (decrease) increase in unrealized (loss) gain included in other comprehensive (loss) income, before deferred tax offsets		(106,394	)		12,761			20,073
Total net investment return	$	73,370		$	257,379		$	195,261

During 2013, 2012 and 2011, 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. As such, the Company recorded total other than temporary impairments of $1.6 million (2012 - $0.8 million; 2011 - $3.5 million) related to credit factors and recognized in earnings.

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

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credit rating agencies. The Company has remained relatively consistent in 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.), with $463.4 million of exposure at December 31, 2013 (2012 - $198.5 million). The increase in exposures as of December 31, 2013 compared to the prior year is mainly due to Moody’s downgrade of the United Kingdom from “Aaa” to “Aa1” in February 2013.

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, 2013. The amortized cost basis of these investments was not significantly different from their fair value at December 31, 2013. 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.

	Sovereign Exposure				Non-Sovereign Exposure
					Corporate securities
Country	Foreign Government Securities		Government Guaranteed Corporate Securities		Financial		Non-Financial		Structured Securities(1)		Equity Securities		Cash and Cash Equivalents		Gross Exposure
	(U.S. dollars in thousands)
Belgium	$	—	$	—	$	—	$	13,010	$	—	$	—	$	—	$	13,010
Brazil		10,424		—		1,911		4,578		—		—		—		16,913
China		2,192		—		—		—		—		1,031		—		3,223
Colombia		1,267		—		—		—		—		—		—		1,267
France		18,519		3,686		4,086		9,649		—		1,921		—		37,861
Germany		15,881		22,611		276		9,881		543		11,350		—		60,542
Hong Kong		—		—		—		—		—		1,197		—		1,197
Indonesia		—		—		—		—		—		922		—		922
Ireland		—		—		—		924		3,814		—		—		4,738
Italy		568		—		—		1,470		—		—		—		2,038
Japan		—		—		6,989		10,799		—		2,331		—		20,119
Republic of Korea		3,827		—		—		266		—		—		—		4,093
Luxembourg		—		—		—		—		47		—		—		47
Mexico		—		—		742		1,260		—		1,041		—		3,043
Netherlands		8,549		1,023		9,938		3,271		2,719		7,598		—		33,098
Qatar		5,498		2,588		—		—		—		—		—		8,086
Russia		5,333		—		—		4,320		—		—		—		9,653
Slovenia		283		—		—		—		—		—		—		283
South Africa		—		—		—		—		—		1,382		—		1,382
Spain		744		—		—		1,068		—		—		—		1,812
European Supranational(2)		7,533		—		—		—		—		—		—		7,533
Taiwan		—		—		—		4,984		—		—		—		4,984
Thailand		—		—		—		—		—		1,017		—		1,017
United Arab Emirates		1,210		—		—		—		—		—		—		1,210
United Kingdom		90,756		—		29,058		43,265		33,460		3,653		25,175		225,367
Total	$	172,584	$	29,908	$	53,000	$	108,745	$	40,583	$	33,443	$	25,175	$	463,438

⁽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, 2013 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, 2013:

Country	AAA		AA		A		BBB		Below BB		NR		Total
	(U.S. dollars in thousands)
Belgium	$	—	$	—	$	13,010	$	—	$	—	$	—	$	13,010
Brazil		—		—		4,186		12,727		—		—		16,913
China		—		2,192		—		—		—		1,031		3,223
Colombia		—		—		—		1,267		—		—		1,267
France		—		24,449		7,305		3,786		400		1,921		37,861
Germany		36,452		2,783		7,969		1,771		218		11,349		60,542
Hong Kong		—		—		—		—		—		1,197		1,197
Indonesia		—		—		—		—		—		922		922
Ireland		486		3,328		—		924		—		—		4,738
Italy		—		—		—		2,038		—		—		2,038
Japan		—		4,722		12,314		752		—		2,331		20,119
Republic of Korea		—		—		3,827		266		—		—		4,093
Luxembourg		47		—		—		—		—		—		47
Mexico		—		—		2,002		—		—		1,041		3,043
Netherlands		2,039		14,152		14,545		—		—		2,362		33,098
Qatar		—		2,588		5,498		—		—		—		8,086
Russia		—		—		—		9,653		—		—		9,653
Slovenia		—		—		283		—		—		—		283
South Africa		—		—		—		—		—		1,382		1,382
Spain		—		—		—		1,812		—		—		1,812
European Supranational		6,815		718		—		—		—		—		7,533
Taiwan		—		—		4,984		—		—		—		4,984
Thailand		—		—		—		—		—		1,017		1,017
United Arab Emirates		—		1,210		—		—		—		—		1,210
United Kingdom		126,022		8,385		76,935		10,372		—		3,653		225,367
Total	$	171,861	$	64,527	$	152,858	$	45,368	$	618	$	28,206	$	463,438

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.

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, if any, on its ordinary shares, its 7.75% Non-Cumulative Preferred Shares, Series A (“Series A Preferred Shares”) and its 7.5% Non-Cumulative Preferred Shares, Series B (“Series B Preferred Shares”). There are restrictions on the payment of dividends by the Company’s operating subsidiaries to Endurance Holdings, which are described in more detail below.

Ability of Subsidiaries to Pay Dividends. 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, 2013, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $654.5 million without prior regulatory approval based upon the Bermuda insurance and corporate regulations. In 2011, Endurance Holdings loaned Endurance Bermuda $200.0 million, which remains outstanding and is callable on demand.

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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 and American Agri-Business 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, 2013, 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 2014 without the prior approval of the applicable insurance regulator. At December 31, 2013, American Agri-Business (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 Prudential Regulatory Authority (“PRA”), 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 PRA 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 PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At December 31, 2013, Endurance U.K. did not have retained profits available for distributions.

Cash and Invested Assets. The Company’s aggregate invested assets as of December 31, 2013 totaled $6.5 billion compared to aggregate invested assets of $6.6 billion as of December 31, 2012. The decrease in invested assets since December 31, 2012 resulted from losses and loss expenses paid, acquisition expenses paid, reinsurance premiums paid, general and administrative expenses paid, interest and dividends paid, the repurchase of the Company’s ordinary shares, and the change in market value of invested assets offset in part by collections of premiums on insurance policies and reinsurance contracts, investment income and proceeds from the issuance of the Company’s ordinary shares.

As of December 31, 2013 and 2012, the Company had pledged cash and cash equivalents and fixed maturity investments of $146.1 million and $224.4 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2013 and 2012, the Company had also pledged $302.7 million and $380.0 million of its cash and fixed maturity investments to meet collateral obligations for $260.3 million and $320.4 million in secured letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2013 and 2012, cash and fixed maturity investments with fair values of $273.7 million and $280.0 million were on deposit with U.S. state regulators, respectively.

Cash Flows

	2013			2012			2011
	(U.S. dollars in thousands)
Net cash provided by operating activities	$	157,924		$	283,468		$	281,285
Net cash (used in) provided by investing activities		(347,777	)		46,302			238,105
Net cash used in financing activities		(74,422	)		(97,576	)		(234,102	)
Effect of exchange rate changes on cash and cash equivalents		(13,893	)		911			(4,226	)
Net (decrease) increase in cash and cash equivalents		(278,168	)		233,105			281,062
Cash and cash equivalents, beginning of year		1,124,019			890,914			609,852
Cash and cash equivalents, end of year	$	845,851		$	1,124,019		$	890,914

Our cash and cash equivalents decreased $278.2 million to $845.9 million at December 31, 2013, compared to $1,124.0 million at December 31, 2012, and $890.9 million at December 31, 2011.

Cash flows provided by operating activities. Cash flows provided by operating activities for the year ended December 31, 2013 were $157.9 million compared to $283.5 million for the year ended December 31, 2012 and $281.3 million for the year ended December 31, 2011. The decrease in cash flows provided by operating activities in 2013 compared to 2012 was primarily due to higher claim payments in 2013 that was partially offset by increased premium collections and recoveries on ceded losses. The decrease in cash flows provided by operating activities in 2013 compared to 2011 was primarily due to a decrease in premium collections.

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Cash flows used in investing activities. During the twelve months ended December 31, 2013, cash flows used in investing activities were $347.8 million, compared to cash flows provided by investing activities of $46.3 million for 2012 and $238.1 million in 2011. The Company actively manages its investment portfolio on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing of investment sales and purchases. The cash flows used in investing activities in 2013 were higher than in 2012 and 2011 due to a decrease in net proceeds from available for sale investments and for 2011 from the absence of positive cash flows from securities lending collateral received.

Cash flows used in financing activities. The Company’s cash flows used in financing activities for the twelve months ended December 31, 2013 were $74.4 million, compared to $97.6 million and $234.1 million in 2012 and 2011, respectively. The 2013 cash flows used in financing activities decreased compared to 2012 due to proceeds from the issuance of ordinary shares. Compared to 2011, cash flows used in financing activities in 2013 decreased due to the decrease in ordinary share repurchase activity and absence of negative cash flows from securities lending payables partially offset by a decrease in proceeds from share issuances.

On May 28, 2013, prior to John R. Charman becoming the Company’s Chairman and Chief Executive Officer, Mr. Charman, together with members of his family, purchased from the Company $30.0 million of newly issued ordinary shares.

During 2013, the Company used its capital to repurchase 318,252 of its ordinary shares in the open market for $14.6 million at an average price per share of $45.83. During 2012, the Company repurchased $1.0 million of its 6.15% Senior Notes due October 15, 2015 (2013: nil; 2011: $0.5 million). 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 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.

Credit Facility. On April 19, 2012 the Company and certain designated subsidiaries of the Company entered into a $700.0 million four-year revolving credit facility with JPMorgan Chase Bank, N.A. (“JPMorgan”) as administrative agent (“Credit Facility”). Upon entering into the Credit Facility, the Company terminated its existing $1,175.0 million amended and restated credit agreement dated May 8, 2007 with JPMorgan as administrative agent. As of December 31, 2013, there were no borrowings under the Credit Facility and letters of credit outstanding under the Credit Facility were $260.3 million (2012 - $320.4 million).

The Credit Facility consists of two tranches: (i) a tranche 1 secured credit facility in an aggregate principal amount of $560.0 million (the “Tranche 1 Facility”), which is secured on a several basis by the respective entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas and (ii) a tranche 2 unsecured facility in an aggregate principal amount of $140.0 million (the “Tranche 2 Facility”). The proceeds of the Credit Facility may be used for general corporate purposes, to finance potential acquisitions and for the repurchase of the Company’s outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $350.0 million, provided that no participating lender is obligated to increase its commitments under the Credit Facility.

For letters of credit issued on a collateralized basis under the Tranche 1 Facility, the Company is required to pay a fee of 0.45% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis under the Tranche 2 Facility, the Company is required to pay a fee ranging from 1.125% to 1.750% over LIBOR on the daily stated amount of such letters of credit based upon the Company’s debt ratings as issued by Moody’s or Standard & Poor’s. The interest rate for revolving loans under the Tranche 2 Facility is (a) the highest of (i) 0.5% in excess of the federal funds effective rate, (ii) the prime rate as announced by JP Morgan and (iii) the Eurodollar rate applicable for an interest period of one month plus 1%, plus a margin ranging from 0.125% to 0.750% depending upon the type of loan and the Company’s ratings as issued by Moody’s and Standard & Poor’s or (b) LIBOR plus a margin ranging from 1.125% to 1.750%. In addition, the Credit Facility required the Company to pay to the lenders a commitment fee.

The 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 $1.8 billion at any time). In addition, each of the Company’s regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the Credit Facility restrict the declaration or payment of dividends if the Company is already in default or the payment or declaration would cause a default under the terms of the Credit Facility.

The Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the Credit Facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the Credit Facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 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 Credit Facility.

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Contractual Obligations. At December 31, 2013, letters of credit totaling $260.3 million were outstanding, $198.5 million face value of 6.15% Senior Notes due October 15, 2015 (the “6.15% Senior Notes”) were outstanding and $335.0 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, 2013 are summarized as follows:

	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	$	4,002,259	$	1,446,929	$	1,170,211	$	559,560	$	825,559
6.15% Senior Notes		198,500		—		198,500		—		—
Interest on 6.15% Senior Notes		24,416		12,208		12,208		—		—
7% Senior Notes		335,000		—		—		—		335,000
Interest on 7% Senior Notes		492,450		23,450		46,900		46,900		375,200
Investment commitments(1)		57,997		57,997		—		—		—
Operating lease obligations(2)		109,808		14,778		27,886		22,494		44,650
Total	$	5,220,430	$	1,555,362	$	1,455,705	$	628,954	$	1,580,409

⁽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.

The following table summarizes the components of our capital resources at December 31, 2013 and 2012:

	2013			2012
	(U.S. dollars in thousands)
Senior notes	$	527,398		$	527,195
Preferred shares		430,000			430,000
Common shareholders equity		2,456,549			2,280,597
Total capital resources(1)	$	3,413,947		$	3,237,792
Ratio of debt to total capital resources		15.4	%		16.3	%
Ratio of debt plus preferred shares to total capital resources		28.0	%		29.6	%

⁽¹⁾  The Company also has credit facility capacity of $439.7 million and $854.6 million as at December 31, 2013 and 2012, respectively.

Credit Facility. As of December 31, 2013 and 2012, the Company had $260.3 million and $320.4 million, respectively, of letters of credit outstanding under the Credit Facility and no revolving loans outstanding. The Company was in compliance with all covenants contained in the Credit Facility as of December 31, 2013.

Senior Notes. On October 17, 2005, Endurance Holdings issued $200.0 million principal amount of 6.15% Senior Notes due October 15, 2015. 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%. Endurance Holdings used net proceeds from the offering to repay a $143.5 million revolving loan then outstanding under the Company’s then existing credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes. During 2012, the Company repurchased $1.0 million of its 6.15% Senior Notes (2013: nil; 2011: $0.5 million).

On July 15, 2004, the Company issued $250.0 million principal amount of 7% Senior Notes due July 15, 2034. 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

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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).

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, 2013, the carrying value of the Senior Notes stood at $527.4 million while the fair value as determined by quoted market valuation was $575.1 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2013.

Given that the Company’s Senior Notes and the 2012 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 Credit Facility. If this were to occur, the Company may not have 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.

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 $25.00 per Series A Preferred Share and per 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.

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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 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 £296.4 million as of December 31, 2013 ($490.9 million in U.S. dollars). Endurance U.K. is subject to the United Kingdom’s Prudential Regulation 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.

For the year ended December 31, 2013, 15% 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, net premium receivable and insurance and reinsurance balances receivable, and reserves for loss and loss expenses denominated in non-U.S. currencies at December 31, 2013 were approximately 45%, 5%, 21%, and 15%, respectively. As of December 31, 2013, the Company’s principal foreign currency exposures are denominated in British Sterling and Euros. 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 and net asset balances denominated in Euros were $281.0 million and $48.0 million, respectively. The total estimated gross and net asset balances denominated in British Sterling were $277.9 million and $155.9 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 $20.4 million increase or decrease in the net assets held by the Company at December 31, 2013.

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 or become an unrealized loss position. 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 income investments to maturity which would result in the unrealized gains largely amortizing through net investment income.

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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 uses an initial loss estimate (expected loss technique) for each accident year by business line and type of contract. Under this method, IBNR is set equal to the initial loss estimate multiplied by the expected percent of loss yet to be reported at each valuation date. In a given quarter, if reported losses are less than expected, then the difference would result in a decrease in estimated ultimate losses. If losses for the quarter are greater than expected, then the difference would result in an increase in estimated ultimate 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, Chief Financial Officer, Chief Risk Officer, Group Actuary, Chief Reserving Actuary and representatives of various disciplines from within the Company, such as claims, underwriting and legal.

Current Reserve for Losses and Loss Expenses

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.

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Current and prior year incurred losses and loss expenses by segment and line of business for the year ended December 31, 2013 were as follows:

	Incurred related to:					Total incurred
	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance segment:
Agriculture	$	565,435	$	(5,597	)	$	559,838
Casualty and other specialty		157,870		(15,364	)		142,506
Professional lines		73,557		(979	)		72,578
Property		11,466		(11,963	)		(497	)
Total Insurance		808,328		(33,903	)		774,425
Reinsurance segment:
Catastrophe		135,407		(61,186	)		74,221
Property		193,549		(57,394	)		136,155
Casualty		183,126		(20,370	)		162,756
Professional lines		41,114		(13,947	)		27,167
Other specialty		80,552		(35,592	)		44,960
Total Reinsurance		633,748		(188,489	)		445,259
Totals	$	1,442,076	$	(222,392	)	$	1,219,684

Losses and loss expenses for the year ended December 31, 2013 include $222.4 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during 2013 benefited the Company’s 2013 reported loss ratio by approximately 11.0 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, 2013, as part of the Company’s periodic review of key parameters and in order to recognize accumulated historical experience and other relevant industry information, the Company adjusted the initial expected loss ratios for a number of business units within the Insurance and Reinsurance segments. Within the Insurance segment, initial expected loss ratios were lowered for historical years for the casualty and other specialty and professional lines of business, and raised for the workers’ compensation line of business that is included in the casualty and other specialty line of business. Within the Reinsurance segment, initial expected loss ratios were lowered for historical years for the catastrophe line of business.

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Current and prior year incurred losses and loss expenses by segment and line of business for the year ended December 31, 2012 were as follows:

	Incurred related to:					Total incurred
	Current year		Prior years			losses
	(U.S. dollars in thousands)
Insurance segment:
Agriculture	$	582,772	$	(9,304	)	$	573,468
Casualty and other specialty		162,280		(15,098	)		147,182
Professional lines		104,211		(8,647	)		95,564
Property		52,864		(13,137	)		39,727
Total Insurance	$	902,127	$	(46,186	)	$	855,941
Reinsurance segment:
Catastrophe	$	164,181	$	(30,414	)	$	133,767
Property		251,473		270			251,743
Casualty		179,408		(18,909	)		160,499
Professional lines		39,779		(56	)		39,723
Other specialty		104,184		(24,862	)		79,322
Total Reinsurance	$	739,025	$	(73,971	)	$	665,054
Totals	$	1,641,152	$	(120,157	)	$	1,520,995

Losses and loss expenses for the year ended December 31, 2012 include $120.2 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2012 year benefited the Company’s 2012 reported loss ratio by approximately 6.0 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, 2012, 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 2012 for those reserve categories were within the range of possible results anticipated by the Company.

Insurance

Agriculture. The favorable loss emergence within the agriculture insurance line of business during 2013 and 2012 resulted from lower than anticipated agriculture claims settlements for the 2012 and 2011 crop years, respectively.

Casualty and other specialty. The favorable loss emergence within the casualty and other specialty insurance line of business during 2013 and 2012 was primarily due to lower than expected claims activity within the healthcare liability and excess casualty businesses. This favorable loss emergence was partially offset by adverse development within the workers’ compensation and primary casualty businesses during 2013 and 2012. The Company exited the workers’ compensation business in 2009.

Professional lines. The favorable loss emergence within the professional line of business during 2013 and 2012 was primarily due to lower than expected claims activity in the directors and officers liability business.

Property. The favorable loss emergence within the property line of business during 2013 and 2012 was primarily due to lower than expected reported claim emergence.

Reinsurance

Catastrophe. The Company recorded favorable loss emergence within the catastrophe line of business during 2013 and 2012 primarily due to lower than expected claims activity. During 2013, the favorable loss reserve development was driven by reductions in the Thailand flood losses of 2011 and Superstorm Sandy losses in 2012, and from lower than expected attritional losses.

Property. The Company recorded favorable prior year reserve development within the property line of business during 2013 primarily due to lower expected attritional and Superstorm Sandy losses from 2012. The Company recorded modest unfavorable prior year reserve development within the property line of business during 2012 primarily due to higher than expected claims reported related to 2011 loss events.

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Casualty. The Company recorded favorable prior period development within the casualty line of business during 2013 and 2012 primarily due to lower than expected claims reported.

Professional lines. The favorable loss emergence within the professional line of business during 2013 and 2012 was primarily due to lower than expected claims activity in the directors and officers liability business.

Other specialty. The Company recorded favorable loss emergence within the other specialty line of business during 2013 and 2012 due to lower than expected claims reported.

Case and IBNR reserves for losses and loss expenses by segment and line of business were as follows at December 31, 2013:

	Case Reserves		IBNR Reserves		Reserve for Losses and Loss Expenses
	(U.S. dollars in thousands)
Insurance segment:
Agriculture	$	257,939	$	84,429	$	342,368
Casualty and other specialty		316,170		960,130		1,276,300
Professional lines		110,880		390,875		501,755
Property		23,410		15,057		38,467
Total Insurance	$	708,399	$	1,450,491	$	2,158,890
Reinsurance segment:
Catastrophe	$	167,152	$	98,474	$	265,626
Property		196,715		127,083		323,798
Casualty		244,300		554,289		798,589
Professional lines		65,353		149,882		215,235
Other specialty		96,801		143,320		240,121
Total Reinsurance	$	770,321	$	1,073,048	$	1,843,369
Totals	$	1,478,720	$	2,523,539	$	4,002,259

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Case and IBNR reserves for losses and loss expenses by segment and line of business were as follows at December 31, 2012:

	Case Reserves		IBNR Reserves		Reserve for Losses and Loss Expenses
	(U.S. dollars in thousands)
Insurance segment:
Agriculture	$	392,457	$	71,586	$	464,043
Casualty and other specialty		308,611		944,289		1,252,900
Professional lines		110,441		386,819		497,260
Property		54,196		18,653		72,849
Total Insurance	$	865,705	$	1,421,347	$	2,287,052
Reinsurance segment:
Catastrophe	$	201,105	$	97,223	$	298,328
Property		281,681		133,779		415,460
Casualty		221,327		534,605		755,932
Professional lines		75,167		145,377		220,544
Other specialty		119,261		144,299		263,560
Total Reinsurance	$	898,541	$	1,055,283	$	1,953,824
Totals	$	1,764,246	$	2,476,630	$	4,240,876

Selected quarterly activity in the reserve for losses and loss expenses for the years ended December 31, 2013 and 2012 is summarized as follows:

	Quarter Ended March 31, 2013			Quarter Ended June  30, 2013			Quarter Ended September 30, 2013			Quarter Ended December 31, 2013			Year Ended December 31, 2013
	(U.S. dollars in thousands)
Incurred related to:
Current year	$	269,638		$	421,863		$	387,096		$	363,479		$	1,442,076
Prior years		(50,668	)		(62,805	)		(48,060	)		(60,859	)		(222,392	)
Total incurred	$	218,970		$	359,058		$	339,036		$	302,620		$	1,219,684
Paid related to:
Current year	$	(1,553	)	$	(130,897	)	$	(132,271	)	$	(259,289	)	$	(524,010	)
Prior years		(311,668	)		(105,145	)		(244,366	)		(176,903	)		(838,082	)
Total paid	$	(313,221	)	$	(236,042	)	$	(376,637	)	$	(436,192	)	$	(1,362,092	)
	Quarter Ended March 31, 2012			Quarter Ended June 30, 2012			Quarter Ended September 30, 2012			Quarter Ended December 31, 2012			Year Ended December 31, 2012
	(U.S. dollars in thousands)
Incurred related to:
Current year	$	279,668		$	365,449		$	463,165		$	532,870		$	1,641,152
Prior years		(16,901	)		(19,552	)		(55,642	)		(28,062	)		(120,157	)
Total incurred	$	262,767		$	345,897		$	407,523		$	504,808		$	1,520,995
Paid related to:
Current year	$	(5,096	)	$	(37,237	)	$	(114,996	)	$	(450,899	)	$	(608,228	)
Prior years		(141,594	)		(221,070	)		(250,829	)		(102,035	)		(715,528	)
Total paid	$	(146,690	)	$	(258,307	)	$	(365,825	)	$	(552,934	)	$	(1,323,756	)

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The following table represents the development of the GAAP balance sheet reserve for losses and loss expenses, net of losses and loss expenses recoverable, for 2003 through December 31, 2013. 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.

The table also shows the cumulative paid amounts as of successive years with respect to the reserve liability. All paid loss amounts reflect the conversion from the original currency of the underlying business if not initially denominated in U.S. dollars. The data in the cumulative paid losses table has been restated using the rate of exchange to U.S. dollars as of December 31, 2013. Information presented herein may differ materially from that reported in the Company’s financial statements due to differences in foreign currency exchange rates.

Years Ended Dec. 31,	2003			2004			2005			2006			2007			2008			2009			2010			2011			2012			2013
Gross reserve for losses and loss expenses	$	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		$	4,240,876		$	4,002,259
Less: Reinsurance recoverable on unpaid losses		(1,442	)		(12,203	)		(17,248	)		(44,244	)		(187,354	)		(165,000	)		(240,732	)		(235,741	)		(467,934	)		(691,783	)		(593,755	)
Net reserve for losses and loss expenses	$	831,716		$	1,537,458		$	2,586,342		$	2,657,442		$	2,704,870		$	3,070,456		$	2,916,294		$	3,084,186		$	3,356,290		$	3,549,093		$	3,408,504
Net reserve estimated as of:
1 year later		695,036			1,374,996			2,528,603			2,498,055			2,548,330			2,526,733			2,562,560			2,820,600			3,037,139			3,326,701			—
2 years later		629,925			1,305,424			2,467,734			2,356,210			2,464,893			2,396,200			2,436,531			2,682,900			3,105,231			—			—
3 years later		607,614			1,256,798			2,371,899			2,277,847			2,284,478			2,317,976			2,335,969			2,631,029			—			—			—
4 years later		589,425			1,199,472			2,321,813			2,119,160			2,192,337			2,217,402			2,459,897			—			—			—			—
5 years later		568,421			1,152,412			2,194,657			2,054,334			2,090,463			2,512,746			—			—			—			—			—
6 years later		544,127			1,076,060			2,147,534			1,954,417			2,002,229			—			—			—			—			—			—
7 years later		513,050			1,058,305			2,073,443			1,895,092			—			—			—			—			—			—			—
8 years later		501,355			1,012,268			2,042,303			—			—			—			—			—			—			—			—
9 years later		487,945			991,775			—			—			—			—			—			—			—			—			—
10 years later		475,386			—			—			—			—			—			—			—			—			—			—
Cumulative redundancy		356,330			545,683			544,039			762,350			702,641			557,710			456,397			453,157			251,059			222,392			—
Cumulative paid losses
1 year later		118,957			301,735			696,045			625,637			556,942			598,516			575,569			625,456			715,511			832,521			—
2 years later		183,475			454,300			1,128,689			943,966			855,911			978,677			975,939			992,629			1,224,681			—			—
3 years later		237,472			572,173			1,357,995			1,160,152			1,132,914			1,210,257			1,242,048			1,314,323			—			—			—
4 years later		281,056			649,498			1,506,370			1,300,833			1,277,304			1,417,278			1,472,937			—			—			—			—
5 years later		315,382			709,372			1,608,972			1,369,079			1,410,647			1,574,944			—			—			—			—			—
6 years later		341,362			757,993			1,651,108			1,454,358			1,476,146			—			—			—			—			—			—
7 years later		371,898			786,872			1,736,387			1,497,222			—			—			—			—			—			—			—
8 years later		384,629			818,060			1,770,081			—			—			—			—			—			—			—			—
9 years later		403,241			828,219			—			—			—			—			—			—			—			—			—
10 years later		406,779			—			—			—			—			—			—			—			—			—			—

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

Years Ended December 31,	2003			2004		2005		2006		2007			2008			2009			2010			2011		2012
Cumulative paid losses	$	118,957		$	301,735	$	696,045	$	625,637	$	556,942		$	598,516		$	575,569		$	625,456		$	715,511	$	832,521
Cumulative paid losses due to foreign exchange		(704	)		5,522		23,708		52,350		(17,076	)		(19,182	)		(14,548	)		(27,560	)		17		5,561
Cumulative paid losses excluding the impact of foreign exchange	$	118,253		$	307,257	$	719,753	$	677,987	$	539,866		$	579,334		$	561,021		$	597,896		$	715,528	$	838,082

92

Potential Variability in Reserves for Losses and Loss Expenses

The Company’s estimated reserve for losses and loss expenses can change over time due to 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, 2013. The 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern in the tables below were chosen to demonstrate the impact on the Company’s loss and loss expense reserves of variation in key inputs and, as described below, may not be reflective of actual changes in loss and loss expense reserves.

Insurance

Agriculture

Potential Percentage Change in Total Loss and Loss Expense Reserves

	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(2.2	)%		(1.6	)%		(0.9	)%
Unchanged(1)		(0.7	)%		—	%		0.7	%
10% Slower		0.8	%		1.6	%		2.4	%
Casualty and other specialty Potential Percentage Change in Total Loss and Loss Expense Reserves
	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(13.6	)%		(9.0	)%		(4.5	)%
Unchanged		(5.1	)%		—	%		5.1	%
10% Slower		6.7	%		12.2	%		17.7	%
Professional lines Potential Percentage Change in Total Loss and Loss Expense Reserves
	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(13.2	)%		(8.1	)%		(3.1	)%
Unchanged		(5.6	)%		—	%		5.6	%
10% Slower		2.4	%		8.5	%		14.6	%
Property Potential Percentage Change in Total Loss and Loss Expense Reserves
	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(5.0	)%		(3.8	)%		(2.6	)%
Unchanged		(1.3	)%		—	%		1.3	%
10% Slower		3.7	%		5.2	%		6.6	%

93

Reinsurance

Catastrophe

Potential Percentage Change in Total Loss and Loss Expense Reserves

	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(3.9	)%		(2.7	)%		(1.6	)%
Unchanged		(1.3	)%		—	%		1.3	%
10% Slower		1.6	%		3.0	%		4.4	%
Property Potential Percentage Change in Total Loss and Loss Expense Reserves
	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(6.8	)%		(4.2	)%		(1.6	)%
Unchanged		(2.8	)%		—	%		2.8	%
10% Slower		2.2	%		5.3	%		8.3	%
Casualty Potential Percentage Change in Total Loss and Loss Expense Reserves
	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(12.3	)%		(8.2	)%		(4.1	)%
Unchanged		(4.5	)%		—	%		4.5	%
10% Slower		5.2	%		10.1	%		15.1	%
Professional lines Potential Percentage Change in Total Loss and Loss Expense Reserves
	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(12.1	)%		(7.2	)%		(2.3	)%
Unchanged		(5.4	)%		—	%		5.4	%
10% Slower		1.2	%		7.0	%		12.8	%
Other specialty Potential Percentage Change in Total Loss and Loss Expense Reserves
	Initial Expected Loss Ratio
Reporting Pattern	10% Lower			Unchanged			10% Higher
10% Faster		(8.7	)%		(5.6	)%		(2.5	)%
Unchanged		(3.4	)%		—	%		3.4	%
10% Slower		4.3	%		8.0	%		11.6	%

⁽¹⁾  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 set forth in the tables above represents a reasonable estimate of the possible loss and loss expense reserve variations 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.

94

Ceded Reinsurance

Ceded premiums written were $616.3 million for the year ended December 31, 2013, $519.5 million for the year ended December 31, 2012 and $487.3 million for the year ended December 31, 2011. The increase in ceded premiums written was due to decreased retentions in our U.S. insurance operations, specifically related to the agriculture and professional lines of business, and the purchase of increased levels of protection within the catastrophe line of business in the Reinsurance segment. The Company’s U.S. and Bermuda insurance operating subsidiaries use proportional and excess reinsurance to protect larger limits on certain business written by the Insurance segment. Our agriculture line of business participates in a crop reinsurance program sponsored by the U.S. federal government as well as utilizes third party reinsurance covers. Excess reinsurance coverage is often purchased in relation to the property insurance line of business to protect against catastrophic events.

At December 31, 2013 and 2012, the Company had reinsurance recoverables of $758.0 million and $774.9 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 to the U.S. federal government in 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. At December 31, 2013 and 2012, the Company held collateral of $14.2 million and $11.5 million, respectively, related to its ceded reinsurance agreements. The Company has an allowance of nil for estimated uncollectible reinsurance recoverable balances at December 31, 2013 (2012 - $0.1 million). The balance of losses recoverable at December 31, 2013 was distributed as follows based on the ratings of the reinsurers:

Rating	December 31, 2013		December 31, 2012
	(U.S. dollars in thousands)
U.S. government sponsored program	$	356,049	$	423,803
A+ and above		253,665		214,358
A		135,949		125,694
A- and below		2,046		1,486
Not rated		10,266		9,601
Total	$	757,975	$	774,942

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 business in 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 significant 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 2013, 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 in relation to the ARMtech goodwill. 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 reporting units noted. As a result of the impairment testing, no write-downs were deemed necessary at December 31, 2013 and 2012.

95

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 and Singapore. The Company’s Canadian branch office was closed during the fourth quarter of 2012. The Company is not required to pay any income or capital gains taxes on its operations in Bermuda.

The Company’s income tax (expense) benefit was as follows for the years ended December 31, 2013, 2012 and 2011, respectively:

	2013			2012			2011
	(U.S. dollars in thousands)
Current income tax (expense) benefit	$	(3,089	)	$	(5,029	)	$	13,518
Deferred income tax (expense) benefit		(2,764	)		1,683			9,488
Income tax (expense) benefit	$	(5,853	)	$	(3,346	)	$	23,006

Of the 2013 current income tax (expense) benefit, $(3.1) million related to taxes incurred in the United States (2012 – $(4.6) million; 2011 – $12.7 million). Of the deferred income tax (expense) benefit, $(2.8) million related to deferred income tax expense in the United States (2012 – $1.6 million; 2011 – $9.6 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 2013 totaled $8.4 million. The Company paid net income taxes and received net refunds totaling $1.6 million and $15.7 million for the years ended December 31, 2012 and 2011, respectively. Net operating loss carryforwards in the amount of $80.3 million, $10.6 million, $5.3 million, and $9.9 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 2020 and 2033, respectively.

The Company’s income (loss) before income taxes was distributed as follows for the years ended December 31, 2013, 2012 and 2011, respectively:

	2013		2012			2011
	(U.S. dollars in thousands)
U.S. (domestic)	$	13,103	$	(186,882	)	$	(125,752	)
Non-U.S. (foreign)		304,665		352,744			9,012
Pre-tax income (loss)	$	317,768	$	165,862		$	(116,740	)

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 income (loss) of these operations. The disproportionate relationship between gross premium written and net income (loss) 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 income (loss) for our non-U.S. operations was favorable compared to our U.S. operations for the years ending December 31, 2013, 2012 and 2011 because our U.S. operations were impacted by losses resulting from our agriculture line of business that is underwritten by ARMtech due to declines in commodity prices in 2013 and extreme drought in 2012 and 2011. In addition, pre-tax income for our non-U.S. operations was higher compared to our U.S. operations for the year ending December 31, 2013. This higher pre-tax income resulted primarily from the more volatile catastrophe business underwritten in our non-U.S. operations during 2013 being relatively free of losses and thus generating higher levels of net underwriting income during the period. 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.

The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland and Singapore, which are subject to the relevant taxes in those jurisdictions. During 2013, the Internal Revenue Service conducted audits of income tax returns of the Company’s U.S. subsidiaries. The Canada Revenue Agency and Canadian provinces conducted inquiries of prior year income tax filings of the Company’s former Canadian branch. The audit and inquiry results were immaterial to the operations of the Company. None of the Company’s other operating subsidiaries or branch operations are under an examination in any of the jurisdictions in which they operate. The Company remains subject to examination for tax years 2009 through 2013. As of December 31, 2013 and 2012, the Company had no uncertain tax positions.

96

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 2013, the Company generated income before income taxes in its subsidiaries, which generated a consolidated 1.8% effective income tax rate. In 2012, certain subsidiaries of the Company in the U.S. generated losses, largely contributing to the Company’s income tax benefit.

The Company’s balance sheet at December 31, 2013 contains a net deferred tax asset in the amount of $51.7 million (2012 - $43.5 million deferred tax asset). The current year net deferred tax asset consists of gross deferred tax assets of $222.0 million, gross deferred tax liabilities of $47.6 million and a valuation allowance against certain operating loss carryforwards of $122.7 million (2012 - $85.8 million). Of the Company’s gross deferred tax assets, $106.1 million (2012 - $72.5 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 in 2020 and 2033, respectively.

The 2013 and 2012 valuation allowances were established against net operating loss carryforwards in the Company’s United States subsidiaries, United Kingdom subsidiary and non-U.S. branches. The increase in the valuation allowance was charged to the Company’s income tax expense during 2013. 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 fairly stated as at December 31, 2013. 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The following is a discussion of our primary market risk exposures at December 31, 2013. Our policies to address these risks in 2013 were not materially different from 2012. The Company believes that it is principally exposed to nine types of market risk: interest rate risk, liquidity risk, foreign currency risk, investment and reinsurance counterparty credit risk, equity price risk, derivative counterparty credit risk, derivative interest rate risk, inflation, and energy and weather-related risk.

Interest Rate Risk. The Company’s primary market risk exposure is to changes in interest rates. The Company’s fixed maturity 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 duration of the assets comprising the fixed maturity portfolio increased during the 2013 calendar year from approximately 2.49 years at December 31, 2012 to 3.11 years at December 31, 2013. A significant portion of the investment portfolio matures each quarter, allowing for reinvestment at current market rates. As of December 31, 2013, 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 $5,704.8 million (2012 - $6,034.4 million) at December 31, 2013 and 2012 would have been as follows:

	Interest Rate Shift in Basis Points
December 31, 2013	-100			-50			-			50			100
	(U.S. dollars in millions)
Total market value	$	5,791.3		$	5,723.6		$	5,704.8		$	5,569.0		$	5,489.7
Market value change from base		1.51	%		0.33	%		—	%		(2.38	)%		(3.77	)%
Change in unrealized value	$	86.5		$	18.8		$	—		$	(135.8	)	$	(215.1	)

97

	Interest Rate Shift in Basis Points
December 31, 2012	-100			-50			-			50			100
	(U.S. dollars in millions)
Total market value	$	6,123.7		$	6,091.2		$	6,034.4		$	5,967.2		$	5,896.3
Market value change from base		1.48	%		0.94	%		—	%		(1.11	)%		(2.29	)%
Change in unrealized value	$	89.3		$	56.8		$	—		$	(67.2	)	$	(138.1	)

In addition, we consider the effect of credit spread movements on the market value of our fixed maturity investments, short-term investments and certain of our other investments that 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, 2013 and 2012:

	Credit Spread Shift in Basis Points
December 31, 2013	-100			-50			-			50			100
	(U.S. dollars in millions)
Total market value	$	5,850.1		$	5,777.7		$	5,704.8		$	5,632.4		$	5,567.1
Market value change from base		2.55	%		1.28	%		—	%		(1.27	)%		(2.41	)%
Change in unrealized value	$	145.3		$	72.9		$	—		$	(72.4	)	$	(137.7	)
	Credit Spread Shift in Basis Points
December 31, 2012	-100			-50			-			50			100
	(U.S. dollars in millions)
Total market value	$	6,132.6		$	6,083.2		$	6,034.4		$	5,985.0		$	5,936.2
Market value change from base		1.63	%		0.81	%		—	%		(0.82	)%		(1.63	)%
Change in unrealized value	$	98.2		$	48.8		$	—		$	(49.4	)	$	(98.2	)

Another method used by the Company to evaluate investment 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 investment portfolio loss for this year period is expected to be less than or equal to 3.01% at December 31, 2013 and 1.89% at December 31, 2012.

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.

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 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.

98

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, 2013, 15% (2012 - 13.5%) 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, net premium receivable and insurance and reinsurance balances receivable, and reserves for loss and loss expenses denominated in non-U.S. currencies at December 31, 2013 were approximately 45%, 5%, 21%, and 15%, respectively (2012 - 38%, 3%, 14%, and 12%, respectively). As of December 31, 2013 and 2012, the Company’s principal foreign currency exposures are denominated in British Sterling and Euros. 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 and net asset balances denominated in Euros were $281.0 million and $48.0 million, respectively (2012 - $203.3 million and $60.1 million, respectively). The total estimated gross and net asset balances denominated in British Sterling were $277.9 million and $155.9 million, respectively (2012 - $225.0 million and $140.2 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 $20.4 million and $20.0 million increase or decrease in the net assets held by the Company at December 31, 2013 and 2012, respectively.

Investment Credit Risk. The Company has exposure to credit risk primarily as a holder of fixed maturity investments, short-term investments, equity securities and other investments. 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 approximately 1% of its fixed maturity portfolio.

The following table summarizes the fair value composition of the Company’s fixed maturity investments and short-term investments by investment ratings assigned by Standard & Poor’s, Moody’s or other rating agencies and by contractual maturity at December 31, 2013 and 2012. 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.

December 31, 2013	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
Ratings	(U.S. dollars in thousands)
U.S. government and agencies securities	$	36,886	$	612,785	$	110,907	$	8,765	$	—	$	—	$	769,343
AAA / Aaa		11,862		179,177		12,936		—		466,840		302,005		972,820
AA / Aa		37,429		203,727		23,482		—		1,375,856		130,662		1,771,156
A / A		47,537		603,389		89,896		14,318		130,007		10,402		895,549
BBB		6,305		212,741		48,309		3,854		90,465		2,048		363,722
Below BBB		400		3,421		1,770		—		49,641		11,559		66,791
Not rated		5,234		—		1,186		—		11,631		1,560		19,611
Total	$	145,653	$	1,815,240	$	288,486	$	26,937	$	2,124,440	$	458,236	$	4,858,992

⁽¹⁾  The effective durations of the Company’s mortgage-backed and asset-backed securities portfolios were 3.68 and 0.76, respectively, as of December 31, 2013. These securities are subject to prepayment risk and as such, actual maturity may differ significantly from contract maturity.

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December 31, 2012	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
Ratings	(U.S. dollars in thousands)
U.S. government and agencies securities	$	21,223	$	521,423	$	184,073	$	10,816	$	—	$	—	$	737,535
AAA / Aaa		5,134		184,638		25,851		5,401		468,596		303,657		993,277
AA / Aa		55,952		221,349		11,676		893		1,381,499		149,881		1,821,250
A / A		50,397		679,727		134,545		8,480		117,668		2,490		993,307
BBB		3,783		126,428		29,530		3,016		54,233		2,027		219,017
Below BBB		790		31,445		43,257		4,865		57,807		5,034		143,198
Not rated		288		652		167		332		1,357		—		2,796
Total	$	137,567	$	1,765,662	$	429,099	$	33,803	$	2,081,160	$	463,089	$	4,910,380

⁽¹⁾  The effective durations of the Company’s mortgage-backed and asset-backed securities portfolios were 2.68 and 1.07, respectively, as of December 31, 2012. These securities are subject to prepayment risk and as such, actual maturity may differ significantly from contract maturity.

Credit Risk of Reinsurance Counterparties. 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. 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 on paid and unpaid losses at December 31, 2013 was $758.0 million (2012 - $774.9 million). At December 31, 2013 and 2012, the Company held collateral of $14.2 million and $11.5 million, respectively, related to its ceded reinsurance agreements. At December 31, 2013, the Company had an allowance of nil (2012 - $0.1 million) for estimated uncollectible losses recoverable. The balance of losses recoverable at December 31, 2013 and 2012 was distributed as follows based on the ratings of the reinsurers:

Rating	December 31, 2013		December 31, 2012
	(U.S. dollars in thousands)
U.S. government sponsored program	$	356,049	$	423,803
A+ and above		253,665		214,358
A		135,949		125,694
A- and below		2,046		1,486
Not rated		10,266		9,601
Total	$	757,975	$	774,942

Equity Price Risk. The Company invests a portion of its investment portfolio in marketable equity securities. At December 31, 2013, the fair market value of the equity portfolio was $252.5 million (2012 - $87.0 million). 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 0.53 (2012 - 0.65) 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 $13.5 million and $27.0 million, respectively (2012 - $5.7 million and $11.4 million, respectively). As we designate all equities as available for sale, these fair value declines would impact the Company’s Consolidated Balance Sheet.

	20% decrease			% change			10% decrease			% change			December 31, 2013		10% increase		% change			20% increase		% change
	(U.S. dollars in thousands)
Equities	$	(26,957	)		(10.68	)%	$	(13,478	)		(5.34	)%	$	252,466	$	13,478		5.34	%	$	26,957		10.68	%
Total invested assets(1)	$	(26,957	)		(0.41	)%	$	(13,478	)		(0.21	)%	$	6,500,650	$	13,478		0.21	%	$	26,957		0.41	%
Shareholders’ equity	$	(26,957	)		(0.93	)%	$	(13,478	)		(0.47	)%	$	2,886,549	$	13,478		0.47	%	$	26,957		0.93	%

(1) Includes total investments and cash and cash equivalents, net of investments pending settlement.

	20% decrease			% change			10% decrease			% change			December 31, 2012		10% increase		% change			20% increase		% change
	(U.S. dollars in thousands)
Equities	$	(11,372	)		(13.07	)%	$	(5,686	)		(6.54	)%	$	86,997	$	5,686		6.54	%	$	11,372		13.07	%
Total invested assets(1)	$	(11,372	)		(0.17	)%	$	(5,686	)		(0.09	)%	$	6,566,617	$	5,686		0.09	%	$	11,372		0.17	%
Shareholders’ equity	$	(11,372	)		(0.42	)%	$	(5,686	)		(0.21	)%	$	2,710,597	$	5,686		0.21	%	$	11,372		0.42	%

(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 other investments 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, other investments, 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, 2013, the Company’s absolute notional value of derivative contracts was $795.1 million (2012 - $78.4 million), while the net asset position of those derivative contracts was $58.8 million (2012 - $11.9 million).

Derivative Interest Rate Risk. The Company uses interest rate futures, swaps and swaptions 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 aggregate hypothetical loss generated from an immediate upward parallel shift in the treasury yield curve of 100 basis points would cause an increase in market value of our net position in swaptions, credit default swaps and interest rate swaps of approximately $1.0 million at December 31, 2013 (2012 - $1.3 million). 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.

Energy and Weather-Related Risk. We regularly transact in certain derivative-based risk management products primarily to address weather and energy risks and engage in hedging and trading activities related to these risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Currently, a significant percentage of our derivative-based risk management products are transacted on a dual-trigger basis combining weather or other natural

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phenomenon, with prices for commodities or securities related to energy or agriculture. The fair value of these contracts is obtained through the use of quoted market prices, or in the absence of such quoted prices, industry or internal valuation models. Generally, our current portfolio of such derivative contracts is of comparably short duration and such contracts are predominantly seasonal in nature. Over time, we expect that our participation in these markets, and the impact of these operations on our financial results, is likely to increase on both an absolute and relative basis. It is possible the duration of derivative contracts in this portfolio will lengthen in the future.

We use, among other things, VaR analysis to monitor the risks associated with our energy and weather derivatives trading portfolio. VaR is a tool that measures the potential loss that could occur if our trading positions were maintained over a defined period of time, calculated at a given statistical confidence level. Due to the seasonal nature of our energy and weather derivatives trading activities, the VaR is based on a rolling season (six month) holding period assuming no dynamic trading during the holding period. A 99.6% confidence level is used for the VaR analysis. A 99.6% confidence level implies that within a seasonal period, the potential loss in our portfolio is not expected to exceed the VaR estimate in 99.6% of the possible modeled outcomes. In the remaining estimated 0.4% of the possible outcomes, the anticipated potential loss is expected to be higher than the VaR figure, and on average substantially higher.

The VaR model, based on a Monte Carlo simulation methodology, seeks to take into account correlations between different positions and potential for movements to offset one another within the portfolio. For most of the risk factors, the volatility is derived from exchange-traded options markets. For those risk factors for which exchange-traded options might not exist, the volatility is based on historical analysis matched to broker quotes from the over-the-counter market, where available. The joint distribution of outcomes is based on our estimate of the historical seasonal dependence among the underlying risk factors, scaled to the current market levels. We then estimate the expected outcomes by applying a Monte Carlo simulation to these risk factors. The joint distribution of the simulated risk factors is then filtered through the portfolio positions, and then the distribution of the outcomes are realized. The 99.6 percentile of this distribution is then calculated as the portfolio VaR. The major limitation of this methodology is that the market data used to forecast parameters of the model may not be an appropriate proxy of those parameters. The VaR methodology uses a number of assumptions, such as (i) risks are measured under average market conditions, assuming appropriate distributions of market risk factors, (ii) future movements in market risk factors follow estimated historical movements, and (iii) the assessed exposures do not change during the holding period. There is no guarantee that these assumptions will prove correct. We expect that, for any given period, our actual results will differ from our assumptions, including with respect to previously estimated potential losses and that such losses could be substantially higher than the estimated VaR. At December 31, 2013, the estimated VaR for our portfolio of energy and weather-related derivatives, as described above, calculated at an estimated 99.6% confidence level, was $24.0 million. The average, low and high amounts calculated by our VaR analysis during the year ended December 31, 2013 were $8.9 million, nil and $24.0 million, respectively. Refer to Note 8 – “Derivatives” in the Notes to the Consolidated Financial Statements of the Company for additional information related to derivative-based risk management products.

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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, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (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, 2013, 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, 2013 and 2012, and the related consolidated statements of income (loss) and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 of Endurance Specialty Holdings Ltd. and our report dated February 25, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young Ltd.

Hamilton, Bermuda

February 25, 2014

103

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	105
Consolidated Balance Sheets at December 31, 2013 and 2012	106
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended December  31, 2013, 2012 and 2011	107
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December  31, 2013, 2012 and 2011	108
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011	109
Notes to the Consolidated Financial Statements for the years ended December 31, 2013, 2012 and 2011	110

104

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, 2013 and 2012, and the related consolidated statements of income (loss) and comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

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, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 25, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young Ltd.

Hamilton, Bermuda

February 25, 2014

105

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2013 AND 2012

(In thousands of United States dollars except share amounts)

	DECEMBER 31, 2013		DECEMBER 31, 2012
ASSETS
Investments
Fixed maturity investments, available for sale at fair value (amortized cost: $4,802,580 and $4,728,596 at December 31, 2013 and 2012, respectively)	$	4,823,964	$	4,868,150
Short-term investments, available for sale at fair value (amortized cost: $35,029 and $42,224 at December 31, 2013 and 2012, respectively)		35,028		42,230
Equity securities, available for sale at fair value (cost: $227,828 and $76,997 at December 31, 2013 and 2012, respectively)		252,466		86,997
Other investments		617,478		517,546
Total investments		5,728,936		5,514,923
Cash and cash equivalents		845,851		1,124,019
Premiums receivable, net		669,198		601,952
Insurance and reinsurance balances receivable		127,722		105,663
Deferred acquisition costs		186,027		168,252
Prepaid reinsurance premiums		187,209		166,702
Reinsurance recoverable on unpaid losses		593,755		691,783
Reinsurance recoverable on paid losses		164,220		83,159
Accrued investment income		24,104		27,166
Goodwill and intangible assets		165,378		172,000
Deferred tax asset		51,703		43,501
Net receivable on sales of investments		54,910		9,144
Other assets		179,109		86,708
Total assets	$	8,978,122	$	8,794,972
LIABILITIES
Reserve for losses and loss expenses	$	4,002,259	$	4,240,876
Reserve for unearned premiums		1,018,851		965,244
Deposit liabilities		19,458		22,220
Reinsurance balances payable		181,061		110,843
Debt		527,478		527,339
Net payable on purchases of investments		129,047		81,469
Other liabilities		213,419		136,384
Total liabilities		6,091,573		6,084,375
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Preferred shares
Series A and B, total liquidation preference $430,000 (2012 - $430,000)		17,200		17,200
Common shares
Ordinary - 44,368,742 issued and outstanding (2012 - 43,116,394)		44,369		43,116
Additional paid-in capital		569,116		527,915
Accumulated other comprehensive income		62,731		152,463
Retained earnings		2,193,133		1,969,903
Total shareholders’ equity		2,886,549		2,710,597
Total liabilities and shareholders’ equity	$	8,978,122	$	8,794,972

See accompanying notes to the consolidated financial statements.

106

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012, AND 2011

(In thousands of United States dollars, except share and per share amounts)

	2013			2012			2011
Revenues
Gross premiums written	$	2,665,244		$	2,549,026		$	2,467,114
Ceded premiums written		(616,311	)		(519,531	)		(487,293	)
Net premiums written		2,048,933			2,029,495			1,979,821
Change in unearned premiums		(32,449	)		(15,595	)		(48,428	)
Net premiums earned		2,016,484			2,013,900			1,931,393
Net investment income		166,216			173,326			147,037
Net realized and unrealized investment gains		15,164			72,139			31,671
Total other-than-temporary impairment losses		(1,616	)		(364	)		(2,659	)
Portion of loss recognized in other comprehensive (loss) income		—			(483	)		(861	)
Net impairment losses recognized in earnings (losses)		(1,616	)		(847	)		(3,520	)
Other underwriting loss		(2,046	)		(2,183	)		(3,547	)
Total revenues		2,194,202			2,256,335			2,103,034
Expenses
Net losses and loss expenses		1,219,684			1,520,995			1,632,666
Acquisition expenses		304,430			303,179			282,911
General and administrative expenses		294,906			235,689			264,152
Amortization of intangibles		7,012			10,347			11,213
Net foreign exchange losses (gains)		14,214			(15,911	)		(7,422	)
Interest expense		36,188			36,174			36,254
Total expenses		1,876,434			2,090,473			2,219,774
Income (loss) before income taxes		317,768			165,862			(116,740	)
Income tax (expense) benefit		(5,853	)		(3,346	)		23,006
Net income (loss)		311,915			162,516			(93,734	)
Preferred dividends		(32,750	)		(32,750	)		(24,125	)
Net income (loss) available (attributable) to common and participating common shareholders	$	279,165		$	129,766		$	(117,859	)
Comprehensive income (loss)
Net income (loss)	$	311,915		$	162,516		$	(93,734	)
Other comprehensive (loss) income
Net unrealized holding (losses) gains on investments arising during the year (net of other-than-temporary impairment losses recognized in other comprehensive (loss) income, reclassification adjustment and applicable deferred income tax expense (benefit) in 2013 - $10,613; 2012 - $6,155; 2011 - ($6,914))		(95,781	)		18,916			13,159
Foreign currency translation adjustments		5,960			3,067			(1,268	)
Reclassification adjustment for net losses on derivatives designated as cash flow hedge included in net income (loss)		89			88			88
Other comprehensive (loss) income		(89,732	)		22,071			11,979
Comprehensive income (loss)	$	222,183		$	184,587		$	(81,755	)
Per share data
Basic earnings (losses) per common share	$	6.37		$	3.00		$	(2.95	)
Diluted earnings (losses) per common share	$	6.37		$	3.00		$	(2.95	)

See accompanying notes to the consolidated financial statements.

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ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(In thousands of United States dollars)

	2013			2012			2011
Preferred shares
Balance, beginning of year		17,200			17,200			8,000
Issuance of series B, non-cumulative preferred shares		—			—			9,200
Balance, end of year	$	17,200		$	17,200		$	17,200
Common shares
Balance, beginning of year		43,116			43,087			47,218
Issuance of common shares, net of forfeitures		1,571			280			3,360
Repurchase of common shares		(318	)		(251	)		(7,491	)
Balance, end of year		44,369			43,116			43,087
Additional paid-in capital
Balance, beginning of year		527,915			526,910			613,915
Issuance of common shares, net of forfeitures		30,480			2,820			23,329
Issuance of series B, non-cumulative preferred shares		—			—			214,822
Public offering and registration costs		—			—			(586	)
Repurchase of common shares and share equivalents		(14,266	)		(9,754	)		(333,313	)
Settlement of equity awards		(3,001	)		(3,272	)		(6,074	)
Stock-based compensation expense		27,988			11,211			14,817
Balance, end of year		569,116			527,915			526,910
Accumulated other comprehensive income
Cumulative foreign currency translation adjustments:
Balance, beginning of year		12,676			9,609			10,877
Foreign currency translation adjustments		5,960			3,067			(1,268	)
Balance, end of year		18,636			12,676			9,609
Unrealized holding gains on investments, net of deferred taxes:
Balance, beginning of year		141,731			122,815			109,656
Net unrealized holding (losses) gains arising during the year, net of other-than-temporary impairment losses and reclassification adjustment		(95,781	)		18,916			13,159
Balance, end of year		45,950			141,731			122,815
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of year		(1,944	)		(2,032	)		(2,120	)
Net change from current period hedging transactions, net of reclassification adjustment		89			88			88
Balance, end of year		(1,855	)		(1,944	)		(2,032	)
Total accumulated other comprehensive income		62,731			152,463			130,392
Retained earnings
Balance, beginning of year		1,969,903			1,893,576			2,060,607
Net income (loss)		311,915			162,516			(93,734	)
Dividends on preferred shares		(32,750	)		(32,750	)		(24,125	)
Dividends on common shares		(55,935	)		(53,439	)		(49,172	)
Balance, end of year		2,193,133			1,969,903			1,893,576
Total shareholders’ equity	$	2,886,549		$	2,710,597		$	2,611,165

See accompanying notes to the consolidated financial statements.

108

ENDURANCE SPECIALTY HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(In thousands of United States dollars)

	2013			2012			2011
Cash flows provided by operating activities:
Net income (loss)	$	311,915		$	162,516		$	(93,734	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of net premium on investments		53,336			26,077			17,878
Amortization of other intangibles and depreciation		21,250			22,678			24,023
Net realized and unrealized investment gains		(15,164	)		(72,139	)		(31,671	)
Net impairment losses recognized in earnings (losses)		1,616			847			3,520
Deferred taxes		2,412			(5,828	)		(9,324	)
Stock-based compensation expense		27,988			11,211			14,817
Equity in (earnings) losses of other investments		(64,321	)		(49,059	)		694
Premiums receivable, net		(67,246	)		(57,935	)		251,710
Insurance and reinsurance balances receivable		(22,059	)		(12,953	)		(65,877	)
Deferred acquisition costs		(17,775	)		(2,203	)		(11,565	)
Prepaid reinsurance premiums		(20,507	)		(17,032	)		(41,693	)
Reinsurance recoverable on unpaid losses		98,028			(223,849	)		(232,193	)
Reinsurance recoverable on paid losses		(81,061	)		115,835			(110,337	)
Accrued investment income		3,062			2,542			3,226
Other assets		(10,372	)		19,464			5,690
Reserve for losses and loss expenses		(238,617	)		416,652			504,297
Reserve for unearned premiums		53,607			33,136			89,954
Deposit liabilities		(2,762	)		(4,667	)		(5,618	)
Reinsurance balances payable		70,218			(78,645	)		(39,904	)
Other liabilities		54,376			(3,180	)		7,392
Net cash flows provided by operating activities		157,924			283,468			281,285
Cash flows (used in) provided by investing activities
Proceeds from sales of available for sale investments		3,374,002			4,143,528			3,034,880
Proceeds from maturities and calls on available for sale investments		649,337			943,445			1,086,854
Proceeds from the redemption of other investments		31,961			79,225			14,493
Purchases of available for sale investments		(4,259,800	)		(4,964,345	)		(3,870,547	)
Purchases of other investments		(67,572	)		(115,054	)		(71,193	)
Net settlements of other assets		(50,355	)		(15,123	)		(457	)
Purchases of fixed assets		(24,960	)		(23,855	)		(11,254	)
Change in securities lending collateral received		—			—			59,886
Net cash paid for subsidiary acquisition		(390	)		(1,519	)		(4,557	)
Net cash flows (used in) provided by investing activities		(347,777	)		46,302			238,105
Cash flows used in financing activities
Issuance of common shares		31,884			2,935			26,489
Issuance of series B, non-cumulative preferred shares		—			—			224,022
Repurchase of common shares		(14,584	)		(10,005	)		(344,272	)
Change in securities lending payable		—			—			(59,886	)
Settlement of equity awards		(3,001	)		(3,272	)		(6,074	)
Offering and registration costs paid		—			—			(586	)
Proceeds from issuance of debt		703			972			847
Repayments and repurchases of debt		(768	)		(2,017	)		(1,345	)
Dividends on preferred shares		(32,750	)		(32,750	)		(24,125	)
Dividends on common shares		(55,906	)		(53,439	)		(49,172	)
Net cash flows used in financing activities		(74,422	)		(97,576	)		(234,102	)
Effect of exchange rate changes on cash and cash equivalents		(13,893	)		911			(4,226	)
Net (decrease) increase in cash and cash equivalents		(278,168	)		233,105			281,062
Cash and cash equivalents, beginning of year		1,124,019			890,914			609,852
Cash and cash equivalents, end of year	$	845,851		$	1,124,019		$	890,914

See accompanying notes to the consolidated financial statements.

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)

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. (“Endurance Bermuda”)	Bermuda
Endurance Worldwide Insurance Limited (“Endurance U.K.”)	England
Endurance Reinsurance Corporation of America (“Endurance U.S. Reinsurance”)	Delaware
Endurance American Insurance Company (“Endurance American”)	Delaware
Endurance American Specialty Insurance Company (“Endurance American Specialty”)	Delaware
Endurance Risk Solutions Assurance Co. (“Endurance Risk Solutions”)	Delaware
American Agri-Business Insurance Company (“American Agri-Business”), managed by ARMtech Insurance Services, Inc. (together with American Agri-Business, “ARMtech”)	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 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 that 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 broker and ceding company estimates and also utilizes judgment in establishing proportional reinsurance contract 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.

(a) Premiums and related expenses, cont’d.

Premiums on the Company’s excess of loss and proportional reinsurance contracts are estimated 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 a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. 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 uses an initial loss estimate (expected loss technique) for each accident year by business line and type of contract. Under this method, IBNR is set equal to the initial loss estimate multiplied by the expected percent of loss yet to be reported at each valuation date. In a given quarter, if reported losses are less than expected, then the difference would result in a decrease in estimated ultimate losses. If losses are greater than expected, then the difference would result in an increase in estimated ultimate 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.

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.

(b) Reserve for losses and loss expenses, cont’d.

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 reliably predicted, 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 (losses) and included in shareholders’ equity as a component of accumulated other comprehensive income. Investment transactions are recorded on a trade date basis. 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.

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)

2. Summary of significant accounting policies, cont’d.

(d) Investments, cont’d.

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 has the intent to sell an available for sale security in an unrealized loss position or 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 (losses) as an other-than-temporary impairment (“OTTI”) loss.

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 (losses) 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 Consolidated Balance Sheets.

For equity securities, 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 Income (Loss) and Comprehensive Income (Loss). 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 investment 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.

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)

2. Summary of significant accounting policies, cont’d.

(e) Cash equivalents and short-term investments

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. Deposits and securities with maturities greater than ninety days and less than one year are classified as short-term investments.

(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 (loss).

(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 net foreign exchange gains and losses included in earnings (losses). Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.

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)

2. Summary of significant accounting policies, cont’d.

(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, future and option contracts; interest rate futures, swaps, swaptions, and options; credit default swaps; commodity futures and options; weather swaps and options; and to-be-announced mortgage-backed securities. Except for a cash flow hedge entered into in 2004 as disclosed in Note 8, these derivative instruments are used to manage exposure to interest rate and currency risk, to enhance the efficiency of the Company’s investment portfolio, to economically hedge certain risks, and as part of its weather risk management business. These derivative instruments 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, net foreign exchange losses (gains), or other underwriting loss in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). 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 may be netted by the counterparty.

(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) benefit.

(k) Stock compensation and other stock plans

The Company has a share-based employee and non-employee director equity incentive plan (“2007 Equity Incentive Plan”) and other share 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 generally vest over four years for employees and one year for non-employee directors.

(l) Earnings per share

The two-class method utilized by the Company is an earnings allocation formula that determines earnings (losses) per share for the holders of Endurance Holdings’ ordinary shares (also referred to as “common shares”) and participating common shares, which includes unvested restricted shares that receive cash dividends, according to dividends declared (or accumulated) and participation rights in undistributed earnings. Net income (loss) available (attributable) 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. Any remaining

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)

2. Summary of significant accounting policies, cont’d.

(l) Earnings per share, cont’d.

undistributed earnings are allocated to the common and participating common shareholders to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. In periods of loss, no losses are allocated to participating common shareholders. Instead, all such losses are allocated solely to the common shareholders.

Basic earnings (losses) per common share are calculated by dividing net income (loss) available (attributable) 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 earnings (losses) 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.

(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.

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)

2. Summary of significant accounting policies, cont’d.

(p) Recent accounting pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-11 “Disclosures About Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires additional disclosures about financial instruments and derivative instruments relating to netting arrangements. ASU 2011-11 was effective for interim and annual periods beginning on or after January 1, 2013, with retrospective presentation required. The Company adopted this standard effective January 1, 2013. This standard did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02 “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires entities to report, in one location, information about reclassifications out of accumulated other comprehensive income (“AOCI”). ASU 2013-02 also requires companies to report changes in AOCI balances. For significant items reclassified out of AOCI into net income in their entirety in the same reporting period, reporting (either on the face of the statement where net income is presented or in the notes to the financial statements) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified into net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under US GAAP is required in the notes. The above information must be presented in one place (parenthetically on the face of the financial statements by income statement line item or in a note to the financial statements). ASU 2013-02 was effective for fiscal years and interim periods beginning after December 15, 2012. The Company adopted this standard prospectively on January 1, 2013. This standard resulted in additional disclosure in Note 12 to the consolidated financial statements, “Shareholders’ equity”.

In July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 will be effective for annual and interim reporting periods beginning after December 15, 2013, with both early adoption and retrospective application permitted. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

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

Composition of Net Investment Income and of Invested Assets

The components of net investment income for the years ended December 31, 2013, 2012 and 2011 are as follows:

	2013			2012			2011
Available for sale investments	$	113,074		$	135,841		$	160,580
Other investments		64,321			49,059			(694	)
Cash and cash equivalents		2,752			1,616			924
	$	180,147		$	186,516		$	160,810
Investment expenses		(13,931	)		(13,190	)		(13,773	)
Net investment income	$	166,216		$	173,326		$	147,037

The following table summarizes the composition of the investment portfolio by investment type at December 31, 2013 and 2012:

	December 31, 2013					December 31, 2012
Type of Investment	Fair Value		Percentage			Fair Value		Percentage
Fixed maturity securities	$	4,823,964		74.2	%	$	4,868,150		74.2	%
Cash and cash equivalents(1)		771,714		11.9	%		1,051,694		16.0	%
Other investments(2)		617,478		9.5	%		517,546		7.9	%
Short-term investments		35,028		0.5	%		42,230		0.6	%
Equity securities		252,466		3.9	%		86,997		1.3	%
Total	$	6,500,650		100.0	%	$	6,566,617		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.

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 following table summarizes the composition by investment rating of the fixed maturity and short-term investments at December 31, 2013 and 2012. In some cases, where bonds are unrated, the rating of the issuer has been applied.

	December 31, 2013					December 31, 2012
Ratings(1)	Fair Value		Percentage			Fair Value		Percentage
U.S. government and agencies securities	$	769,343		15.8	%	$	737,535		15.0	%
AAA/Aaa		972,820		20.0	%		993,277		20.2	%
AA/Aa		1,771,156		36.5	%		1,821,250		37.1	%
A/A		895,549		18.4	%		993,307		20.2	%
BBB		363,722		7.5	%		219,017		4.5	%
Below BBB		66,791		1.4	%		143,198		2.9	%
Not rated		19,611		0.4	%		2,796		0.1	%
Total	$	4,858,992		100.0	%	$	4,910,380		100.0	%

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

Contractual maturities of the Company’s fixed maturity and short-term investments are shown below as of December 31, 2013 and 2012. 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.

	December 31, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	144,814	$	145,653	$	136,283	$	137,567
Due after one year through five years		1,808,001		1,815,240		1,725,927		1,765,662
Due after five years through ten years		290,391		288,486		410,755		429,099
Due after ten years		26,344		26,937		29,654		33,803
Residential mortgage-backed securities		1,176,945		1,171,553		1,252,468		1,280,579
Commercial mortgage-backed securities		936,358		952,887		741,178		781,379
Asset-backed securities		454,756		458,236		474,555		482,291
Total	$	4,837,609	$	4,858,992	$	4,770,820	$	4,910,380

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)

3. Investments, cont’d.

In addition to the Company’s fixed maturity, short-term and equity investments, the Company invests in (i) hedge funds and private investment funds that generally invest in senior secured bank debt, high yield credit, 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, 2013 and 2012, the Company had invested, net of capital returned, a total of $440.9 million and $394.5 million, respectively, in other investments. At December 31, 2013 and 2012, the carrying value of other investments was $617.5 million and $517.5 million, respectively. The following table summarizes the composition and redemption restrictions of other investments as of December 31, 2013 and 2012:

December 31, 2013	Market Value		Unfunded Commitments		Ineligible for Redemption in 2014
Alternative funds
Hedge funds	$	401,438	$	—	$	47,406
Private investment funds		59,703		57,997		59,703
Total alternative funds		461,141		57,997		107,109
Specialty funds
High yield loan funds		111,254		—		—
Convertible debt funds		45,083		—		—
Total specialty funds		156,337		—		—
Total other investments	$	617,478	$	57,997	$	107,109

December 31, 2012	Market Value		Unfunded Commitments		Ineligible for Redemption in 2013
Alternative funds
Hedge funds	$	337,200	$	—	$	61,161
Private investment funds		35,219		29,483		35,219
Total alternative funds		372,419		29,483		96,380
Specialty funds
High yield loan funds		105,886		—		—
Convertible debt funds		39,241		—		—
Total specialty funds		145,127	$	—	$	—
Total other investments	$	517,546	$	29,483	$	96,380

Hedge funds – The redemption frequency of the hedge funds range from monthly to biennially with notice periods from 30 to 90 days. Over one year, it is estimated that the Company can liquidate approximately 88% of the hedge fund portfolio, with the remainder over the following two years.

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)

3. Investments, cont’d.

Private investment funds – The Company generally has no right to redeem its interest in any private investment funds in advance of dissolution of the applicable partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the distribution of income or the liquidation of the underlying assets of the applicable limited partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 5 to 10 years from inception of the limited partnership. A secondary market, with unpredictable liquidity, exists for limited partner interests in private investment funds.

High yield loan funds – There are generally no restrictions on the Company’s right to redeem its interest in high yield loan funds with the exception of certain redemption frequency and notice requirements. The redemption frequency of these funds ranges from monthly to quarterly with notice periods from 30 to 90 days.

Convertible debt funds – There are generally no restrictions on the Company’s right to redeem its interest in convertible debt funds with the exception of certain redemption frequency and notice requirements. The redemption frequency of these funds is monthly with a required notice period of 5 days.

Net Realized and Unrealized Investment Gains

Realized and unrealized investment gains and losses are recognized in earnings (losses) using the first in, first out method. The analysis of net realized and unrealized investment gains and the change in the fair value of investment-related derivative financial instruments for the years ended December 31, 2013, 2012 and 2011 are as follows:

	2013			2012			2011
Gross realized gains on investment sales	$	40,018		$	77,474		$	50,884
Gross realized losses on investment sales		(25,521	)		(6,164	)		(18,500	)
Change in fair value of derivative financial instruments(1)		667			829			(713	)
Net realized and unrealized investment gains	$	15,164		$	72,139		$	31,671

(1) For additional information on the Company’s derivative financial instruments, see Note 8.

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)

3. Investments, cont’d.

Unrealized Gains and Losses and Other-than-temporary Impairments

The Company classifies its investments in fixed maturity investments, short-term investments and equities as available for sale. The amortized cost, fair value and related gross unrealized gains and losses and non-credit OTTI losses on the Company’s securities classified as available for sale at December 31, 2013 and 2012 are as follows:

December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI (2)
Fixed maturity investments
U.S. government and agencies securities	$	771,227	$	5,735	$	(7,619	)	$	769,343	$	—
U.S. state and municipal securities		27,138		111		(395	)		26,854		—
Foreign government securities		183,650		1,003		(2,006	)		182,647		—
Government guaranteed corporate securities		34,921		274		(50	)		35,145		—
Corporate securities		1,217,585		16,225		(6,511	)		1,227,299		—
Residential mortgage-backed securities		1,176,945		16,530		(21,922	)		1,171,553		(4,257	)
Commercial mortgage-backed securities(1)		936,358		24,673		(8,144	)		952,887		(47	)
Asset-backed securities		454,756		4,377		(897	)		458,236		(163	)
Total fixed maturity investments	$	4,802,580	$	68,928	$	(47,544	)	$	4,823,964	$	(4,467	)
Short-term investments		35,029		1		(2	)		35,028		—
Total fixed income investments	$	4,837,609	$	68,929	$	(47,546	)	$	4,858,992	$	(4,467	)
Equity securities
Equity investments	$	152,525	$	24,139	$	(1,995	)	$	174,669	$	—
Emerging market debt funds		60,250		594		—			60,844		—
Preferred equity investments		6,325		1,977		(79	)		8,223		—
Short-term fixed income fund		8,728		2		—			8,730		—
Total equity securities	$	227,828	$	26,712	$	(2,074	)	$	252,466	$	—

(1) Balances include amounts related to collateralized debt obligations held with total fair values of $18.7 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, 2013, the gross unrealized loss related to fixed income investments for which a non-credit OTTI was recognized in accumulated other comprehensive income was $0.1 million.

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)

3. Investments, cont’d.

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI (2)
Fixed maturity investments
U.S. government and agencies securities	$	718,992	$	18,596	$	(53	)	$	737,535	$	—
U.S. state and municipal securities		37,952		1,119		(177	)		38,894		—
Foreign government securities		106,218		3,264		(145	)		109,337		—
Government guaranteed corporate securities		62,782		1,682		—			64,464		—
Corporate securities		1,334,451		40,555		(1,335	)		1,373,671		—
Residential mortgage-backed securities		1,252,468		30,426		(2,315	)		1,280,579		(5,686	)
Commercial mortgage-backed securities(1)		741,178		41,737		(1,536	)		781,379		(53	)
Asset-backed securities		474,555		8,435		(699	)		482,291		(198	)
Total fixed maturity investments	$	4,728,596	$	145,814	$	(6,260	)	$	4,868,150	$	(5,937	)
Short-term investments		42,224		6		—			42,230		—
Total fixed income investments	$	4,770,820	$	145,820	$	(6,260	)	$	4,910,380	$	(5,937	)
Equity securities
Equity investments	$	59,736	$	7,194	$	(620	)	$	66,310	$	—
Emerging market debt funds		10,000		576		—			10,576		—
Preferred equity investments		7,261		2,851		(1	)		10,111		—
Total equity securities	$	76,997	$	10,621	$	(621	)	$	86,997	$	—

(1) Balances include amounts related to collateralized debt obligations held with total fair values of $8.5 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, 2012, the gross unrealized loss related to fixed income investments for which a non-credit OTTI was recognized in accumulated other comprehensive income was $0.4 million.

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)

3. Investments, cont’d.

The following tables summarize, for all available for sale securities in an unrealized loss position at December 31, 2013 and 2012, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

	Less than 12 months					12 months or greater					Total
December 31, 2013	Unrealized Losses(1)			Fair Value		Unrealized Losses(1)			Fair Value		Unrealized Losses(1)			Fair Value
Fixed maturity investments
U.S. government and agencies securities	$	(7,359	)	$	382,593	$	(260	)	$	6,050	$	(7,619	)	$	388,643
U.S. state and municipal securities		(395	)		20,452		—			—		(395	)		20,452
Foreign government securities		(1,981	)		139,503		(25	)		5,261		(2,006	)		144,764
Government guaranteed corporate securities		(50	)		13,326		—			—		(50	)		13,326
Corporate securities		(5,959	)		478,287		(552	)		28,690		(6,511	)		506,977
Residential mortgage-backed securities		(17,565	)		520,906		(4,357	)		102,446		(21,922	)		623,352
Commercial mortgage-backed securities		(7,664	)		377,969		(480	)		19,183		(8,144	)		397,152
Asset-backed securities		(745	)		178,280		(152	)		7,011		(897	)		185,291
Total fixed maturity investments	$	(41,718	)	$	2,111,316	$	(5,826	)	$	168,641	$	(47,544	)	$	2,279,957
Short-term investments		(2	)		2,468		—			—		(2	)		2,468
Total fixed income investments	$	(41,720	)	$	2,113,784	$	(5,826	)	$	168,641	$	(47,546	)	$	2,282,425
Equity securities
Equity investments	$	(1,995	)	$	36,751	$	—		$	—	$	(1,995	)	$	36,751
Preferred equity investments		(79	)		2,987		—			—		(79	)		2,987
Total equity securities	$	(2,074	)	$	39,738	$	—		$	—	$	(2,074	)	$	39,738

(1) Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2013.

As of December 31, 2013, 880 available for sale securities were in an unrealized loss position aggregating $49.6 million. Of those, 71 securities with aggregated unrealized losses of $5.8 million at December 31, 2013 had been in a continuous unrealized loss position for twelve months or greater.

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)

3. Investments, cont’d.

	Less than 12 months					12 months or greater					Total
December 31, 2012	Unrealized Losses(1)			Fair Value		Unrealized Losses(1)			Fair Value		Unrealized Losses(1)			Fair Value
Fixed maturity investments
U.S. government and agencies securities	$	(53	)	$	48,570	$	—		$	—	$	(53	)	$	48,570
U.S. state and municipal securities		(177	)		6,905		—			—		(177	)		6,905
Foreign government securities		(139	)		23,157		(6	)		4,870		(145	)		28,027
Corporate securities		(1,305	)		245,232		(30	)		1,849		(1,335	)		247,081
Residential mortgage-backed securities		(1,920	)		327,473		(395	)		7,511		(2,315	)		334,984
Commercial mortgage-backed securities		(474	)		79,125		(1,062	)		11,625		(1,536	)		90,750
Asset-backed securities		(94	)		53,471		(605	)		8,123		(699	)		61,594
Total fixed maturity investments	$	(4,162	)	$	783,933	$	(2,098	)	$	33,978	$	(6,260	)	$	817,911
Equity securities
Equity investments	$	(580	)	$	9,183	$	(40	)	$	387	$	(620	)	$	9,570
Preferred equity investments		(1	)		201		—			—		(1	)		201
Total equity securities	$	(581	)	$	9,384	$	(40	)	$	387	$	(621	)	$	9,771

(1) Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2012.

As of December 31, 2012, 403 available for sale securities were in an unrealized loss position aggregating $6.9 million. Of those, 55 securities with aggregated unrealized losses of $2.1 million at December 31, 2012 had been in a continuous unrealized loss position for twelve months or greater.

The analysis of OTTI for the years ended December 31, 2013, 2012 and 2011 is as follows:

	2013			2012			2011
Total other-than-temporary impairment losses	$	(1,616	)	$	(364	)	$	(2,659	)
Portion of loss recognized in other comprehensive (loss) income		—			(483	)		(861	)
Net impairment losses recognized in earnings (losses)	$	(1,616	)	$	(847	)	$	(3,520	)

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)

3. Investments, cont’d.

Of the $1.6 million (2012 - $0.8 million; 2011 - $3.5 million) of OTTI losses recognized by the Company for the year ended December 31, 2013, the majority was related to reductions in expected recovery values on mortgage-backed securities during the period, and expected losses on corporate securities following the Company’s decision to liquidate a specific portfolio. The unrealized losses on the Company’s fixed income securities at December 31, 2013 were primarily due to an increase in interest rates and widening of credit spreads, rather than any actual credit losses on these securities. At December 31, 2013, the Company did not have the intent to sell any of the remaining fixed maturity investments 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 Company has the ability and intent to hold its equity securities until recovery, therefore the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2013.

The following table provides a roll-forward of the amount related to credit losses for the Company’s available for sale investments recognized in earnings (losses) for which a portion of an OTTI loss was recognized in accumulated other comprehensive income for the years ended December 31, 2013, 2012 and 2011:

	2013			2012			2011
Beginning balance	$	(2,000	)	$	(2,225	)	$	(10,214	)
Addition for the amount related to the credit loss for which an other-than- temporary impairment was not previously recognized		—			(3	)		(46	)
Addition for the amount related to the credit loss for which an other-than- temporary impairment was previously recognized		—			(502	)		(1,226	)
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		447			730			9,261
Ending balance at December 31	$	(1,553	)	$	(2,000	)	$	(2,225	)

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 various other investments 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, 2013 and 2012. 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 Sheets and any unfunded investment commitments.

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)

4. Fair value measurement

The Company determines the fair value of the fixed maturity investments, short-term investments, equity securities, other investments, debt, and other assets and liabilities in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Valuation inputs by security type may include the following:

• Government and agencies fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate option adjusted spreads, daily interest rate data and market/sector news. The Company generally classifies the fair values of government and agencies securities in Level 2. Current issue U.S. government securities are generally valued based on Level 1 inputs, which use the market approach valuation technique.

• Government guaranteed corporate fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing service or index providers may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical spread models which may incorporate inputs from the U.S treasury curve or LIBOR. The Company generally classifies the fair values of its government guaranteed corporate securities in Level 2.

• Corporate fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its corporate securities in Level 2.

• Equity securities – These securities are generally priced by pricing services or index providers. Depending on the type of underlying equity security or equity fund, the securities are generally priced by pricing services or index providers based on quoted market prices in active markets or through a discounted cash flow model that incorporates benchmark curves for treasury, swap and credit for like or similar securities. The Company generally classifies the fair values of its preferred equity securities in Level 1 or 2.

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)

4. Fair value measurement, cont’d.

• Other assets and liabilities – A portion of other assets and liabilities are composed of a variety of derivative instruments used to enhance the efficiency of the investment portfolio and economically hedge certain risks. These instruments are generally priced by pricing services, broker/dealers and/or recent trading activity. The market value approach valuation technique is used to estimate the fair value for these derivatives based on significant observable market inputs. Certain derivative instruments are priced by pricing services based on quoted market prices in active markets. These derivative instruments are generally classified in Level 1. Other derivative instruments are priced using industry valuation models and are considered Level 2, as the inputs to the valuation model are based on observable market inputs. Also included in this line item are proprietary, non-exchange traded derivative-based risk management products primarily used to address weather and energy risks. The trading market for these weather derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. In instances where market prices are not available, the Company uses industry or internally developed valuation techniques such as spread option, Black Scholes, quanto and simulation modeling to determine fair value and classifies these in Level 3. These models may reference prices for similar instruments.

• 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.

• Other investments – Other investments are comprised of alternative funds and specialty funds and are generally priced on net asset values (“NAV”) received from the fund managers or administrators. Due to the timing of the delivery of the final NAV 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 NAVs, period end estimates, or, in some cases, prior month or prior quarter NAVs. As this valuation technique incorporates both observable and significant unobservable inputs, the Company generally classifies the fair value of its other investments in Level 3.

• Debt – Outstanding debt consists of the Company’s 6.15% Senior Notes due October 15, 2015 and the 7.0% Senior Notes due July 15, 2034 (the “Senior Notes”). The fair values of these securities were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of the Senior Notes are classified in Level 2.

The carrying values of cash and cash equivalents, accrued investment income, net receivable on sales of investments, net payable on purchases of investments, and other financial instruments not described above approximated their fair values at December 31, 2013 and 2012.

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)

4. Fair value measurement, cont’d.

The following table sets forth the Company’s available for sale investments, other investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2013:

			Fair Value Measurements at December 31, 2013
	Total at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Fixed maturity investments
U.S. government and agencies securities	$	769,343	$	20,248	$	749,095	$	—
U.S. state and municipal securities		26,854		—		26,854		—
Foreign government securities		182,647		—		182,647		—
Government guaranteed corporate securities		35,145		—		35,145		—
Corporate securities		1,227,299		—		1,226,553		746
Residential mortgage-backed securities		1,171,553		—		1,171,305		248
Commercial mortgage-backed securities		952,887		—		949,547		3,340
Asset-backed securities		458,236		—		455,242		2,994
Total fixed maturity investments	$	4,823,964	$	20,248	$	4,796,388	$	7,328
Equity securities
Equity investments		174,669		117,776		56,893		—
Emerging market debt funds		60,844		—		60,844		—
Preferred equity investments		8,223		—		8,223		—
Short-term fixed income fund		8,730		8,730		—		—
Total equity securities	$	252,466	$	126,506	$	125,960	$	—
Short-term investments		35,028		—		35,028		—
Other investments		617,478		—		—		617,478
Other assets (see Note 8)		108,272		—		94,234		14,038
Total assets	$	5,837,208	$	146,754	$	5,051,610	$	638,844
Liabilities
Other liabilities (see Note 8)	$	49,435	$	—	$	29,866	$	19,569
Debt		575,115		—		575,115		—
Total liabilities	$	624,550	$	—	$	604,981	$	19,569

During 2013, there were no transfers into Level 1; however, the Company purchased current issue U.S. government securities and exchange traded equity securities, which are classified as Level 1 securities. U.S. government securities were transferred from Level 1 to Level 2 as they no longer qualified as on the run U.S. treasury securities.

During 2013, certain fixed maturity investments were transferred from Level 3 to Level 2. The reclassifications were largely related to asset-backed and commercial mortgage-backed securities. During the year, the market activity for these securities increased and observable inputs became available. In addition, the Company purchased asset-backed securities, which are classified as Level 3 securities, as no observable price was available. The Company used pricing models with significant unobservable inputs in order to determine the fair value of these securities.

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)

4. Fair value measurement, cont’d.

The following table sets forth the Company’s available for sale investments, other investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2012:

			Fair Value Measurements at December 31, 2012
	Total at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Fixed maturity investments
U.S. government and agencies securities	$	737,535	$	39,889	$	697,646	$	—
U.S. state and municipal securities		38,894		—		38,894		—
Foreign government securities		109,337		—		109,337		—
Government guaranteed corporate securities		64,464		—		64,464		—
Corporate securities		1,373,671		—		1,373,671		—
Residential mortgage-backed securities		1,280,579		—		1,280,223		356
Commercial mortgage-backed securities		781,379		—		777,049		4,330
Asset-backed securities		482,291		—		478,480		3,811
Total fixed maturity investments	$	4,868,150	$	39,889	$	4,819,764	$	8,497
Equity securities
Equity investments		66,310		66,310		—		—
Emerging market debt funds		10,576		—		10,576		—
Preferred equity investments		10,111		—		10,111		—
Total equity securities	$	86,997	$	66,310	$	20,687	$	—
Short-term investments		42,230		—		42,230		—
Other investments		517,546		—		—		517,546
Other assets (see Note 8)		21,570		—		20,688		882
Total assets	$	5,536,493	$	106,199	$	4,903,369	$	526,925
Liabilities
Other liabilities (see Note 8)	$	9,621	$	—	$	7,699	$	1,922
Debt		592,677		—		592,677		—
Total liabilities	$	602,298	$	—	$	600,376	$	1,922

Level 3 assets represented 10.9% and 9.5% of the Company’s total available for sale investments, other investments and derivative instruments at December 31, 2013 and 2012, respectively. Level 3 securities are primarily comprised of non-agency commercial mortgage-backed securities, asset-backed securities, investments in alternative and specialty funds, and weather derivatives. The NAV used to measure the fair value the Company’s other investments are generally derived from the underlying investments held within the funds. Although the Company does not have direct access to detailed financial information related to the underlying investments of the funds, the Company obtains and reviews fund financial statements, internal control review reports, and industry benchmarking reports to determine the reasonability of the NAV of the funds. There were no material changes in the Company’s valuation techniques for the year ended December 31, 2013.

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)

4. Fair value measurement, cont’d.

Other assets and other liabilities measured at fair value include assets of $14.0 million (2012 - $0.9 million) and liabilities of $19.6 million (2012 - $1.9 million) related to proprietary, non-exchange traded derivative-based risk management products used in the Company’s weather risk management business, and hedging and trading activities related to these risks. In instances where market prices are not available, the Company may use industry or internally developed valuation techniques such as historical analysis and simulation modeling to determine fair value and are considered Level 3.

Observable and unobservable inputs to these valuation techniques vary by contract requirements and commodity type, are validated using market-based or independently sourced parameters where applicable and may typically include the following, if applicable, dependent on contract requirements and commodity type:

• observable inputs: contract price, notional, option strike, term to expiry, interest rate, contractual limits;

• unobservable inputs: correlation; and

• both observable and unobservable: forward commodity price, forward weather curve.

The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the below table on quantitative information.

If a trade has one or more significant valuation inputs that are unobservable, such trades are initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the initial valuation, the Company updates market observable inputs to reflect observable market changes. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data.

Changes in any or all of the unobservable inputs listed above may contribute positively or negatively to the overall portfolio fair value depending upon the underlying position. In general, movements in weather curves are the largest contributing factor that impact fair value.

Below is a summary of quantitative information regarding the significant observable and unobservable inputs used in determining the fair value of assets and liabilities classified in Level 3 which are measured at fair value on a recurring basis:

December 31, 2013
	Fair Value (Level 3)		Valuation Techniques	Unobservable Inputs	Low		High		Weighted Average or Actual
Weather and energy related derivatives Net liability	$	5,531	Historical Analysis and Simulation	Correlation		0		1	See above
				Weather curve		0		7,940	See above
				Commodity curve	$	0.65	$	10.00	See above

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)

4. Fair value measurement, cont’d.

There were no impairment losses on Level 3 securities recognized in earnings for the year ended December 31, 2013. Impairment losses of $0.1 million were recognized for the year ended December 31, 2012.

The following tables present a reconciliation of the beginning and ending balances for all available for sale investments, other investments and derivative instruments measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2013 and 2012.

December 31, 2013	Fixed maturity investments			Other investments			Other assets			Total assets			Other liabilities
Level 3, beginning of year	$	8,497		$	517,546		$	882		$	526,925		$	(1,922	)
Total equity income and realized gains included in earnings		127			86,605			—			86,732			—
Total equity losses and losses included in earnings		(17	)		(22,284	)		—			(22,301	)		—
Total income included in other underwriting loss		—			—			10,452			10,452			7,340
Total loss included in other underwriting loss		—			—			(6,927	)		(6,927	)		(11,126	)
Change in unrealized gains included in other comprehensive loss		749			—			—			749			—
Change in unrealized losses included in other comprehensive loss		(305	)		—			—			(305	)		—
Purchases		1,665			67,571			2,994			72,230			(587	)
Issues		—			—			6,637			6,637			(13,274	)
Sales		(6,654	)		(31,960	)		—			(38,614	)		—
Transfers into Level 3		11,729			—			—			11,729			—
Transfers out of Level 3		(8,463	)		—			—			(8,463	)		—
Level 3, end of year	$	7,328		$	617,478		$	14,038		$	638,844		$	(19,569	)
December 31, 2012	Fixed maturity investments			Other investments			Other assets			Total assets			Other liabilities
Level 3, beginning of year	$	10,394		$	—		$	—		$	10,394		$	—
Total equity income and realized gains included in earnings		59			47,908			—			47,967			—
Total equity losses and losses included in earnings		(22	)		(21,974	)		—			(21,996	)		—
Change in unrealized gains included in other comprehensive income		2,241			—			—			2,241			—
Change in unrealized losses included in other comprehensive income		(308	)		—			—			(308	)		—
Purchases		(38	)		113,379			—			113,341			—
Issues		—			—			882			882			(1,922	)
Sales		(3,721	)		(54,195	)		—			(57,916	)		—
Transfers into Level 3		7,771			432,428	(1)		—			440,199			—
Transfers out of Level 3		(7,879	)		—			—			(7,879	)		—
Level 3, end of year	$	8,497		$	517,546		$	882		$	526,925		$	(1,922	)

⁽¹⁾  As required by ASU 2011-04, the fair value of the Company’s other investments was transferred into Level 3 at March 31, 2012.

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)

5. Reserve for losses and loss expenses

Activity in the reserve for losses and loss expenses for the years ended December 31, 2013, 2012 and 2011 is summarized as follows:

	2013			2012			2011
Gross reserve for losses and loss expenses, January 1	$	4,240,876		$	3,824,224		$	3,319,927
Reinsurance recoverable on unpaid losses		691,783			467,934			235,741
Net reserve for losses and loss expenses, January 1		3,549,093			3,356,290			3,084,186
Incurred related to:
Current year		1,442,076			1,641,152			1,812,644
Prior years		(222,392	)		(120,157	)		(179,978	)
Total incurred		1,219,684			1,520,995			1,632,666
Paid related to:
Current year		(524,010	)		(608,228	)		(756,981	)
Prior years		(838,082	)		(715,528	)		(597,896	)
Total paid		(1,362,092	)		(1,323,756	)		(1,354,877	)
Foreign currency translation		1,819			(4,436	)		(5,685	)
Net reserve for losses and loss expenses, December 31		3,408,504			3,549,093			3,356,290
Reinsurance recoverable on unpaid losses		593,755			691,783			467,934
Gross reserve for losses and loss expenses, December 31	$	4,002,259		$	4,240,876		$	3,824,224

During 2013, the Company’s estimated ultimate losses for prior accident years were reduced by $222.4 million (2012 – $120.2 million; 2011 – $180.0 million) due to lower claims emergence than originally estimated by the Company. During 2013, the Company experienced favorable development in the Reinsurance segment of $188.5 million in the catastrophe, property, casualty, professional lines and other specialty lines of business. In the Insurance segment, the Company experienced $33.9 million of favorable development across the agriculture, casualty and other specialty, professional lines, and property lines of business. During 2012, the Company experienced favorable development in the Reinsurance segment of $74.0 million in the catastrophe, casualty, professional lines and other specialty lines of business. In the Insurance segment, the Company experienced $46.2 million of favorable development across the agriculture, casualty and other specialty, professional lines, and property lines of business. During 2011, the Company experienced favorable development in the Reinsurance segment of $109.2 million in the catastrophe, property, casualty, professional lines and other specialty lines of business. In the Insurance segment, the Company experienced $70.8 million of favorable development across the agriculture, casualty and other specialty, professional lines, and property lines of business during 2011.

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.

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)

6. Reinsurance

The effects of reinsurance on premiums earned and written during the years ended December 31, 2013, 2012 and 2011 are as follows:

	Year Ended						Year Ended						Year Ended
	December 31, 2013						December 31, 2012						December 31, 2011
	Earned			Written			Earned			Written			Earned			Written
Direct	$	1,472,796		$	1,475,429		$	1,428,765		$	1,429,930		$	1,408,230		$	1,469,798
Assumed		1,139,487			1,189,815			1,087,702			1,119,096			968,773			997,316
Ceded		(595,799	)		(616,311	)		(502,567	)		(519,531	)		(445,610	)		(487,293	)
	$	2,016,484		$	2,048,933		$	2,013,900		$	2,029,495		$	1,931,393		$	1,979,821

The Company purchases reinsurance to reduce its exposure to risk of loss in certain insurance and reinsurance lines of business. Reinsurance 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, 2013, the Company recorded ceded losses of $683.2 million (2012 - $737.8 million; 2011 - $667.0 million). At December 31, 2013, the Company has an allowance for estimated uncollectible premiums receivable of $2.3 million (2012 - $3.4 million) and an allowance for estimated uncollectible losses recoverable of nil (2012 - $0.1 million). The balance of reinsurance recoverable on paid and unpaid losses at December 31, 2013 was distributed as follows based on the ratings of the reinsurers:

Rating	December 31, 2013		December 31, 2012
U.S. government sponsored program	$	356,049	$	423,803
A+ and above		253,665		214,358
A		135,949		125,694
A- and below		2,046		1,486
Not rated		10,266		9,601
Total	$	757,975	$	774,942

At December 31, 2013 and 2012, the Company held collateral of $14.2 million and $11.5 million, respectively, related to its ceded reinsurance agreements.

7. Debt and financing arrangements

On April 19, 2012, the Company and certain designated subsidiaries of the Company entered into a $700.0 million four-year revolving credit facility with JPMorgan Chase Bank, N.A. (“JPMorgan”) as administrative agent (“Credit Facility”). Upon entering into the Credit Facility, the Company terminated its existing $1,175.0 million amended and restated credit agreement dated May 8, 2007 with JPMorgan as administrative agent. As of December 31, 2013, there were no borrowings under the Credit Facility and letters of credit outstanding under the Credit Facility were $260.3 million (2012 - $320.4 million).

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)

7. Debt and financing arrangements, cont’d.

The Credit Facility consists of two tranches: (i) a tranche 1 secured credit facility in an aggregate principal amount of $560.0 million (the “Tranche 1 Facility”), which is secured on a several basis by the respective entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas and (ii) a tranche 2 unsecured facility in an aggregate principal amount of $140.0 million (the “Tranche 2 Facility”). The proceeds of the Credit Facility may be used for general corporate purposes, to finance potential acquisitions and for the repurchase of the Company’s outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $350.0 million, provided that no participating lender is obligated to increase its commitments under the Credit Facility.

For letters of credit issued on a collateralized basis under the Tranche 1 Facility, the Company is required to pay a fee of 0.45% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis under the Tranche 2 Facility, the Company is required to pay a fee ranging from 1.125% to 1.750% over LIBOR on the daily stated amount of such letters of credit based upon the Company’s debt ratings as issued by Moody’s or Standard & Poor’s. The interest rate for revolving loans under the Tranche 2 Facility is (a) the highest of (i) 0.5% in excess of the federal funds effective rate, (ii) the prime rate as announced by JP Morgan and (iii) the Eurodollar rate applicable for an interest period of one month plus 1%, plus a margin ranging from 0.125% to 0.750% depending upon the type of loan and the Company’s ratings as issued by Moody’s and Standard & Poor’s or (b) LIBOR plus a margin ranging from 1.125% to 1.750%. In addition, the Credit Facility required the Company to pay to the lenders a commitment fee.

The 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 $1.8 billion at any time). In addition, each of the Company’s regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the Credit Facility restrict the declaration or payment of dividends if the Company is already in default or the payment or declaration would cause a default under the terms of the Credit Facility.

The Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the Credit Facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the Credit Facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the 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 Credit Facility.

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.

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)

7. Debt and financing arrangements, cont’d.

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 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, 2013.

The Company made aggregate interest payments of $35.7 million during the year ended December 31, 2013 (2012 - $35.7 million, 2011 - $35.8 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 $125.0 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 (loss) income and is being recognized as a component of interest expense in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) as the interest expense related to the 7% Senior Notes affects earnings. The net income effect of the interest rate lock was not material.

The Company regularly transacts in certain derivative-based weather risk management products primarily to address weather and energy risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Generally, the Company’s current portfolio of such derivative contracts is of short duration and such contracts are predominantly seasonal in nature.

None of the Company’s derivatives are designated as hedges under current accounting guidance, with the exception of the interest rate lock. The Company invests 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 may enter derivative transactions directly or as part of strategies employed by its external investment managers. The Company’s objectives for holding these derivatives are as follows:

Interest Rate Futures, Swaps, Swaptions and Options - to manage exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk through modification of the portfolio composition and duration.

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)

8. Derivatives, cont’d.

Foreign Exchange Forwards, Futures and Options - as part of its overall currency risk management and investment strategies.

Credit Default Swaps - to manage market exposures. The Company may assume or economically hedge credit risk through credit default swaps to replicate or hedge investment positions. The original term of these credit default swaps is generally five years or less.

Commodity Futures and Options - to economically hedge certain underwriting risks.

To-Be-Announced Mortgage-backed Securities (“TBAs”) - to enhance investment performance and as part of overall investment strategy. TBAs represent commitments to purchase or sell a future issuance of agency mortgage-backed securities. For the period between the purchase of a TBA and issuance of the underlying securities, the Company’s position is accounted for as a derivative.

Energy and Weather Contracts - to address weather and energy risks. The Company may purchase or sell contracts with financial settlements based on the performance of an index linked to a quantifiable weather element, such as temperature, precipitation, snowfall or windspeed, and structures with multiple risk triggers indexed to a quantifiable weather element and a weather sensitive commodity price, such as temperature and electrical power or natural gas. Generally, the Company’s current portfolio of energy and weather derivative contracts is of comparably short duration and such contracts are predominantly seasonal in nature.

The fair values and the related notional values of derivatives at December 31, 2013 and 2012 are noted below.

	December 31, 2013				December 31, 2012
	Fair Value		Notional Principal Amount		Fair Value		Notional Principal Amount
Derivatives recorded in other assets
Foreign exchange forward contracts	$	251	$	19,269	$	23	$	1,652
Credit default swaps		—		—		9		410
Interest rate swaps		124		16,100		76		5,000
Interest rate swaptions		39		24,338		57		2,200
TBAs		93,820		93,840		20,523		19,000
Energy and weather contracts		14,038		53,986		882		7,787
Total recorded in other assets	$	108,272			$	21,570
Derivatives recorded in other liabilities
Foreign exchange forward contracts	$	172	$	15,861	$	60	$	5,296
Interest rate swaps		933		12,193		—		—
Interest rate swaptions		543		361,455		133		14,500
Interest rate futures		—		103,935		—		—
TBAs		28,218		28,000		7,506		7,000
Energy and weather contracts		19,569		66,113		1,922		15,573
Total recorded in other liabilities	$	49,435			$	9,621
Net derivative asset	$	58,837			$	11,949

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)

8. Derivatives, cont’d.

On January 1, 2013, the Company adopted new guidance that requires disclosure of financial instruments subject to a master netting agreement. At December 31, 2013, derivative assets of $14.5 million and liabilities of $21.2 million were traded under International Swaps and Derivatives Association Master Agreements (“ISDAs”) which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. TBAs and interest rate futures are not subject to ISDAs. At December 31, 2013 and 2012, none of the Company’s derivative instruments were netted. See Note 11 for information on collateral pledged.

The gains and losses on the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for derivatives for the years ended December 31, 2013 and 2012 were as follows:

	2013			2012
Derivatives recorded in net foreign exchange losses (gains)
Foreign exchange forward contracts	$	357		$	98
Total gains recorded in net foreign exchange losses (gains)	$	357		$	98
Derivatives recorded in net realized and unrealized investment gains
Credit default swaps	$	49		$	48
Interest rate swaps		1,241			85
Interest rate swaptions		291			29
Interest rate futures		44			87
TBAs		(958	)		580
Total gains recorded in net realized and unrealized investment gains	$	667		$	829
Derivatives recorded in other underwriting loss
Commodity put options		—			(2,684	)
Energy and weather contracts		(261	)		—
Total losses recorded in other underwriting loss	$	(261	)	$	(2,684	)
Total gains (losses) from derivatives	$	763		$	(1,757	)

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)

9. Segment reporting

The determination of the Company’s business segments is based on how the Company monitors the performance of its underwriting operations. The Company has two reportable business segments, Insurance and Reinsurance.

• Insurance – This segment is comprised of four lines of business: agriculture, casualty and other specialty, professional lines, and property. 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 and other specialty line of business is comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty and healthcare liability. The professional line of business includes directors’ and officers’ liability, errors and omissions, employment practices liability, environmental liability and pension trust liability insurance. 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.

• Reinsurance – This segment is comprised of five lines of business: catastrophe, property, casualty, professional lines, and other specialty. The catastrophe line of business includes reinsurance for catastrophic perils on a treaty basis. The property line of business includes proportional and excess of loss reinsurance of personal and commercial exposures. The casualty line of business is comprised of third party liability exposures, clash and workers’ compensation coverages. The professional line of business includes directors’ and officers’ liability, errors and omissions, employment practices liability, environmental liability and pension trust liability reinsurance. The other specialty line of business includes the reinsurance of aviation and space business and proportional and non-proportional reinsurance of hull and cargo insurance business, and proportional and excess of loss coverages of contract and commercial surety business, personal accident coverages, political risk coverages, weather risk management products and agriculture coverages for weather related perils as well as protection from yield and price risks.

Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the net losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by 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.

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)

9. Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the year ended December 31, 2013, reserve for losses and loss expenses as of December 31, 2013 and the carrying value of goodwill as of December 31, 2013:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	1,475,429		$	1,189,815		$	2,665,244
Ceded premiums written		(542,919	)		(73,392	)		(616,311	)
Net premiums written		932,510			1,116,423			2,048,933
Net premiums earned		946,474			1,070,010			2,016,484
Other underwriting loss		—			(2,046	)		(2,046	)
		946,474			1,067,964			2,014,438
Expenses
Net losses and loss expenses		774,425			445,259			1,219,684
Acquisition expenses		64,778			239,652			304,430
General and administrative expenses		157,596			137,310			294,906
		996,799			822,221			1,819,020
Underwriting (loss) income	$	(50,325	)	$	245,743		$	195,418
Net loss ratio		81.8	%		41.6	%		60.5	%
Acquisition expense ratio		6.8	%		22.4	%		15.1	%
General and administrative expense ratio		16.7	%		12.8	%		14.6	%
Combined ratio		105.3	%		76.8	%		90.2	%
Reserve for losses and loss expenses	$	2,158,890		$	1,843,369		$	4,002,259
Goodwill	$	47,925		$	43,368		$	91,293

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)

9. Segment reporting, cont’d.

The following table provides a summary of the segment revenues and results for the year ended December 31, 2012, reserve for losses and loss expenses as of December 31, 2012 and the carrying value of goodwill as of December 31, 2012:

	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	1,429,930		$	1,119,096		$	2,549,026
Ceded premiums written		(487,573	)		(31,958	)		(519,531	)
Net premiums written		942,357			1,087,138			2,029,495
Net premiums earned		955,089			1,058,811			2,013,900
Other underwriting (loss) income		(2,684	)		501			(2,183	)
		952,405			1,059,312			2,011,717
Expenses
Net losses and loss expenses		855,941			665,054			1,520,995
Acquisition expenses		75,597			227,582			303,179
General and administrative expenses		125,108			110,581			235,689
		1,056,646			1,003,217			2,059,863
Underwriting (loss) income	$	(104,241	)	$	56,095		$	(48,146	)
Net loss ratio		89.6	%		62.8	%		75.5	%
Acquisition expense ratio		7.9	%		21.5	%		15.1	%
General and administrative expense ratio		13.1	%		10.4	%		11.7	%
Combined ratio		110.6	%		94.7	%		102.3	%
Reserve for losses and loss expenses	$	2,287,052		$	1,953,824		$	4,240,876
Goodwill	$	47,925		$	43,014		$	90,939

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)

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:

	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

The following table reconciles total segment results to income (loss) before income taxes for the years ended December 31, 2013, 2012 and 2011:

	2013			2012			2011
Total underwriting income (loss)	$	195,418		$	(48,146	)	$	(251,883	)
Net investment income		166,216			173,326			147,037
Net foreign exchange (losses) gains		(14,214	)		15,911			7,422
Net realized and unrealized investment gains		15,164			72,139			31,671
Net impairment losses recognized in earnings (losses)		(1,616	)		(847	)		(3,520	)
Amortization of intangibles		(7,012	)		(10,347	)		(11,213	)
Interest expense		(36,188	)		(36,174	)		(36,254	)
Income (loss) before income taxes	$	317,768		$	165,862		$	(116,740	)

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)

9. Segment reporting, cont’d.

The following table provides gross premiums written by line of business for the years ended December 31, 2013, 2012 and 2011:

Business Segment	2013		2012		2011
Insurance
Agriculture	$	954,389	$	903,730	$	901,746
Casualty and other specialty		316,609		296,325		289,421
Professional lines		148,537		169,815		169,319
Property		55,894		60,060		109,312
Total Insurance		1,475,429		1,429,930		1,469,798
Reinsurance
Catastrophe		355,751		378,387		346,021
Property		297,806		349,579		266,562
Casualty		252,163		224,237		217,584
Professional lines		163,594		59,076		59,911
Other specialty		120,501		107,817		107,238
Total Reinsurance		1,189,815		1,119,096		997,316
Total	$	2,665,244	$	2,549,026	$	2,467,114

The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2013, 2012 and 2011:

	2013		2012		2011
United States	$	2,097,272	$	2,023,082	$	2,001,117
Worldwide		299,076		291,545		259,707
Europe		153,516		121,363		106,070
Japan		33,879		36,392		37,610
Canada		15,403		17,248		17,103
Australasia		25,191		22,497		15,364
Other		40,907		36,899		30,143
Total gross premiums written	$	2,665,244	$	2,549,026	$	2,467,114

The Company attributes gross premiums written to the geographic region in which the risks originate.

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)

10. Goodwill and intangible assets

The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2013 and 2012:

	Goodwill		Intangible assets with indefinite lives		Intangible assets with finite lives			Total
Net balance at December 31, 2011	$	90,454	$	17,229	$	74,145		$	181,828
Additions		485		—		34			519
Amortization		—		—		(10,347	)		(10,347	)
Net balance at December 31, 2012	$	90,939	$	17,229	$	63,832		$	172,000
Additions		354		—		36			390
Amortization		—		—		(7,012	)		(7,012	)
Net balance at December 31, 2013	$	91,293	$	17,229	$	56,856		$	165,378
Gross balance	$	91,293	$	17,229	$	138,026		$	246,548
Accumulated Amortization		—		—		(81,170	)		(81,170	)
Net balance	$	91,293	$	17,229	$	56,856		$	165,378

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, 2013 and 2012. 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 $6.5 million in 2014, $6.3 million in each of 2015 to 2017, $6.2 million in 2018 and $25.3 million in all years thereafter.

11. Commitments and contingencies

Concentrations of credit risk. The areas where significant concentrations of credit risk may exist include reinsurance recoverables, investments and cash and cash equivalents. The Company’s reinsurance recoverables on paid and unpaid losses at December 31, 2013 and 2012 amounted to $758.0 million and $774.9 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, 2013, $391.7 million of reinsurance recoverable on paid and unpaid losses (2012 – $341.5 million) was due from reinsurers rated A- or better by A.M. Best or Standard & Poor’s. An additional $356.0 million (2012 – $423.8 million) of reinsurance recoverable on paid and unpaid losses was due from a U.S. government sponsored reinsurance program as of December 31, 2013. At December 31, 2013 and 2012, the Company held collateral of $14.2 million and $11.5 million, respectively, related to its ceded reinsurance agreements.

As of December 31, 2013, substantially all the Company’s cash and investments were held by three custodians.

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)

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, 2013, 2012 and 2011:

Broker	2013			2012			2011
Aon Benfield		17.7	%		17.4	%		18.2	%
Marsh & McLennan Companies, Inc.		19.5	%		16.9	%		16.1	%
Willis Companies		11.9	%		15.8	%		12.7	%
Total of largest brokers		49.1	%		50.1	%		47.0	%

Letters of credit. As of December 31, 2013, the Company had issued letters of credit of $260.3 million (2012 – $320.4 million) under its credit facility in favor of certain ceding companies to collateralize obligations.

Investment commitments. As of December 31, 2013 and 2012, the Company had pledged cash and cash equivalents and fixed maturity investments of $146.1 million and $224.4 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2013 and 2012, the Company had also pledged $302.7 million and $380.0 million of its cash and fixed maturity investments as required to meet collateral obligations for $260.3 million and $320.4 million in secured letters of credit outstanding under its credit facility, respectively. In addition, at December 31, 2013 and 2012, cash and fixed maturity investments with fair values of $273.7 million and $280.0 million were on deposit with U.S. state regulators, respectively.

The Company is subject to certain commitments with respect to other investments at December 31, 2013 and 2012. See Note 3.

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.

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)

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, 2013 are as follows:

Year ending December 31,	Amount
2014	$	14,778
2015		15,566
2016		12,320
2017		11,683
2018		10,811
2019 and thereafter		44,650
	$	109,808

Total lease expense under operating leases for the year ended December 31, 2013 was $14.7 million (2012 – $15.2 million; 2011 – $12.2 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, 2013 and 2012 is comprised as follows:

	2013		2012
Preferred shares
Authorized – $1.00 par value each		17,200,000		17,200,000
Issued, outstanding and fully paid:
Series A preferred shares – $1.00 par value each; aggregate liquidation preference $200,000 (2012 - $200,000)		8,000,000		8,000,000
Series B preferred shares – $1.00 par value each; aggregate liquidation preference $230,000 (2012 - $230,000)		9,200,000		9,200,000
		17,200,000		17,200,000
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		44,368,742		43,116,394

During 2013, the Company issued restricted shares under its equity compensation plans (Note 15). The common shares issued, outstanding and fully paid for at December 31, 2013 includes 1,260,845 restricted shares.

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)

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 $25.00 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.

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)

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 2013 and 2012, under programs authorized by the Company’s Board of Directors, the Company repurchased 318,252 and 251,309 of its ordinary shares and share equivalents in open market and privately negotiated transactions at an average price of $45.83 and $39.81 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. There were no authorized repurchases remaining at December 31, 2013 (2012 – 6,748,691).

At December 31, 2013, 2012 and 2011, no warrants were outstanding. During 2011, the Company repurchased 90,000 outstanding warrants at an average price of $36.72, net of the average warrant strike price of $12.87 per warrant. During 2011, 2,895,527 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.

Accumulated other comprehensive income

The following table presents the changes in accumulated other comprehensive income balances by component for the year ended December 31, 2013:

	For the Year Ended December 31, 2013
	Gains and losses on cash flow hedges			Unrealized gains and losses on available for sale securities			Foreign currency items		Total
Beginning balance	$	(1,944	)	$	141,731		$	12,676	$	152,463
Other comprehensive (loss) income before reclassifications		—			(83,951	)		5,960		(77,991	)
Amounts reclassified from accumulated other comprehensive income(1)		89			(11,830	)		—		(11,741	)
Net current period other comprehensive income (loss)		89			(95,781	)		5,960		(89,732	)
Ending balance	$	(1,855	)	$	45,950		$	18,636	$	62,731

⁽¹⁾  All amounts are net of tax.

148

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.

The following table presents the significant items reclassified out of accumulated other comprehensive income during the year ended December 31, 2013:

For the Year Ended December 31, 2013
Details about accumulated other comprehensive income components	Amount reclassified from accumulated other comprehensive income			Affected line item in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
Gains and losses on cash flow hedges - Debt	$	89		Interest expense
		89		Total before income taxes
		—		Income tax expense
	$	89		Total net of income taxes
Unrealized (gains) losses on available for sale securities	$	(14,497	)	Net realized and unrealized investment gains
		1,616		Net impairment losses recognized in earnings
		(12,881	)	Total before income taxes
		1,051		Income tax expense
	$	(11,830	)	Total net of income taxes

13. Earnings per share

The following table sets forth the computation of basic and diluted earnings (losses) per share for the years ended December 31, 2013, 2012 and 2011:

	2013			2012			2011
Numerator:
Net income (loss) available (attributable) to common and participating common shareholders	$	279,165		$	129,766		$	(117,859	)
Less amount allocated to participating common shareholders (1)		(6,444	)		(2,113	)		(961	)
Net income (loss) allocated to common shareholders	$	272,721		$	127,653		$	(118,820	)
Denominator:
Weighted average shares - basic		42,817,624			42,567,736			40,214,979
Share equivalents:
Options		—			31,833			—
Restricted share units		583			2,266			—
Weighted average shares - diluted		42,818,207			42,601,835			40,214,979
Basic earnings (losses) per common share	$	6.37		$	3.00		$	(2.95	)
Diluted earnings (losses) per common share	$	6.37		$	3.00		$	(2.95	)

⁽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).

149

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, cont’d.

The following table sets forth dividends declared in the years ended December 31, 2013, 2012 and 2011, respectively:

	2013		2012		2011
Dividends declared per Series A preferred share	$	1.9375	$	1.9375	$	1.9375
Dividends declared per Series B preferred share	$	1.8750	$	1.8750	$	0.9375
Dividends declared per common share	$	1.28	$	1.24	$	1.20

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. The Company incurred expenses totaling $2.9 million (2012 - $3.1 million; 2011 - $3.2 million) of which $0.9 million was accrued in relation to services rendered by Blackrock at December 31, 2013 (2012 - $1.5 million). At December 31, 2013, the Company owned BlackRock common shares with a fair value of $1.4 million (2012 - $0.8 million). As of January 31, 2013, BlackRock was no longer considered a related party as a result of reducing its ownership below 5% of the Company’s ordinary shares outstanding.

Pyramis Global Advisors, a subsidiary of FMR, LLC (“Fidelity”), provides investment management services to the Company. Fidelity and its affiliates owned 4.1 million or 9.2% of Endurance Holdings’ ordinary shares outstanding at December 31, 2013 and were therefore considered a related party. The Company incurred investment management fees totaling $1.4 million (2012 - $1.4 million; 2011 - $1.5 million) to this investment manager of which $0.4 million was accrued at December 31, 2013 (2012 - $0.3 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 2010. 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 member of the Board of Directors 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.

150

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 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.

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, which was subsequently 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, 2013, 2,107,889 (2012 - 2,339,707) ordinary shares remained available for issuance under the 2007 and prior Plans.

On May 28, 2013, the Board of Directors elected John R. Charman as the Company’s Chairman and Chief Executive Officer. Mr. Charman received an option to purchase 800,000 ordinary shares at an exercise price of $48.20 per share, and a grant of 708,890 restricted shares, as an employment inducement pursuant to Rule 303A.08 of the New York Stock Exchange Corporate Governance Standards and were made outside of the 2007 Plan.

Options

The 800,000 options awarded to Mr. Charman will vest annually, in five equal tranches commencing on May 28, 2013, subject to Mr. Charman’s continued employment, or in the event of certain terminations of employment and other events. Mr. Charman’s options have a 10-year contractual life.

Prior to 2005, 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 vested at a rate of 20% per year over a five-year term. Option awards have a 10-year contractual life.

151

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 and other stock plans, cont’d.

A summary of option activity, including options held by employees and non-employee directors, during the year ended December 31, 2013 is presented below:

	For the year ended December 31, 2013
Options Outstanding	Number of Options			Weighted Average Exercise  Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Beginning of year		39,501		$	27.78
Granted		800,000			48.20
Exercised		(24,501	)		23.88
Forfeited		—			—
Outstanding, end of year		815,000		$	47.94		9.24	$	8,745
Exercisable and vested options, end of year		175,000		$	46.98		8.63	$	2,046

During the year ended December 31, 2013, 800,000 options were granted with a weighted average grant date fair value of $10.2 million. No options were granted during the years ended December 31, 2012 and 2011. The Company uses the Black-Scholes-Merton formula to estimate the value of stock options granted. No options expired during the years ended December 31, 2013, 2012 and 2011. During the year ended December 31, 2013, 175,000 options vested. No options vested during the years ended December 31, 2012 and 2011. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $0.5 million, $1.4 million, and $32.5 million, respectively. The Company received proceeds of $0.6 million from the exercise of options during the year ended December 31, 2013. The Company issued new ordinary shares in connection with the exercise of the above options.

For the year ended December 31, 2013, 2012 and 2011, compensation costs recognized in earnings (losses) for all options totaled $4.5 million (2012 and 2011 - nil).

There were unrecognized stock-based compensation expenses of $5.7 million related to unvested stock options at December 31, 2013. This expense is expected to be recognized between 2014 and 2017, with approximately 53.9% expected to be recognized during 2014.

Restricted Shares and Restricted Share Units

The Company has 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 was 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 generally vest pro rata over a four-year period. Restricted shares are forfeited upon departure from the Company for any reason prior to the applicable vesting date other than in cases where an employee meets certain retirement eligibility criteria which allow for continuing post-employment vesting of restricted shares, subject to compliance with certain non-competition obligations.

The 708,890 restricted shares awarded to Mr. Charman, as discussed above, will vest annually, in five equal tranches commencing on May 28, 2013, subject to Mr. Charman’s continued employment, or in the event of certain terminations of employment and other events.

152

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 and other stock plans, cont’d.

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, 2013, is presented below:

	Number of Shares/Units			Aggregate Intrinsic Value
Unvested, beginning of year		686,633
Granted		1,211,987
Settled		(407,511	)
Forfeited		(229,849	)
Unvested, end of year		1,261,260
Outstanding, end of year		1,261,260		$	73,998

During the years ended December 31, 2013, 2012 and 2011, the Company granted an aggregate of 1,211,987, 437,284 and 305,806 restricted shares and restricted share units with weighted average grant date fair values of $58.1 million, $16.8 million and $14.8 million, respectively. During the years ended December 31, 2013, 2012 and 2011, the aggregate fair value of restricted shares and restricted share units that vested was $17.1 million, $11.7 million and $14.4 million, respectively.

For the years ended December 31, 2013, 2012 and 2011, compensation costs recognized in earnings (losses) for all restricted shares and restricted share units were $23.5 million, $11.2 million, and $14.8 million, respectively. At December 31, 2013, compensation costs not yet recognized related to non-vested awards was $29.7 million (2012 – $8.8 million). This expense is expected to be recognized between 2014 and 2018, with approximately 57.4% expected to be recognized during 2014.

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 Section 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.

153

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 and other stock plans, cont’d.

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, 2013 was approximately $167,000 (2012 – $165,000; 2011– $200,000).

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 12% 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, 2013 resulted in an expense of $10.8 million being recorded in earnings (2012 – $7.4 million; 2011 – $7.5 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, the most significant of which are 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.

The combined statutory capital and combined statutory net income (loss) for our principal operating subsidiaries in their respective jurisdictions were as follows:

Statutory capital	Bermuda						United States				Other(2)
	2013			2012			2013		2012		2013		2012
Required statutory capital	$	1,012,964		$	1,127,969		$	236,652	$	235,454	$	66,863	$	44,113
Actual statutory capital		2,618,198	(1)		2,492,307	(1)		654,480		612,127		511,106		243,188

Statutory net income (loss)	Bermuda		United States			Other(2)
For the year ended December 31, 2013	$	454,840	$	(48,035	)	$	(36,495	)
For the year ended December 31, 2012		355,118		(147,325	)		2,829
For the year ended December 31, 2011		51,101		(77,374	)		(9,913	)

⁽¹⁾  Bermuda statutory capital 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 Endurance Bermuda’s Singapore branch.

154

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.

Bermuda

As a Bermuda holding company, Endurance Holdings is subject to the Companies Act 1981, which limits the Company’s ability to pay dividends and make distributions to its shareholders. The Company’s retained earnings are unrestricted; however, the Company is not permitted to declare or pay a dividend, or make a distribution out of contributed surplus, if it is, or would after the payment be, unable to pay its liabilities as they come due, or if the realizable value of its assets would be less than its liabilities. Endurance Holdings had, as of December 31, 2013, $2.2 billion in retained earnings, $0.1 billion in accumulated other comprehensive income and an additional $0.6 billion in contributed surplus available to declare or pay a dividend, or make a distribution out of contributed surplus, so long as Endurance Holdings remained in compliance with the Companies Act 1981 following such dividend or distribution. Endurance Holdings relies on dividends from Endurance Bermuda to provide cash flow required for debt service and dividends to shareholders.

Endurance Bermuda is a registered Class 4 insurer under the Insurance Act 1978 and related regulations. Endurance Bermuda is required to maintain minimum solvency standards and to hold available statutory capital and surplus equal to or exceeding the Enhanced Capital Requirement as determined by the Bermuda Monetary Authority based upon a standard mathematical model that correlates the risk underwritten to the capital that is dedicated to the business. The required capital noted in the table above has been based on the Enhanced Capital Requirement. In addition to the Enhanced Capital Requirement, Endurance Bermuda is required to maintain a minimum statutory liquidity ratio and solvency margin. For all periods presented herein, Endurance Bermuda materially exceeded these minimum requirements.

Endurance Bermuda’s ability to pay dividends and make capital distributions is subject to certain regulatory restrictions based on the Enhanced Capital Requirement, limits on the amount of Endurance Bermuda’s premiums written and net reserves for losses and loss expenses and a minimum general capital and surplus requirement of $100.0 million. At December 31, 2013, Endurance Bermuda can pay dividends of $654.5 million (2012 - $623.1 million) to Endurance Holdings without prior approval under Bermuda law.

United States

Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the Delaware Department of Insurance. American Agri-Business is subject to regulation by the Texas Department of Insurance. Endurance’s Delaware and Texas domiciled entities must maintain a minimum level of statutory capital as established by such jurisdictions. The amount of required capital is determined through the use of the Risk Based Capital model established by the National Association of Insurance Commissioners and adopted by Delaware and Texas. The required capital noted in the table above has been based on the Risk Based Capital model and represents the authorized control level risk based capital for these entities.

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 for Endurance’s Delaware domiciled entities. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2013, 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 2014 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, 2013, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.9 million (2012 - $4.3 million) without prior regulatory approval.

155

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.

Other Jurisdictions

The required and actual statutory capital amounts in the “Other” category in the table above include amounts related to Endurance U.K. and Endurance Bermuda’s Singapore branch (“Singapore Branch”). Under the jurisdiction of the United Kingdom’s Prudential Regulation Authority (“PRA”), 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. Insurers are required to calculate their required minimum solvency margin and to report it to the PRA. The PRA also mandates calculation of an Enhanced Capital Requirement for Endurance U.K. At December 31, 2013 and 2012, the actual capital for Endurance U.K. exceeded the capital requirements currently promulgated by the PRA.

The Singapore Branch is subject to Fund Solvency and Capital Adequacy requirements by the Monetary Authority of Singapore as a foreign company in Singapore and is regulated by the Monetary Authority of Singapore pursuant to the Insurance Act in Singapore. At December 31, 2013 and 2012, the Singapore Branch complied with the capital requirements promulgated by the Monetary Authority of Singapore.

The required capital noted in the table above as “Other” represents the combined capital requirements for Endurance U.K. and the Singapore Branch.

The PRA 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 PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distribution. At December 31, 2013 Endurance U.K did not have retained profits available for distribution.

18. Taxes

The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland and Singapore, which are subject to the relevant taxes in those jurisdictions. During 2013, the Internal Revenue Service conducted audits and inquiries of income tax returns of the Company’s U.S. subsidiaries. The Canada Revenue Agency and Canadian provinces conducted inquiries of prior year income tax filings of the Company’s former Canadian branch. The audit and inquiry results were immaterial to the operations of the Company. None of the Company’s other operating subsidiaries or branch operations were under examination in any of the jurisdictions in which they operate. The Company remains subject to examination for tax years 2009 through 2013.

Endurance Holdings and Endurance Bermuda are not required to pay any income or capital gains taxes in Bermuda. 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 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 Holdings and Endurance Bermuda 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.

156

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 income tax (expense) benefit was as follows for the years ended December 31, 2013, 2012 and 2011, respectively:

	2013			2012			2011
Current income tax (expense) benefit	$	(3,089	)	$	(5,029	)	$	13,518
Deferred income tax (expense) benefit		(2,764	)		1,683			9,488
Income tax (expense) benefit	$	(5,853	)	$	(3,346	)	$	23,006

Of the 2013 current income tax (expense) benefit, $(3.1) million related to taxes incurred in the United States (2012 – $(4.6) million; 2011 – $12.7 million). Of the deferred income tax (expense) benefit, $(2.8) million related to deferred income tax expense in the United States (2012 – $1.6 million; 2011 – $9.6 million). A full valuation allowance has been recorded against the net asset position of Endurance Bermuda’s foreign branches and Endurance U.K.

The actual income tax (expense) benefit attributable to income (losses) for the years ended December 31, 2013, 2012 and 2011 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income (loss) before income taxes, as a result of the following:

	2013			2012			2011
Computed expected tax expense	$	—		$	—		$	—
Tax benefit effect on foreign taxes		31,054			51,059			40,808
Change in valuation allowance		(36,907	)		(54,405	)		(17,802	)
	$	(5,853	)	$	(3,346	)	$	23,006

157

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.

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, 2013 and 2012:

	2013			2012
Deferred income tax assets:
Unearned premiums	$	22,701		$	21,940
Loss reserves		32,109			36,990
Net operating loss carry forward		106,112			72,502
Deferred compensation		14,943			10,191
Deferred interest		43,341			41,474
Start up costs		(720	)		(297	)
Realized investment losses		150			65
Other		3,388			5,418
Total deferred income tax assets		222,024			188,283
Deferred income tax liabilities:
Deferred acquisition costs		(16,874	)		(16,787	)
Unrealized investment losses (gains)		30			(11,512	)
Unrealized foreign exchange losses (gains)		600			(138	)
Temporary differences related to acquisition		(22,612	)		(23,706	)
Other		(8,785	)		(6,866	)
Total deferred income tax liabilities		(47,641	)		(59,009	)
Valuation allowance		(122,680	)		(85,773	)
Net deferred income tax asset	$	51,703		$	43,501

Net income tax refunds received in 2013 totaled $8.4 million. The Company paid net income taxes and received net refunds totaling $1.6 million and $15.7 million for the years ended December 31, 2012 and 2011, respectively. Net operating loss carryforwards in the amount of $80.3 million, $10.6 million, $5.3 million and $9.9 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 2020 and 2033, respectively.

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, 2013, management has established a valuation allowance of $122.7 million (2012 – $85.8 million) against net operating loss carryforwards in the Company’s United States subsidiaries, United Kingdom subsidiary and non-U.S. branches.

158

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 Company’s income (loss) before income taxes was distributed as follows for the years ended December 31, 2013, 2012 and 2011, respectively:

	2013		2012			2011
U.S. (domestic)	$	13,103	$	(186,882	)	$	(125,752	)
Non-U.S. (foreign)(1)		304,665		352,744			9,012
Income (loss) before income taxes	$	317,768	$	165,862		$	(116,740	)

⁽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, 2013 and 2012, 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, 2013:

	Quarter Ended March 31, 2013			Quarter Ended June  30, 2013			Quarter Ended September 30, 2013			Quarter Ended December 31, 2013
Net premiums earned	$	420,117		$	543,335		$	553,545		$	499,487
Net investment income		49,305			32,468			38,097			46,346
Net realized and unrealized investment gains (losses)		6,235			10,372			(6,640	)		5,197
Net impairment losses recognized in earnings		(806	)		(579	)		(190	)		(41	)
Subtotal	$	474,851		$	585,596		$	584,812		$	550,989
Net losses and loss expenses	$	218,970		$	359,058		$	339,036		$	302,620
Acquisition and general and administrative expenses	$	138,114		$	153,227		$	146,245		$	161,750
Net foreign exchange losses	$	2,927		$	3,368		$	2,201		$	5,718
Net income	$	100,299		$	61,019		$	83,416		$	67,181
Preferred dividends		(8,188	)		(8,188	)		(8,188	)		(8,186	)
Net income available to common and participating common shareholders	$	92,111		$	52,831		$	75,228		$	58,995
Basic earnings per share	$	2.13		$	1.21		$	1.70		$	1.33
Diluted earnings per share	$	2.13		$	1.21		$	1.70		$	1.33

159

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, 2012:

	Quarter Ended March 31, 2012			Quarter Ended June  30, 2012			Quarter Ended September 30, 2012			Quarter Ended December 31, 2012
Net premiums earned	$	411,635		$	519,340		$	551,872		$	531,053
Net investment income		57,075			31,766			45,882			38,603
Net realized and unrealized investment gains		5,203			14,958			10,097			41,881
Net impairment losses recognized in earnings (losses)		(219	)		(407	)		(131	)		(90	)
Subtotal	$	473,694		$	565,657		$	607,720		$	611,447
Net losses and loss expenses	$	262,767		$	345,897		$	407,523		$	504,808
Acquisition and general and administrative expenses	$	134,530		$	134,737		$	141,497		$	128,104
Net foreign exchange (gains) losses	$	(18,137	)	$	(336	)	$	3,774		$	(1,212	)
Net income (loss)	$	82,542		$	72,483		$	40,118		$	(32,627	)
Preferred dividends		(8,188	)		(8,188	)		(8,188	)		(8,186	)
Net income (loss) available (attributable) to common and participating common shareholders	$	74,354		$	64,295		$	31,930		$	(40,813	)
Basic earnings (losses) per share	$	1.72		$	1.48		$	0.74		$	(0.96	)
Diluted earnings (losses) per share	$	1.72		$	1.48		$	0.74		$	(0.96	)

160

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, 2013. 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 (1992 Framework). Based on this assessment, management concluded that, as of December 31, 2013, 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, 2013 was so reported.

161

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 2014 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 2014 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 2014 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

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	15,415	$	33.91		2,350,090
Equity compensation plans not approved by security holders	—		—		—
Total	15,415	$	33.91		2,350,090

⁽¹⁾  Weighted average exercise price does not include $0 exercise price of 415 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 2014 Annual General Meeting of Shareholders.

162

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 2014 Annual General Meeting of Shareholders.

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 104 hereof.

(2) Financial Statement Schedules. See Index to Consolidated Financial Statement Schedules on page 165 hereof.

(3) Exhibits. See Exhibit Index beginning on page 176 hereof.

163

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.

Date: February 25, 2014	ENDURANCE SPECIALTY HOLDINGS LTD.
	/s/ John R. Charman
	Name: John R. Charman
	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/ John R. Charman John R. Charman	Chief Executive Officer and Director (Principal Executive Officer)	February 25, 2014
/s/ Michael J. McGuire Michael J. McGuire	Chief Financial Officer (Principal Accounting Officer)	February 25, 2014
/s/ John T. Baily John T. Baily	Director	February 25, 2014
/s/ Norman Barham Norman Barham	Director	February 25, 2014
/s/ Galen R. Barnes Galen R. Barnes	Director	February 25, 2014
/s/ William H. Bolinder William H. Bolinder	Director	February 25, 2014
/s/ Steven W. Carlsen Steven W. Carlsen	Director	February 25, 2014
/s/ Susan S. Fleming Susan S. Fleming	Director	February 25, 2014
/s/ Scott D. Moore Scott D. Moore	Director	February 25, 2014
/s/ Brendan R. O’Neill Brendan R. O’Neill	Director	February 25, 2014
/s/ William J. Raver William J. Raver	Director	February 25, 2014
/s/ Robert A. Spass Robert A. Spass	Director	February 25, 2014

164

Index to Consolidated Financial Statement Schedules

		Pages
Report of Independent Registered Public Accounting Firm on Schedules			166
I.	Summary of Investments other than Investments in Related Parties at December 31, 2013		167
II.	Condensed Financial Statement Information of the Registrant		168
III.	Supplementary Insurance Information for the years ended December 31, 2013, 2012 and 2011		171
IV.	Reinsurance for the years ended December 31, 2013, 2012 and 2011		173
VI.	Supplementary Information for Property and Casualty Insurance Underwriters for the years ended December 31, 2013, 2012 and 2011		174

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

165

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, 2013 and 2012, and for each of the three years in the period ended December 31, 2013, and have issued our report thereon dated February 25, 2014 (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 of this Annual Report on Form 10-K for the year ended December 31, 2013. 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 25, 2014

166

SCHEDULE I

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES

AT DECEMBER 31, 2013

(In thousands of United States dollars)

	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	$	771,227	$	769,343	$	769,343
States, municipalities and political subdivisions		27,138		26,854		26,854
Foreign governments		183,650		182,647		182,647
Corporate bonds		1,252,506		1,262,444		1,262,444
Mortgage-backed securities
Agency mortgage-backed securities		1,171,805		1,165,864		1,165,864
Non-agency mortgage-backed securities		941,498		958,576		958,576
Asset-backed securities		454,756		458,236		458,236
Total fixed maturity investments	$	4,802,580	$	4,823,964	$	4,823,964
Short-term investments		35,029		35,028		35,028
Equity securities		227,828		252,466		252,466
Other investments		440,887		617,478		617,478
Total Investments	$	5,506,324	$	5,728,936	$	5,728,936

⁽¹⁾  Investments in fixed maturity investments and short-term investments are shown at amortized cost.

167

SCHEDULE II

ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED FINANCIAL STATEMENT INFORMATION OF THE REGISTRANT

BALANCE SHEETS-PARENT ONLY

DECEMBER 31, 2013 AND 2012

(In thousands of United States dollars except share amounts)

	2013		2012
ASSETS
Investment in subsidiary	$	3,211,570	$	3,033,650
Cash and cash equivalents		6,517		10,083
Amounts due from subsidiaries		200,530		200,929
Other assets		15,496		10,521
Total assets	$	3,434,113	$	3,255,183
LIABILITIES
Debt		527,398		527,195
Other liabilities		20,166		17,391
Total liabilities		547,564		544,586
SHAREHOLDERS’ EQUITY
Preferred shares
Series A and Series B, non-cumulative – 17,200,000 issued and outstanding (2012 – 17,200,000)		17,200		17,200
Common shares
Ordinary – 44,368,742 issued and outstanding (2012 – 43,116,394)		44,369		43,116
Additional paid-in capital		569,116		527,915
Accumulated other comprehensive income		62,731		152,463
Retained earnings		2,193,133		1,969,903
Total shareholders’ equity		2,886,549		2,710,597
Total liabilities and shareholders’ equity	$	3,434,113	$	3,255,183

See accompanying notes to the consolidated financial statements.

168

SCHEDULE II

ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED FINANCIAL STATEMENT INFORMATION OF THE REGISTRANT, Cont’d.

STATEMENTS OF INCOME (LOSS)-PARENT ONLY

YEARS ENDED DECEMBER 31, 2013, 2012, AND 2011

(In thousands of United States dollars)

	2013			2012			2011
Revenues
Net investment loss	$	—		$	(2	)	$	(6	)
Net realized and unrealized losses		(1,511	)		(74	)		—
Other income		10,200			11,083			8,303
		8,689			11,007			8,297
Expenses
General and administrative expenses		48,017			17,923			22,670
Net foreign exchange losses		—			2			—
Interest expense		36,188			36,174			36,250
Total expenses		84,205			54,099			58,920
Net loss before equity in net income (loss) of subsidiaries		(75,516	)		(43,092	)		(50,623	)
Equity in net income (loss) of subsidiaries		387,431			205,608			(43,111	)
Net income (loss)		311,915			162,516			(93,734	)
Preferred dividends		(32,750	)		(32,750	)		(24,125	)
Net income (loss) available (attributable) to common and participating common shareholders	$	279,165		$	129,766		$	(117,859	)

See accompanying notes to the consolidated financial statements

169

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, 2013, 2012, AND 2011

(In thousands of United States dollars)

	2013			2012			2011
Cash flows used in operating activities:
Net income (loss)	$	311,915		$	162,516		$	(93,734	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		1,504			1,095			760
Net realized and unrealized losses		1,511			74			—
Stock-based compensation expense		20,708			4,819			8,292
Equity in net (earnings) losses of subsidiary		(387,431	)		(205,608	)		43,111
Other assets		2,112			(2,614	)		(490	)
Other liabilities		2,942			(2,136	)		(307	)
Net cash used in operating activities		(46,739	)		(41,854	)		(42,368	)
Cash flows provided by investing activities:
Contributions of capital made to subsidiaries		(10,389	)		—			—
Returns of capital received from subsidiaries		10,289			—			—
Dividends received from subsidiary		118,278			126,550			107,100
Net amounts received from subsidiaries		7,650			21,760			104,650
Purchases of fixed assets		(8,298	)		—			—
Net cash provided by investing activities		117,530			148,310			211,750
Cash flows used in financing activities:
Repayment of long term debt		—			(1,072	)		(529	)
Issuance of common shares		31,884			2,935			26,489
Issuance of series B, non-cumulative preferred shares		—			—			224,022
Offering and registration costs paid		—			—			(586	)
Repurchase of common shares		(14,584	)		(10,005	)		(344,272	)
Settlement of restricted shares		(3,001	)		(3,272	)		(6,074	)
Dividends paid on preferred shares		(32,750	)		(32,750	)		(24,125	)
Dividends paid on common shares		(55,906	)		(53,439	)		(49,172	)
Net cash used in financing activities		(74,357	)		(97,603	)		(174,247	)
Net (decrease) increase in cash and cash equivalents		(3,566	)		8,853			(4,865	)
Cash and cash equivalents, beginning of year		10,083			1,230			6,095
Cash and cash equivalents, end of year	$	6,517		$	10,083		$	1,230

See accompanying notes to the consolidated financial statements

170

SCHEDULE III

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION

YEARS ENDED DECEMBER 31, 2013, 2012, AND 2011

(In thousands of United States dollars)

Year Ended December 31, 2013

	Insurance		Reinsurance		Total
Deferred Acquisition Costs	$	30,095	$	155,932	$	186,027
Reserve for Losses and Loss Expenses		2,158,890		1,843,369		4,002,259
Unearned Premiums		452,113		566,738		1,018,851
Net Premiums Earned		946,474		1,070,010		2,016,484
Net Investment Income (1)		—		—		166,216
Net Losses and Loss Expenses		774,425		445,259		1,219,684
Amortization of Deferred Acquisition Costs		64,778		239,652		304,430
Other Operating Expenses (2)		157,596		137,310		294,906
Net Premiums Written		932,510		1,116,423		2,048,933

⁽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, 2012

	Insurance		Reinsurance		Total
Deferred Acquisition Costs	$	31,620	$	136,632	$	168,252
Reserve for Losses and Loss Expenses		2,287,052		1,953,824		4,240,876
Unearned Premiums		449,475		515,769		965,244
Net Premiums Earned		955,089		1,058,811		2,013,900
Net Investment Income (1)		—		—		173,326
Net Losses and Loss Expenses		855,941		665,054		1,520,995
Amortization of Deferred Acquisition Costs		75,597		227,582		303,179
Other Operating Expenses (2)		125,108		110,581		235,689
Net Premiums Written		942,357		1,087,138		2,029,495

⁽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.

171

SCHEDULE III

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION, Cont’d

YEARS ENDED DECEMBER 31, 2013, 2012, AND 2011

(In thousands of United States dollars)

Year Ended December 31, 2011

	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.

172

SCHEDULE IV

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

REINSURANCE

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(In thousands of United States dollars)

Premiums Written	Gross		Ceded to Other Companies		Assumed from Other Companies		Net Amount		Percentage of Amount Assumed to Net
Year ended December 31, 2013:
Property and liability insurance	$	1,475,429	$	616,311	$	1,189,815	$	2,048,933		58	%
Year ended December 31, 2012:
Property and liability insurance	$	1,429,930	$	519,531	$	1,119,096	$	2,029,495		55	%
Year ended December 31, 2011:
Property and liability insurance	$	1,469,798	$	487,293	$	997,316	$	1,979,821		50	%

173

SCHEDULE VI

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY

INSURANCE UNDERWRITERS

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012, AND 2011

(In thousands of United States dollars)

Year Ended December 31, 2013
	Insurance			Reinsurance			Total
Deferred Acquisition Costs	$	30,095		$	155,932		$	186,027
Reserve for Losses and Loss Expenses		2,158,890			1,843,369			4,002,259
Discount if any, Reserve for Losses and Loss Expenses		—			—			—
Unearned Premiums		452,113			566,738			1,018,851
Net Premiums Earned		946,474			1,070,010			2,016,484
Net Investment Income (1)		—			—			166,216
Net Losses and Loss Expenses
Current Year		808,328			633,748			1,442,076
Prior Year		(33,903	)		(188,489	)		(222,392	)
Amortization of Deferred Acquisition Costs		64,778			239,652			304,430
Paid Losses and Loss Expenses		797,310			564,782			1,362,092
Net Premiums Written		932,510			1,116,423			2,048,933

(1) Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

Year Ended December 31, 2012
	Insurance			Reinsurance			Total
Deferred Acquisition Costs	$	31,620		$	136,632		$	168,252
Reserve for Losses and Loss Expenses		2,287,052			1,953,824			4,240,876
Discount if any, Reserve for Losses and Loss Expenses		—			—			—
Unearned Premiums		449,475			515,769			965,244
Net Premiums Earned		955,089			1,058,811			2,013,900
Net Investment Income (1)		—			—			173,326
Net Losses and Loss Expenses
Current Year		902,127			739,025			1,641,152
Prior Year		(46,186	)		(73,971	)		(120,157	)
Amortization of Deferred Acquisition Costs		75,597			227,582			303,179
Paid Losses and Loss Expenses		715,309			608,447			1,323,756
Net Premiums Written		942,357			1,087,138			2,029,495

(1) Because the Company does not manage its assets by segment, investment income is not allocated to the individual segments.

174

SCHEDULE VI

ENDURANCE SPECIALTY HOLDINGS LTD. AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY

INSURANCE UNDERWRITERS, Cont’d.

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(In thousands of United States dollars)

Year Ended December 31, 2011
	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		779,003			575,874			1,354,877
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.

175

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, dated as of May 8, 2013. Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 9, 2013.
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	Credit Agreement, dated as of April 19, 2012, 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 April 20, 2012.
10.2	Pledge and Security Agreement, dated as of April 19, 2012, by and among the Company, various designated subsidiary borrowers, Deutsche Bank Trust Company Americas, as Collateral Agent, Deutsche Bank Trust Company Americas, as Custodian and JPMorgan Chase Bank, N.A., as Administrative Agent. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on April 20, 2012.
10.3	Account Control Agreement, dated as of April 19, 2012, by and among the Company, Endurance Specialty Insurance Ltd., Endurance U.S. Holdings Corp., Endurance Worldwide Holdings Limited, Endurance Worldwide Insurance Limited, Endurance Reinsurance Corporation of America, Endurance American Insurance Company, Endurance American Specialty Insurance Company, ARMtech Holdings, Inc. and Deutsche Bank Trust Company Americas, as Custodian. Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on April 20, 2012.

176

10.4	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.
10.5	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.
10.6	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.**
10.7	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.**
10.8	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.**
10.9	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.**
10.10	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.**
10.11	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.**
10.12	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.**
10.13	Employee Share Purchase Plan. Incorporated herein by reference to Exhibit 4.2 of Registration Statement on Form S-8 filed on September 9, 2005.**
10.14	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. **
10.15	Severance Agreement and General Release, dated May 2, 2012, by and between the Company and Mr. William Jewett. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 3, 2012.**
10.16	Independent Contractor Agreement, effective as of May 12, 2012, by and between Endurance Services Limited and Shadowbrook Advising Inc. Incorporated herein by reference to Exhibit 10.19 to the Annual Report on Form 10-K filed on February 28, 2013.**
10.17	Employment Agreement, dated February 27, 2013, by and between the Company and John A. Kuhn. Incorporated herein by reference to Exhibit 10.20 to the Annual Report on Form 10-K filed on February 28, 2013.**
10.18	Employment Agreement, dated as of March 11, 2013, by and between the Company and Jerome Faure. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March 15, 2013.**
10.19	Employment Agreement, dated May 28, 2013, by and between the Company and John R. Charman. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 31, 2013.**
10.20	Restricted Share Agreement, dated May 28, 2013, by and between the company and John R. Charman. Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on May 31, 2013.**
10.21	Option Agreement, dated May 28, 2013, by and between the Company and John R. Charman. Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on May 31, 2013.**
10.22	Indemnification Agreement, dated May 28, 2013, by and between the Company and John R. Charman. Incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on May 31, 2013.**
10.23	Share Purchase Agreement, dated May 28, 2013, by and between Dragon Global Holdings Ltd. and the Company. Incorporated herein by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on May 31, 2013.
10.24	Share Purchase Agreement, dated May 28, 2013, by and between The Fortis Trust and the Company. Incorporated herein by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on May 31, 2013.

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10.25	Share Purchase Agreement, dated May 28, 2013, by and between The Prometheus Trust and the Company. Incorporated herein by reference to Exhibit 10.7 to the Current Report on Form 8-K filed on May 31, 2013.
10.26	Shareholders’ Agreement, dated May 28, 2013, by and among John R. Charman, Dragon Global Holdings Ltd. and the Company. Incorporated herein by reference to Exhibit 10.8 to the Current Report on Form 8-K filed on May 31, 2013.
10.27	Consulting Agreement, dated May 28, 2013, by and between the Company and David Cash. Incorporated herein by reference to Exhibit 10.9 to the Current Report on Form 8-K filed on May 31, 2013.**
10.28	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. **
10.29	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. **
10.30	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.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as at December 31, 2013 and December 31, 2012; (ii) the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 2013; (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2013 and December 21, 2012; (iv) the Condensed Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and (v) the Notes to the Condensed Consolidated Financial Statements for the years ended December 31, 2013, 2012 and 2011.

** Management contract or compensatory plan or arrangement.

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