Prepared and filed by St Ives Burrups

S-1/A 1 b329725_s1a.htm PRE-EFFECTIVE AMENDMENTS Prepared and filed by St Ives Burrups

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As filed with the Securities and Exchange Commission on March 2, 2004

Registration No. 333-112258

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 2
to

FORM S-1

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

Endurance Specialty Holdings Ltd.
(Exact Name of Registrant as Specified in Its Charter)

Bermuda		6331		98-0392908
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

Wellesley House, 90 Pitts Bay Road Pembroke HM 08, Bermuda (441) 278-0400		CT Corporation System 111 Eighth Avenue, 13th Floor New York, New York 10011 (212) 590-9200
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)		(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

Copies To:

Susan J. Sutherland, Esq.	John V. Del Col, Esq.	Michael Groll, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP	General Counsel and Secretary	Sheri E. Bloomberg, Esq.
Four Times Square	Wellesley House	LeBoeuf, Lamb, Greene & MacRae, L.L.P.
New York, New York 10036	90 Pitts Bay Road	125 West 55th Street
(212) 735-3000	Pembroke HM 08, Bermuda	New York, NY 10019
(212) 735-2000 (facsimile)	(441) 278-0400	(212) 424-8000; (212) 424-8500 (facsimile)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering.

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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Subject to Completion. Dated March 2, 2004.

PROSPECTUS

8,000,000 Shares

Endurance Specialty Holdings Ltd.

Ordinary Shares

The selling shareholders identified in this prospectus are offering up to 8,000,000 ordinary shares of Endurance Specialty Holdings Ltd. We will not receive any proceeds from the sale of ordinary shares by the selling shareholders.

Our ordinary shares are listed on the New York Stock Exchange (“NYSE”) under the trading symbol “ENH.” The last reported sale price of our ordinary shares on the NYSE on March 1, 2004 was $33.86 per share.

Investing in our ordinary shares involves risk. See “Risk Factors” beginning on page 8 to read about factors you should consider before buying ordinary shares.


	Per Share	Total

Public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to selling shareholders	$	$

To the extent that the underwriters sell more than 8,000,000 ordinary shares, the underwriters have the option to purchase up to an additional 1,200,000 ordinary shares from the selling shareholders at the initial offering price less the underwriting discount.

Neither the Securities and Exchange Commission, any state securities commission, the Registrar of Companies in Bermuda, the Bermuda Monetary Authority nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about , 2004.


Goldman, Sachs & Co.		Merrill Lynch & Co.

Credit Suisse First Boston

Deutsche Bank Securities

JPMorgan

Wachovia Securities

The date of this prospectus is , 2004.

The information in this prospectus is not complete and may be changed. The selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

TABLE OF CONTENTS

	Page
Prospectus Summary		1
Risk Factors		8
Cautionary Statement Regarding Forward-Looking Statements		28
Use of Proceeds		29
Price Range of Our Ordinary Shares		29
Dividend Policy		30
Selected Consolidated Financial Information		31
Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Industry Background		54
Business		56
Regulatory Matters		71
Management		82
Principal and Selling Shareholders		96
Certain Relationships and Related Transactions		101
Description of Share Capital		103
Certain Indebtedness		114
Shares Eligible for Future Sale		116
Material Tax Considerations		118
Underwriting		127
Legal Matters		130
Experts		130
Where You Can Find More Information		130
Enforceability of Civil Liabilities under United States Federal Securities Laws and Other Matters		131
Index to Consolidated Financial Statements		F-1
Glossary of Selected Insurance and Other Terms		G-1

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with information that is different from that contained in this prospectus. Neither we nor the selling shareholders are making, nor will make, an offer to sell the ordinary shares in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of time of delivery of this prospectus or of any sale of our ordinary shares.

Ordinary shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 of Bermuda which regulates the sale of securities in Bermuda. In addition, the Bermuda Monetary Authority (the “BMA”) must approve all issuances and transfers of shares of a Bermuda exempted company. We have received from the BMA their permission for the issue and free transferability of the ordinary shares in the Company being offered pursuant to this prospectus, as long as the shares are listed on the NYSE, to and among persons who are non-residents of Bermuda for exchange control purposes. In addition, we will deliver to and file a copy of this prospectus with the Registrar of Companies in Bermuda in accordance with Bermuda law. The BMA and the Registrar of Companies accept no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this prospectus.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. While we have highlighted what we believe is the most important information about the Company and this offering in this summary, you should read the entire prospectus carefully, including the “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” sections and our consolidated financial statements and the notes to those financial statements before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our” and “the Company” refer to the consolidated operations of Endurance Specialty Holdings Ltd., and its direct and indirect subsidiaries, including Endurance Specialty Insurance Ltd. (“Endurance Bermuda”), Endurance Worldwide Holdings Limited, Endurance Worldwide Insurance Limited (“Endurance U.K.”), Endurance U.S. Holdings Corp., Endurance Reinsurance Corporation of America (“Endurance U.S.”) and Endurance Services Ltd. (“Endurance Services”). “Endurance Holdings” refers solely to Endurance Specialty Holdings Ltd. In this prospectus, amounts are expressed in U.S. dollars and the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), except as otherwise indicated. We have included a glossary of insurance and other terms, commencing on page G-1. Each term defined in the glossary is printed in boldface the first time it appears in this prospectus. On December 17, 2002, we effected a share premium issuance to our existing shareholders at that time. Except as otherwise indicated, all share data in this prospectus assumes the share premium issuance to such existing shareholders of four additional shares for each common share outstanding had occurred as of the date such data is presented. As used in this prospectus, “common shares” refers to our ordinary shares and class A shares collectively. Unless otherwise indicated, all data in this prospectus assumes no exercise of either the underwriters’ over-allotment option or of any outstanding warrants or options to purchase common shares of Endurance Holdings.

The Company

Overview

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

We seek to create a portfolio of specialty lines which are profitable and have limited correlation with one another. We believe that a well constructed portfolio of diversified risks will produce less volatile results than each of the individual lines of business independently, allow for greater capital efficiency, and provide a superior risk-adjusted return on capital. We identify and underwrite attractive insurance and reinsurance business through our experienced underwriting staff and apply a centralized, quantitative framework of risk analysis across all of our business segments. We produce our business through the leading worldwide insurance and reinsurance intermediaries.

Since our inception in December 2001, we have been able to achieve significant success in the development of our business. Our accomplishments include:

•

building our business from a startup in 2001 to $1.6 billion in gross premiums and $263.4 million in net income for the year ended December 31, 2003;


	•	generating an 18.4% return on average equity for the year ended December 31, 2003;


	•	successfully launching multiple specialty business segments;


	•	building a substantial client base around the world;


	•	recruiting a highly experienced management team and building a staff of approximately 250;


	•	licensing insurance subsidiaries in Bermuda, the United Kingdom and the United States;

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•

acquiring renewal rights to the property catastrophe business of LaSalle Re Limited (“LaSalle”);


	•	acquiring renewal rights to the majority of the reinsurance business of The Hartford Fire Insurance Company and HartRe Company, L.L.C. (collectively, “HartRe”);


	•	establishing a $192 million multi-year term loan facility and a $108 million one-year revolving credit facility that was expanded to a $500 million letter of credit and revolving credit facility, and;


	•	successfully completing our initial public offering in February 2003 and obtaining a NYSE listing.

Current conditions in the global insurance and reinsurance markets continue to present an attractive opportunity for us to deploy our capital. Many global property and casualty insurers and reinsurers are currently experiencing significantly reduced capital resulting from several years of excessively competitive pricing, expanding coverage terms, significant increases in losses from asbestos liability, under-reserving, and poor investment performance. In addition, Standard & Poor’s Rating Services (“Standard & Poor’s”) and A.M. Best Company Inc. (“A.M. Best”) have lowered the financial strength ratings of a significant number of reinsurers in 2002 and 2003, further reducing available reinsurance capacity with sufficient financial security.

Our Competitive Strengths

We believe certain characteristics distinguish us from our competitors, including:

•

Extensive Specialized Underwriting and Risk Management Capabilities. We have made significant investments in our technical capabilities, including hiring 103 experienced underwriters and an actuarial, risk analysis and modeling staff of 28.


	•	Underwriting and Risk Management Discipline. We remain highly selective in our underwriting approach. All of our underwriting activity is supported by detailed, upfront pricing analyses through which we seek to limit our exposure to any single contract and any single geographic or catastrophic peril. In 2003, despite significant expansion of our business, we provided insurance quotes on 36.7% of the 8,637 submissions we received. Our quotation rate in 2002 was similar to that in 2003.


	•	Experienced Management Team. Our senior management team averages over 20 years of experience in the insurance and reinsurance industry and participates in our stock-based compensation plan that ties compensation to the achievement of goals aligned with those of our shareholders.


	•	Strong Market Relationships. The underwriting expertise and extensive industry relationships previously developed by our senior management team and underwriters have allowed us to quickly establish our presence in the global insurance and reinsurance markets. We have strong relationships with major insurance and reinsurance brokers, including: Aon Corporation (“Aon”), Marsh & McLennan Companies, Inc. (“Marsh”), Willis Group Holdings, Ltd. (“Willis”), Benfield Group plc (“Benfield”) and Towers Perrin Reinsurance (“Towers Perrin”).


	•	Bermuda-Based Operations. Bermuda is our principal base of operations, which allows us to benefit from its well-developed network of insurance and reinsurance brokers, an experienced pool of employees with significant insurance expertise and a responsive regulatory environment that allows for rapid innovation in insurance and reinsurance products.


	•	Conservative Investment Policy. We have a conservative investment policy aimed at minimizing the volatility of our investment results. At December 31, 2003, 100% of our invested assets were held in cash and cash equivalents and fixed maturity securities, 87% of which were rated AAA and 100% were rated A or better.

•

Excellent Financial Strength. The Company’s operating subsidiaries are rated “A” (Excellent) by A.M. Best and “A-” (Strong) by Standard & Poor’s. We were one of a small

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number of companies to be upgraded by A.M. Best in 2003 when we received our upgrade to “A” (“Excellent”). These ratings reflect A.M. Best and Standard & Poor’s opinions of our financial strength and are not applicable to the ordinary shares offered by this prospectus and are not recommendations to buy, sell or hold such shares.


	•	Unencumbered Capital Base. At December 31, 2003, we had total shareholders’ equity of approximately $1.6 billion. As a recently formed company, we are unencumbered by any historical losses relating to asbestos liabilities, the World Trade Center tragedy and other pre-December 2001 liability exposures currently affecting many of our competitors. By choosing to form and license new subsidiaries rather than assuming unknown liabilities through the acquisition of existing licensed “shell” companies, we have no risk that loss reserve development relating to historical exposures prior to our formation will negatively impact our future financial results.

Business Strategy

Our goal is to generate a superior long-term return on capital by leveraging our competitive strengths and successfully executing our strategy. The key elements of our strategy are:

•

Maintain a Portfolio of Profitable Specialty Lines. We believe there are significant opportunities in a number of lines of business in the current market environment. We participate in those specific specialty lines 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 intend to use our ability to participate in multiple lines of business to deploy capital and resources to the most attractive business lines at the most opportune times.


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


	•	Apply Extensive Technical Analysis to Our Underwriting. We manage our portfolio of risks through the utilization of catastrophe modeling and dynamic financial analysis techniques that provide a quantitative basis for the management of risk aggregation and correlation. We license a broad array of catastrophe modeling products. We have our own proprietary underwriting risk management system and have built a proprietary suite of individual contract, portfolio, capital allocation, and market risk management and price monitoring tools around this system.


	•	Maintain an Efficient Expense Structure. Several factors contribute to our low cost structure, including our utilization of variable cost brokerage distribution, our presence in the Bermuda market which targets large insurance and reinsurance programs for clients, our current emphasis on high severity, low frequency lines which can be underwritten by relatively small teams, and our centralized risk management structure which limits redundant expenses and systems.


	•	Proactively Manage Our Capital Base. We actively manage our capital by allocating resources to underwriting opportunities which we believe will offer the highest risk-adjusted return on capital. Over the long-term, we will seek to return excess capital to our shareholders rather than use it to underwrite business at unattractive pricing levels. We have already undertaken a number of capital management initiatives, including two acquisitions at prices which were accretive to our earnings, selective repurchases of our ordinary shares on favorable terms, and the payment of shareholder dividends.

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Risks Relating to Our Company

As part of your evaluation of the Company, you should take into account the risks we face in our business. These risks include:

•

Limited Operating History. We have a limited operating and financial history. As a result, there is limited historical financial and operating information to help you evaluate our past performance or to make a decision about an investment in our ordinary shares.


	•	Uncertainty of Establishing Loss Reserves. Establishing and maintaining an appropriate level of loss reserves is an inherently uncertain process, especially for recently formed insurers like us without an established loss history. Because of this uncertainty, it is possible that our loss reserves at any given time will prove inadequate. This could cause a material reduction in our profitability and capital.


	•	Vulnerability to Losses from Catastrophes. Our property and property catastrophe insurance and reinsurance operations expose us to claims arising from catastrophes. In the event that we experience catastrophe losses, there is a possibility that our unearned premium and loss reserves will be inadequate to cover these risks, which could have a material adverse effect on our financial condition and our results of operations.


	•	Failure of Our Loss Limitation Methods. Limitations or exclusions from coverage or choice of forum, or other loss limitation methods we employ may not be effective or may not be enforceable in the manner we intend, 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.


	•	Non-renewal of Existing Contracts. Our contracts are generally for a one-year term. In our financial forecasting process, we make assumptions about the renewal of our prior year’s contracts. If actual renewals do not meet expectations, our 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 reinsurance contracts are subject to renewal.


	•	Constraints Related to Our Holding Company Structure. As a holding company, Endurance Holdings has no substantial operations of its own. Dividends and other permitted distributions from insurance subsidiaries are expected to be Endurance Holdings’ sole source of funds to meet ongoing cash requirements. These payments are limited by the regulations in the jurisdictions in which our subsidiaries operate. The inability of these subsidiaries to pay dividends in sufficient amounts for Endurance Holdings to meet its cash requirements could have a material adverse effect on its operations.


	•	Cyclical Nature of the Insurance and Reinsurance Business. Historically, the property and casualty reinsurance business has been a cyclical industry characterized by periods of intense price competition. Although premium levels for many products have generally increased during the past two years, the supply of insurance and reinsurance capacity may increase, either by capital provided by new entrants or by the commitment of additional capital by existing insurers and reinsurers, which may cause prices to decrease.

For more information about these and other risks, see “Risk Factors” beginning on page 8. You should carefully consider these risk factors together with all the other information included in this prospectus before making an investment decision.

Our principal executive offices are located at Wellesley House, 90 Pitts Bay Road, Pembroke HM 08, Bermuda and our telephone number is (441) 278-0400.

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The Offering

Ordinary shares offered by the
selling shareholders

8,000,000 ordinary shares


Over-allotment option granted by the selling shareholders	1,200,000 ordinary shares


Common shares outstanding before and after this offering	63,915,000 ordinary shares


Use of proceeds	We will not receive any proceeds from the sale of ordinary shares by the selling shareholders.


Voting Rights	On all matters submitted to a vote of shareholders, holders of our ordinary shares are entitled to one vote per share, subject to the adjustments regarding voting set forth in “Description of Share Capital — Voting Adjustments.”

Dividend policy

We paid dividends of $0.08 per ordinary share on June 30, 2003, $0.12 per ordinary share on September 30, 2003 and $0.12 per ordinary share on December 31, 2003. On February 12, 2004, our board of directors declared a dividend of $0.18 per ordinary share to be paid on March 31, 2004 to holders of ordinary shares as of the close of business on March 17, 2004. Any future payment of dividends will be at the discretion of our board of directors and will be subject to significant restrictions which are described under “Dividend Policy,” “Regulatory Matters” and elsewhere in this prospectus.


Risk factors	See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.


NYSE symbol	ENH

As of March 1, 2004, the selling shareholders beneficially held approximately 77% of our outstanding ordinary shares and warrants exercisable for an additional 10.5% of our outstanding common shares. After giving effect to this offering, assuming no exercise of the over-allotment option, the selling shareholders would have held approximately 63% of our outstanding ordinary shares and warrants exercisable for an additional 10.5% of our outstanding common shares, as of that date. See “Principal and Selling Shareholders.”

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Summary Consolidated Financial Information

The following table sets forth our summary consolidated financial information for the periods ended and as of the dates indicated. As described in Note 1 to our consolidated financial statements included elsewhere in this prospectus, our consolidated financial statements include the accounts of Endurance Holdings, Endurance Bermuda, Endurance U.K. and Endurance U.S. Endurance Bermuda was incorporated on November 30, 2001 and commenced operations on December 17, 2001. Endurance Holdings was incorporated on June 27, 2002 and effected an exchange offer in July 2002 with the shareholders of Endurance Bermuda. The exchange offer was accounted for as a business combination of companies under common control. On December 17, 2002, we effected a share premium issuance to our existing shareholders. Except as otherwise indicated, all share data in this prospectus assumes the share premium issuance to our existing shareholders of four additional shares for each common share outstanding had occurred as of the date such data is presented.

The summary consolidated financial information presented below is derived from our consolidated financial statements included elsewhere in this prospectus. These historical results are not necessarily indicative of results to be expected from any future period. You should read this summary consolidated financial information together with our consolidated financial statements and related notes and the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

	Year Ended December 31, 2003		Year Ended December 31, 2002		Period Ended December 31, 2001

	(in thousands, except earnings per share data)
Summary Income Statement Data:

Gross premiums written and acquired (a)	$	1,601,997	$	798,760	$	376

Net premiums written and acquired (b)		1,597,844		764,918		376

Net premiums earned (includes $0.3 million and $30.7 million from related parties in 2003 and 2002, respectively)		1,173,947		369,489		1

Net investment income		71,010		42,938		838

Net realized gains on sales of investments		5,718		6,730		—
Losses and loss expenses (includes $0.2 million and $17.5 million from related parties in 2003 and 2002, respectively)		663,696		204,455		—
Acquisition expenses (includes $0.0 million and $7.0 million from related parties in 2003 and 2002, respectively)		230,549		64,013		—
General and administrative expenses		100,657		49,999		527
Net income		263,437		102,066		312

Per Share Data:
Basic earnings per share	$	4.19	$	1.74	$	0.01
Diluted earnings per share	$	4.00	$	1.73	$	0.01
Weighted average number of common shares outstanding:
Basic		62,933		58,699		39,630
Diluted		65,900		58,858		39,630

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	As of December 31, 2003		As of December 31, 2002		As of December 31, 2001

	(in thousands, except book value per share data)
Summary Balance Sheet Data:

Cash and investments	$	2,674,232	$	1,663,249	$	1,162,498

Total assets		3,458,964		2,054,594		1,165,099

Reserve for losses and loss expenses		833,158		200,840		—

Reserve for unearned premiums		824,685		403,305		375

Bank debt		103,029		192,000		—

Total shareholders’ equity		1,644,815		1,217,500		1,162,312

Per Share Data:
Book value per share (c)	$	25.68	$	22.14	$	19.37
Diluted book value per share (d)	$	24.03	$	21.73	$	19.37

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

	Year Ended December 31, 2003			Year Ended December 31, 2002

Loss ratio (e)		56.5	%		55.3	%
Acquisition expense ratio (f)		19.6	%		17.3	%
General and administrative expense ratio (g)		8.6	%		13.6	%

Combined ratio (h)		84.7	%		86.2	%

(a)

Gross premiums written and acquired for the year ended December 31, 2003 included $400.3 million of gross premiums acquired in the HartRe transaction. Gross premiums written and acquired for the year ended December 31, 2002 included $90.0 million of gross premiums acquired in the LaSalle transaction. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Years Ended December 31, 2003 and December 31, 2002 — Premiums.”

(b)

Net premiums written and acquired for the year ended December 31, 2003 included $400.3 million of gross premiums acquired in the HartRe transaction. Net premiums written and acquired for the year ended December 31, 2002 included $69.0 million of net premiums acquired in the LaSalle transaction. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Years Ended December 31, 2003 and December 31, 2002 — Premiums.”

(c)

Book value per share is based on total shareholders’ equity divided by basic common shares outstanding of 64,046,776 at December 31, 2003, 55,000,000 at December 31, 2002 and 60,000,000 at December 31, 2001. Common shares outstanding include 134,776 vested restricted share units for purposes of the December 31, 2003 book value per share calculation.

(d)

Diluted book value per share is a non-GAAP measure based on total shareholders’ equity 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 68,444,576 at December 31, 2003, 56,016,679 at December 31, 2002 and 60,000,000 at December 31, 2001. Common shares outstanding include 134,776 vested restricted share units for purposes of the December 31, 2003 book value per share calculation. 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.

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

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

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

(h)	The combined ratio is the sum of the loss ratio, the acquisition expense ratio and the general and administrative expense ratio. As a recently formed company, our historical combined ratio may not be indicative of future underwriting performance.

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RISK FACTORS

Before investing in our ordinary shares you should carefully consider the following risk factors and all other information set forth in this prospectus. These risks could materially affect our business, results of operations or financial condition and cause the trading price of our ordinary shares to decline. You could lose all or part of your investment.

Risks Relating to Our Business

Since we have a limited operating history, it is difficult to predict our future performance.

Our Bermuda insurance subsidiary, Endurance Bermuda, was formed on November 30, 2001 and began operations on December 17, 2001. Endurance Holdings was formed on June 27, 2002. Endurance U.S. was formed on September 5, 2002 and received a license to write certain lines of reinsurance business in the State of New York from the New York State Department of Insurance (the “New York Department”) on December 18, 2002. Endurance U.K. was formed on April 10, 2002 and on December 4, 2002 was authorized by the United Kingdom’s Financial Services Authority (“FSA”) to begin writing certain lines of insurance and reinsurance in the United Kingdom and European Union. As a result, there is limited historical financial and operating information available to help you evaluate our past performance or to make a decision about an investment in our ordinary shares. Companies in their initial stages of development present substantial business and financial risks and may suffer significant losses. These new companies must successfully develop business relationships, establish operating procedures, hire staff, install management information and other systems, establish facilities and obtain licenses, as well as take other steps necessary to conduct their intended business activities. As a result of these risks, it is possible that we may not be successful in implementing our business strategy or in completing the development of the infrastructure necessary to run our business. In addition, because of our limited operating history, our historical financial results may not accurately predict our future performance. As a result of industry factors or factors specific to us, we may have to alter our anticipated methods of conducting our business, such as the nature, amount and types of risks we assume.

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 insurers like us than for insurers with a longer operating history because we do not yet have an established 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 reserves recorded in our financial statements, we will be required to immediately increase reserves. This could cause a material reduction in our profitability and capital. The number and size of reported claims that we have received to date have been moderate, resulting in $162.5 million in case reserves on our balance sheet at December 31, 2003. In the future, the number of claims could increase, and their cumulative size could exceed our loss reserves.

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

Our property and property catastrophe insurance and reinsurance operations expose us to claims arising out of catastrophes. Catastrophes can be caused by various unpredictable events, including earthquakes, hurricanes, hailstorms, severe winter weather, floods, fires, tornadoes, explosions and other natural or man-made disasters. We also face substantial exposure to losses resulting from acts of war, acts of terrorism and political instability. 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 Europe, hurricanes in Florida, the Gulf Coast and the Atlantic coast regions of the United States, typhoons and earthquakes in Japan and earthquakes in California and the New Madrid region of the United States. The loss experience of property catastrophe insurers and reinsurers has generally been characterized as low frequency but high severity in nature. 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 unearned premium and loss reserves 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. Our ability to write new business also could be adversely impacted. See “Business — Underwriting and Risk Management.”

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. Although we generally exclude acts of terrorism from insurance policies and reinsurance treaties where practicable, we also provide coverage in circumstances where we believe we are adequately compensated for assuming such risk. Even in cases where we have deliberately sought to exclude coverage, we may not be able to eliminate completely our exposure to terrorist acts and thus it is possible that these acts will have a material adverse effect on us.

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

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

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

Our contracts are generally for a one-year term. In our financial forecasting process, we make assumptions about the renewal of our prior year’s contracts. If actual renewals do not meet expectations, our 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 reinsurance contracts are subject to renewal.

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

We seek to limit our loss exposure by writing many of our insurance and reinsurance contracts on an excess of loss basis, adhering to maximum limitations on policies written in defined geographical zones,

limiting program size for each client, establishing per risk and per occurrence limitations for each event and prudent underwriting guidelines for each program written. In the case of proportional treaties, we seek per occurrence limitations or loss ratio caps to limit the impact of losses from any one event. Most of our direct liability insurance policies include maximum aggregate limitations. We also seek to limit our loss exposure through geographic diversification. Geographic zone limitations involve significant underwriting judgments, including the determination of the area of the zones and whether a policy falls within particular zone limits. 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 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.

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. Although we are not aware of any planned departures, we rely substantially upon the services of Kenneth J. LeStrange, our Chief Executive Officer, President and Chairman of the board of directors, Steven W. Carlsen, Chairman of Endurance U.S. and President of Endurance Services, and James R. Kroner, our Chief Financial Officer. Each of Messrs. LeStrange, Carlsen and Kroner have employment agreements with the Company. We believe we have been successful in attracting and retaining key personnel since our inception. The loss of any of their services or the services of other members of our management team or the inability to attract and retain other talented personnel could impede the further implementation of our business strategy, which could have a material adverse effect on our business. We do not currently maintain key man life insurance policies with respect to any of our employees.

Our business could be adversely affected by Bermuda employment restrictions.

We will need to continue to hire employees to work in Bermuda. Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by th