UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

for the period ended March 31, 2017,



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

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 No.)

Waterloo House

100 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

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 ý 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 (Section 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 ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "accelerated filer", "large accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Description of Class		Common Shares Outstanding as of May 10, 2017
Ordinary Shares - $1.00 par value		30,000

INDEX




	Page

Cautionary Statement Regarding Forward-Looking Statements	2

Part I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2017 (unaudited) and December 31, 2016	4
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2017 and 2016	5
Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 2017 and 2016	6
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	7

Notes to the Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3. Quantitative and Qualitative Disclosures about Market Risk	48

Item 4. Controls and Procedures	48

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	49

Item 1A. Risk Factors	49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3. Defaults Upon Senior Securities	49

Item 4. Mine Safety Disclosures	49

Item 5. Other Information	49

Item 6. Exhibits	50

SIGNATURES	51

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Cautionary Statement Regarding Forward-Looking Statements

Some of the statements under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q 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 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. ("Endurance Holdings") or Endurance Specialty Insurance Ltd. ("Endurance Bermuda") becomes subject to income taxes in jurisdictions outside of Bermuda;


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


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


•	changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including the implementation of Solvency II by the European Commission;


•	the impact of the United Kingdom's June 2016 referendum on European Union membership and the potential withdrawal of the United Kingdom from the European Union;


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

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•	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;


•	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;


•	the inability to retain key personnel;


•	political stability of Bermuda or other countries in which we operate;


•	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 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;


•	risks relating to the acquisition of the Company by Sompo Holdings, Inc. ("Sompo"), including risks that our future financial performance may differ from projections, risks relating to integration challenges and costs, and loss of business; and


•	changes in general economic conditions and/or industry specific conditions, including inflation or deflation, 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 Endurance Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 2016, including the risk factors set forth in Item 1A. Risk Factors thereof. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

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ENDURANCE SPECIALTY HOLDINGS LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

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



	MARCH 31, 2017			DECEMBER 31, 2016
	(UNAUDITED)
ASSETS
Investments
Fixed maturity investments, trading at fair value (amortized cost: $2,382,280 and $2,727,271 at March 31, 2017 and December 31, 2016, respectively)	$	2,397,307		$	2,740,055
Fixed maturity investments, available for sale at fair value (amortized cost: $3,929,611 and $3,538,227 at March 31, 2017 and December 31, 2016, respectively)	3,967,360			3,572,766
Short-term investments, trading at fair value (amortized cost: $53,075 and $330,305 at March 31, 2017 and December 31, 2016, respectively)	52,967			330,199
Short-term investments, available for sale at fair value (amortized cost: $39,891 and $78,506 at March 31, 2017 and December 31, 2016, respectively)	39,881			78,505
Equity securities, trading at fair value (cost: $182 and $16,094 at March 31, 2017 and December 31, 2016, respectively)	202			16,056
Equity securities, available for sale at fair value (cost: $479,649 and $461,684 at March 31, 2017 and December 31, 2016, respectively)	529,938			485,085
Other investments	569,706			588,308
Total investments	7,557,361			7,810,974
Cash and cash equivalents	1,332,167			1,149,541
Premiums receivable, net	2,266,004			1,657,752
Insurance and reinsurance balances receivable	110,020			110,183
Deferred acquisition costs	331,503			276,639
Prepaid reinsurance premiums	1,087,710			711,695
Reinsurance recoverable on unpaid losses	1,277,467			1,213,129
Reinsurance recoverable on paid losses	351,423			273,789
Accrued investment income	32,104			35,853
Goodwill and intangible assets	452,445			468,374
Deferred tax asset	85,814			71,802
Net receivable on sales of investments	121,571			54,620
Other assets	377,593			288,510
Total assets	$	15,383,182		$	14,122,861
LIABILITIES
Reserve for losses and loss expenses	$	4,834,969		$	4,905,138
Reserve for unearned premiums	2,844,125			1,994,676
Reinsurance balances payable	1,027,488			784,162
Debt	705,437			705,292
Net payable on purchases of investments	241,123			181,337
Deferred tax liability	12,539			13,074
Other liabilities	521,122			397,049
Total liabilities	10,186,803			8,980,728
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Preferred shares, total liquidation preference $230,000 (2016 - $230,000)	9			9
Common shares, ordinary - 30,000 issued and outstanding (2016 - 67,627,901)	30			67,628
Additional paid-in capital	2,063,537			1,961,917
Accumulated other comprehensive loss	(22,930		)	(58,749		)
Retained earnings	2,895,618			2,911,634
Total shareholders' equity available to Endurance Holdings	4,936,264			4,882,439
Non-controlling interests	260,115			259,694
Total shareholders' equity	5,196,379			5,142,133
Total liabilities and shareholders' equity	$	15,383,182		$	14,122,861

See accompanying notes to unaudited condensed consolidated financial statements.

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ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

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



	THREE MONTHS ENDED MARCH 31,
	2017			2016
Revenues
Gross premiums written	$	1,778,861		$	1,611,677
Ceded premiums written	(759,212		)	(672,835		)
Net premiums written	1,019,649			938,842
Change in unearned premiums	(472,617		)	(385,651		)
Net premiums earned	547,032			553,191
Net investment income	52,850			11,181
Net realized and unrealized gains	4,093			13,787
Net impairment losses recognized in earnings	(430		)	(623		)
Other underwriting loss	(5,892		)	(2,444		)
Total revenues	597,653			575,092
Expenses
Net losses and loss expenses	301,313			243,328
Acquisition expenses	119,124			103,842
General and administrative expenses	73,957			72,225
Corporate expenses	70,367			11,771
Amortization of intangibles	15,934			21,374
Net foreign exchange gains	(1,157		)	(11,729		)
Interest expense	10,788			10,870
Total expenses	590,326			451,681
Income before income taxes	7,327			123,411
Income tax benefit	19,056			1,233
Net income	26,383			124,644
Net income attributable to non-controlling interests	(6,955		)	(9,063		)
Net income available to Endurance Holdings	19,428			115,581
Preferred dividends	(3,651		)	(9,203		)
Net income available to Endurance Holdings' common and participating common shareholders	$	15,777		$	106,378
Comprehensive income
Net income	$	26,383		$	124,644
Other comprehensive income
Net unrealized holding gains on investments arising during the period (net of other-than-temporary impairment losses recognized in other comprehensive income, reclassification adjustment and applicable deferred income taxes of $514 and ($6,881) for the three months ended March 31, 2017 and 2016, respectively)	30,108			57,758
Foreign currency translation adjustments	5,689			(12,318		)
Reclassification adjustment for net losses on derivative designated as cash flow hedge included in net income	22			22
Other comprehensive income	35,819			45,462
Comprehensive income	62,202			170,106
Comprehensive income attributable to non-controlling interests	(6,955		)	(9,063		)
Comprehensive income attributable to Endurance Holdings	$	55,247		$	161,043
Per share data
Dividend per common share	$	0.38		$	0.38

See accompanying notes to unaudited condensed consolidated financial statements.

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ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS' EQUITY

(In thousands of United States dollars)



	THREE MONTHS ENDED MARCH 31,
	2017			2016
Preferred shares
Balance, beginning and end of period	9			9,209
Common shares
Balance, beginning of period	67,628			66,798
Issuance of common shares, net of forfeitures	(113		)	552
Cancellation of common shares	(67,485		)	—
Balance, end of period	30			67,350
Additional paid-in capital
Balance, beginning of period	1,961,917			2,145,836
Issuance of common shares, net of forfeitures	136			1,055
Cancellation of common shares	67,485			—
Settlement of equity awards	(13,606		)	(10,735		)
Stock-based compensation expense	41,816			10,015
Reclassification due to ASU 2016-09	5,789			—
Balance, end of period	2,063,537			2,146,171
Accumulated other comprehensive loss
Cumulative foreign currency translation adjustments:
Balance, beginning of period	(118,642		)	(32,318		)
Foreign currency translation adjustments	5,689			(12,318		)
Balance, end of period	(112,953		)	(44,636		)
Unrealized holding gains on investments, net of deferred taxes:
Balance, beginning of period	61,483			(12,638		)
Net unrealized holding gains arising during the period, net of other-than-temporary impairment losses and reclassification adjustment	30,108			57,758
Balance, end of period	91,591			45,120
Accumulated derivative loss on cash flow hedging instruments:
Balance, beginning of period	(1,590		)	(1,678		)
Net change from current period hedging transactions, net of reclassification adjustment	22			22
Balance, end of period	(1,568		)	(1,656		)
Total accumulated other comprehensive loss	(22,930		)	(1,172		)
Retained earnings
Balance, beginning of period	2,911,634			2,681,053
Reclassification due to ASU 2016-09	(5,789		)	—
Net income	26,383			124,644
Net income attributable to non-controlling interests	(6,955		)	(9,063		)
Dividends on preferred shares	(3,651		)	(9,203		)
Dividends on common shares	(26,004		)	(25,632		)
Balance, end of period	2,895,618			2,761,799
Total shareholders' equity available to Endurance Holdings	4,936,264			4,983,357
Non-controlling interests	260,115			258,259
Total shareholders' equity	$	5,196,379		$	5,241,616

See accompanying notes to unaudited condensed consolidated financial statements.

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ENDURANCE SPECIALTY HOLDINGS LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of United States dollars)



	THREE MONTHS ENDED MARCH 31,
	2017			2016
Cash flows used in operating activities
Net income	$	26,383		$	124,644
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of net premium on investments	9,714			10,460
Amortization of other intangibles and depreciation	22,554			26,880
Net realized and unrealized gains	(4,093		)	(13,787		)
Net impairment losses recognized in earnings	430			623
Deferred taxes	(14,033		)	(1,842		)
Stock-based compensation expense	41,816			10,015
Equity in (earnings) losses of other investments	(13,078		)	28,257
Change in:
Premiums receivable, net	(608,252		)	(524,440		)
Insurance and reinsurance balances receivable	163			(1,445		)
Deferred acquisition costs	(54,864		)	(66,153		)
Prepaid reinsurance premiums	(376,015		)	(392,694		)
Reinsurance recoverable on unpaid losses	(64,338		)	(27,649		)
Reinsurance recoverable on paid losses	(77,634		)	(42,925		)
Accrued investment income	3,749			657
Other assets	(23,552		)	10,312
Reserve for losses and loss expenses	(70,169		)	(52,226		)
Reserve for unearned premiums	849,449			776,257
Reinsurance balances payable	243,326			194,044
Other liabilities	(34,856		)	(89,372		)
Net cash flows used in operating activities	(143,300		)	(30,384		)
Cash flows provided by investing activities
Proceeds from sales and maturities of trading investments	731,116			753,987
Proceeds from sales and maturities of available for sale investments	916,256			964,133
Proceeds from the redemption of other investments	38,873			86,713
Purchases of trading investments	(219,134		)	(780,573		)
Purchases of available for sale investments	(1,163,339		)	(852,752		)
Purchases of other investments	(7,074		)	(39,162		)
Net settlements of other assets and other liabilities	(27,203		)	860
Purchases of fixed assets	(4,284		)	(2,385		)
Net cash paid upon subsidiary acquisition	(5		)	(3		)
Net cash flows provided by investing activities	265,206			130,818
Cash flows provided by (used in) financing activities
Issuance of common shares	30			566
Net distributions to non-controlling interests	(4,778		)	(16,859		)
Settlement of equity awards	(13,606		)	(10,735		)
Received from Sompo for settlement of equity awards	101,778			—
Offering and registration costs paid	—			(258		)
Proceeds from issuance of debt	—			178
Repayments of debt	(7		)	(13,199		)
Dividends on preferred shares	(3,651		)	(9,203		)
Dividends on common shares	(25,973		)	(25,578		)
Net cash flows provided by (used in) financing activities	53,793			(75,088		)
Effect of exchange rate changes on cash and cash equivalents	6,927			9,637
Net increase in cash and cash equivalents	182,626			34,983
Cash and cash equivalents, beginning of period	1,149,541			1,177,750
Cash and cash equivalents, end of period	$	1,332,167		$	1,212,733

See accompanying notes to unaudited condensed consolidated financial statements.

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


1.	General

Endurance Specialty Holdings Ltd. ("Endurance Holdings" and together with its subsidiaries, the "Company") was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its wholly-owned operating subsidiaries.

In addition, as part of its collateralized reinsurance and third party asset management operations, Endurance Holdings and Endurance Specialty Insurance Ltd. ("Endurance Bermuda") together own 33.3% of Blue Capital Reinsurance Holdings Ltd. ("BCRH")'s common shares, and Endurance Bermuda owns 28.0% of Blue Capital Global Reinsurance Fund Limited ("BCGR")'s ordinary shares.

BCRH is a Bermuda-based exempted limited liability holding company managed by Blue Capital Management Ltd. ("BCML"), a wholly-owned subsidiary of the Company. BCRH provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through its wholly-owned Bermuda-based subsidiaries, Blue Capital Re. Ltd. ("Blue Capital Re") and Blue Capital Re ILS Ltd. ("Blue Capital Re ILS"). BCRH's shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange.

BCGR is a closed-ended mutual fund incorporated in Bermuda and managed by BCML. BCGR serves as the feeder fund for the Blue Capital Global Reinsurance SA-I cell (the "BCGR Cell"). BCGR's shares are listed on the Specialist Fund Market of the London Stock Exchange and on the Bermuda Stock Exchange.

On October 5, 2016, the Company entered into an agreement and plan of merger (the "Merger Agreement") for the acquisition of 100% of the outstanding ordinary shares of the Company by Sompo Holdings, Inc. ("Sompo") for $93.00 per share in cash (the "Merger"). The Merger was approved by each company's Board of Directors and the Company's ordinary and preferred shareholders at a special general meeting.

On March 28, 2017, Sompo completed its acquisition of the Company following receipt of all shareholder and regulatory approvals. Pursuant to the terms of the Merger Agreement, Endurance Holdings ordinary shares ceased trading on the New York Stock Exchange ("NYSE") and each Endurance Holdings issued and outstanding ordinary share was canceled and converted into the right to receive $93.00 per share. The Company's 6.35% Non-Cumulative Preferred Shares, Series C (the "Series C Preferred Shares") continue to be traded on the NYSE following the close of the transaction.

Under the terms of the Merger Agreement, the aggregate consideration for the Merger was $6,288.7 million in cash. The purchase was financed by Sompo from existing sources of liquidity and supplementary facilities. In connection with the acquisition by Sompo, the Company incurred transaction expenses of $56.2 million for the three months ended March 31, 2017, related primarily to equity compensation expenses, professional fees and investment banking fees. These expenses have been reported as a component of corporate expenses.


2.	Summary of significant accounting policies

The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The consolidated financial statements include the accounts of Endurance Holdings, its wholly-owned subsidiaries, and BCRH and the BCGR Cell. All intercompany transactions and balances have been eliminated in consolidation. Management is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates. Among other matters, significant estimates and assumptions are used to record premiums written and ceded, to record the fair value of investments and to record reserves for losses and loss expenses and contingencies. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the period that they are determined to be necessary.

The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


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

thereto for the year ended December 31, 2016 contained in Endurance Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the "2016 Form 10-K").

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

There were no material changes in the Company's significant accounting and reporting policies subsequent to the filing of the 2016 Form 10-K.

Recent accounting pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 changes how companies account for certain aspects of share-based payments to employees. Entities are required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The guidance also changes employers' accounting for an employee's use of shares to satisfy the employer's statutory income tax withholding obligation, and accounting for forfeitures. ASU 2016-09 was effective for public business entities for annual and interim periods beginning after December 15, 2016. Early adoption was permitted. The Company adopted ASU 2016-09 effective January 1, 2017. The adoption of this guidance resulted in a reduction of $5.8 million to opening retained earnings and a corresponding increase to opening additional paid-in capital. The adoption of this guidance did not have a material impact on the Company's Unaudited Condensed Consolidated Statements of Income and Comprehensive Income and Unaudited Condensed Consolidated Statements of Cash Flows.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" ("ASU 2017-04"). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements.


3.	Investments

Composition of Net Investment Income and of Invested Assets

The components of net investment income for the three months ended March 31, 2017 and 2016 are as follows:



	Three Months Ended March 31,
	2017			2016
Fixed income investments	$	41,726		$	38,400
Equity securities	1,957			3,847
Other investments	13,078			(28,257		)
Cash and cash equivalents	625			1,047
	$	57,386		$	15,037
Investment expenses	(4,536		)	(3,856		)
Net investment income	$	52,850		$	11,181

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


3.	Investments, cont'd.

Contractual maturities of the Company's fixed maturity and short-term investments are shown below as of March 31, 2017 and December 31, 2016. 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.



	March 31, 2017				December 31, 2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	298,437	$	298,369	$	617,655	$	617,462
Due after one year through five years	2,167,758		2,188,242		2,170,111		2,187,173
Due after five years through ten years	886,477		895,874		887,775		896,388
Due after ten years	59,155		61,938		55,400		58,449
Residential mortgage-backed securities	1,452,746		1,463,232		1,448,917		1,461,286
Commercial mortgage-backed securities	625,162		626,851		615,730		618,848
Collateralized loan and debt obligations	406,111		412,236		369,126		371,256
Asset-backed securities	509,011		510,773		509,595		510,663
Total	$	6,404,857	$	6,457,515	$	6,674,309	$	6,721,525

The following table summarizes the fair value of the fixed maturity investments, short-term investments and equity securities classified as trading at March 31, 2017 and December 31, 2016.



	March 31, 2017		December 31, 2016
Fixed maturity investments
U.S. government and agencies securities	$	412,572	$	551,055
U.S. state and municipal securities	2,627		6,006
Foreign government securities	110,730		110,088
Government guaranteed corporate securities	2,618		2,959
Corporate securities	958,677		1,051,200
Residential mortgage-backed securities	425,734		483,444
Commercial mortgage-backed securities	144,730		164,237
Collateralized loan and debt obligations	115,074		98,924
Asset-backed securities	224,545		272,142
Total fixed maturity investments	2,397,307		2,740,055
Short-term investments	52,967		330,199
Total fixed income investments	$	2,450,274	$	3,070,254
Equity securities
Equity investments	$	202	$	16,056
Total equity securities	$	202	$	16,056

In addition to the Company's fixed maturity, short-term and equity securities, the Company invests in other investments. At March 31, 2017 and December 31, 2016, the Company had invested, net of capital returned, a total of $445.1 million and $470.3 million, respectively, in other investments. At March 31, 2017 and December 31, 2016, the carrying value of other investments was $569.7 million and $588.3 million, respectively.

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


3.	Investments, cont'd.

The following table summarizes the composition, unfunded commitments and redemption restrictions of other investments as of March 31, 2017 and December 31, 2016:



March 31, 2017	Market Value		Unfunded Commitments		Ineligible for Redemption over next 12 months
Hedge funds	$	457,595	$	—	$	89,444
Private investment funds	81,550		86,220		81,550
Other investment funds	30,561		—		31,093
Total	$	569,706	$	86,220	$	202,087



December 31, 2016	Market Value		Unfunded Commitments		Ineligible for Redemption in 2017
Hedge funds	$	482,865	$	—	$	85,963
Private investment funds	76,451		92,214		76,451
Other investment funds	28,992		—		27,518
Total	$	588,308	$	92,214	$	189,932

Hedge funds – The redemption frequency of the hedge funds in which the Company invests range from monthly to biennially with notice periods from 30 to 180 days. Over one year, it is estimated that the Company can liquidate approximately 80.5% of its hedge fund portfolio, with the remainder over the following two years.

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

Other investment funds – Other investment funds includes funds on deposit with Lloyd's of London ("Lloyd's"), which are restricted, and the Company's investment in BCGR, which represents the net asset or liability of the Company's investment in BCGR that has not been deployed into the BCGR cell.

Net Realized and Unrealized Gains

Realized gains and losses are recognized in earnings using the first in, first out method. The analysis of gross realized gains and losses, net unrealized gains on trading securities, and the change in the fair value of investment-related derivative financial instruments for the three months ended March 31, 2017 and 2016 is as follows:



	Three Months Ended March 31,
	2017			2016
Gross realized gains on investment sales	$	8,169		$	9,856
Gross realized losses on investment sales	(7,899		)	(11,195		)
Net unrealized gains on trading securities	7,490			14,796
Change in fair value of investment-related derivative financial instruments⁽¹⁾	(3,667		)	330
Net realized and unrealized gains	$	4,093		$	13,787


(1)	For additional information on the Company's derivative financial instruments, see Note 7, Derivatives.

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


3.	Investments, cont'd.

Unrealized Gains and Losses

The Company classifies some of its investments in fixed maturity investments, short-term investments and equity securities as available for sale. The amortized cost, fair value and related gross unrealized gains and losses on the Company's securities classified as available for sale at March 31, 2017 and December 31, 2016 are as follows:



March 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed maturity investments
U.S. government and agencies securities	$	545,642	$	3,905	$	(1,616	)	$	547,931
U.S. state and municipal securities	14,568		845		(94		)	15,319
Foreign government securities	76,397		1,211		(796		)	76,812
Government guaranteed corporate securities	764		—		(1		)	763
Corporate securities	1,205,017		24,752		(6,243		)	1,223,526
Residential mortgage-backed securities	1,027,938		19,523		(9,963		)	1,037,498
Commercial mortgage-backed securities	480,197		7,686		(5,762		)	482,121
Collateralized loan and debt obligations	294,667		2,639		(144		)	297,162
Asset-backed securities	284,421		2,577		(770		)	286,228
Total fixed maturity investments	3,929,611		63,138		(25,389		)	3,967,360
Short-term investments	39,891		—		(10		)	39,881
Total fixed income investments	$	3,969,502	$	63,138	$	(25,399	)	$	4,007,241
Equity securities
Equity investments	$	479,524	$	50,559	$	(271	)	$	529,812
Preferred equity investments	125		1		—			126
Total equity securities	$	479,649	$	50,560	$	(271	)	$	529,938



December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed maturity investments
U.S. government and agencies securities	$	449,638	$	3,981	$	(2,792	)	$	450,827
U.S. state and municipal securities	11,560		945		(154		)	12,351
Foreign government securities	68,539		2,236		(1,944		)	68,831
Government guaranteed corporate securities	912		46		—			958
Corporate securities	1,078,756		26,481		(8,744		)	1,096,493
Residential mortgage-backed securities	968,273		21,032		(11,463		)	977,842
Commercial mortgage-backed securities	452,011		8,790		(6,190		)	454,611
Collateralized loan and debt obligations	271,361		1,644		(673		)	272,332
Asset-backed securities	237,177		2,242		(898		)	238,521
Total fixed maturity investments	3,538,227		67,397		(32,858		)	3,572,766
Short-term investments	78,506		1		(2		)	78,505
Total fixed income investments	$	3,616,733	$	67,398	$	(32,860	)	$	3,651,271
Equity securities
Equity investments	$	461,509	$	27,948	$	(4,545	)	$	484,912
Preferred equity investments	175		—		(2		)	173
Total equity securities	$	461,684	$	27,948	$	(4,547	)	$	485,085

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


3.	Investments, cont'd.

The following tables summarize, for all available for sale securities in an unrealized loss position at March 31, 2017 and December 31, 2016, 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
March 31, 2017	Unrealized Losses⁽¹⁾			Fair Value		Unrealized Losses⁽¹⁾			Fair Value		Unrealized Losses⁽¹⁾			Fair Value
Fixed maturity investments
U.S. government and agencies securities	$	(1,615	)	$	240,131	$	(1	)	$	248	$	(1,616	)	$	240,379
U.S. state and municipal securities	(91		)	7,702		(3		)	2,058		(94		)	9,760
Foreign government securities	(207		)	22,247		(589		)	2,780		(796		)	25,027
Government guaranteed corporate securities	(1		)	763		—			—		(1		)	763
Corporate securities	(5,269		)	344,120		(974		)	7,106		(6,243		)	351,226
Residential mortgage-backed securities	(8,720		)	522,225		(1,243		)	29,538		(9,963		)	551,763
Commercial mortgage-backed securities	(2,807		)	151,647		(2,955		)	58,708		(5,762		)	210,355
Collateralized loan and debt obligations	(97		)	63,336		(47		)	17,611		(144		)	80,947
Asset-backed securities	(596		)	106,552		(174		)	34,553		(770		)	141,105
Total fixed maturity investments	(19,403		)	1,458,723		(5,986		)	152,602		(25,389		)	1,611,325
Short-term investments	(10		)	35,230		—			—		(10		)	35,230
Total fixed income investments	$	(19,413	)	$	1,493,953	$	(5,986	)	$	152,602	$	(25,399	)	$	1,646,555
Equity securities
Equity investments	$	(56	)	$	2,473	$	(215	)	$	3,884	$	(271	)	$	6,357
Total equity securities	$	(56	)	$	2,473	$	(215	)	$	3,884	$	(271	)	$	6,357


(1)	Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive loss at March 31, 2017.

As of March 31, 2017, 1,015 available for sale securities were in an unrealized loss position aggregating $25.7 million. Of those, 184 securities with aggregated unrealized losses of $6.2 million had been in a continuous unrealized loss position for twelve months or greater.

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


3.	Investments, cont'd.



	Less than 12 months					12 months or greater					Total
December 31, 2016	Unrealized Losses⁽¹⁾			Fair Value		Unrealized Losses⁽¹⁾			Fair Value		Unrealized Losses⁽¹⁾			Fair Value
Fixed maturity investments
U.S. government and agencies securities	$	(2,791	)	$	289,012	$	(1	)	$	248	$	(2,792	)	$	289,260
U.S. state and municipal securities	(152		)	5,288		(2		)	2,143		(154		)	7,431
Foreign government securities	(446		)	15,717		(1,498		)	5,973		(1,944		)	21,690
Corporate securities	(7,512		)	448,643		(1,232		)	11,897		(8,744		)	460,540
Residential mortgage-backed securities	(10,082		)	521,167		(1,381		)	31,835		(11,463		)	553,002
Commercial mortgage-backed securities	(3,453		)	174,144		(2,737		)	76,694		(6,190		)	250,838
Collateralized loan and debt obligations	(223		)	50,194		(450		)	81,043		(673		)	131,237
Asset-backed securities	(539		)	64,109		(359		)	39,770		(898		)	103,879
Total fixed maturity investments	(25,198		)	1,568,274		(7,660		)	249,603		(32,858		)	1,817,877
Short-term investments	(2		)	4,691		—			—		(2		)	4,691
Total fixed income investments	$	(25,200	)	$	1,572,965	$	(7,660	)	$	249,603	$	(32,860	)	$	1,822,568
Equity securities
Equity investments	$	(2,855	)	$	71,509	$	(1,690	)	$	17,408	$	(4,545	)	$	88,917
Preferred equity investments	(2		)	123		—			—		(2		)	123
Total equity securities	$	(2,857	)	$	71,632	$	(1,690	)	$	17,408	$	(4,547	)	$	89,040


(1)	Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive loss at December 31, 2016.

As of December 31, 2016, 1,090 available for sale securities were in an unrealized loss position aggregating $37.4 million. Of those, 218 securities with aggregated unrealized losses of $9.4 million had been in a continuous unrealized loss position for twelve months or greater.

The decrease in gross unrealized losses on the Company's available for sale fixed income investments at March 31, 2017 compared to December 31, 2016 was primarily due to tightening credit spreads during the three months ended March 31, 2017. At March 31, 2017, the Company did not have the intent to sell any of the remaining fixed income investments in an unrealized loss position and determined that it was unlikely that the Company would be required to sell those securities in an unrealized loss position. During the three months ended March 31, 2017, the Company impaired certain fixed maturity investments and equity securities and therefore recognized in earnings total other-than-temporary impairments of $0.4 million for the three months ended March 31, 2017. As of March 31, 2017, the Company did not have the intent to sell any of the remaining equity securities in an unrealized loss position.

Other Investments

The Company is involved in the normal course of business with variable interest entities ("VIEs") as a passive investor in residential and commercial mortgage-backed securities and through its interests in various other investments that are structured as limited partnerships considered to be third party VIEs. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company determined that it was not the primary beneficiary for any of these investments as of March 31, 2017. The Company believes its exposure to loss with respect to these investments is generally limited to the investment carrying amounts reported in the Company's Condensed Consolidated Balance Sheets and any unfunded investment commitments.

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


3.	Investments, cont'd.

Collateralized Reinsurance Entities

As of March 31, 2017, Endurance Holdings and Endurance Bermuda together owned 33.3% of BCRH's common shares. BCRH is considered a VIE under U.S. GAAP due to service agreements for investment management, underwriting and insurance management and administrative services between BCRH and BCML, and the economic penalty to terminate the service agreements by BCRH. The Company has determined that it is BCRH's primary beneficiary due to its ability to direct the activities of BCRH through BCML along with its economic interest in BCRH. As a result, the Company fully consolidates the assets, liabilities and operations of BCRH and its subsidiaries within its Unaudited Condensed Consolidated Financial Statements. The interests in BCRH and its subsidiaries that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Unaudited Condensed Consolidated Financial Statements as non-controlling interests. BCRH's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determination with respect to BCRH on an ongoing basis.

As of March 31, 2017, Endurance Bermuda owned 28.0% of BCGR's ordinary shares. BCGR is considered a "voting interest entity" under U.S. GAAP and, because the Company owns less than 50% of its outstanding ordinary shares, the Company does not consolidate BCGR's assets, liabilities or operations within its Unaudited Condensed Consolidated Financial Statements. However, the BCGR Cell and Blue Water Re Ltd. ("Blue Water Re"), the Company's wholly-owned Bermuda-based special purpose insurance company, are considered VIEs under U.S. GAAP due to service agreements for investment management, underwriting and insurance management and administrative services between Blue Water Re and BCML. The Company has determined that it is the primary beneficiary of these entities due to its ability to direct the activities of Blue Water Re and the BCGR Cell along with its economic interest in these entities. Therefore, as funds held in BCGR are invested in the BCGR Cell, and ultimately into Blue Water Re, they are included in the Company's Unaudited Condensed Consolidated Financial Statements. Conversely, as funds previously invested by BCGR and the BCGR Cell into Blue Water Re are returned to BCGR, they are no longer included in the Company's Unaudited Condensed Consolidated Financial Statements. The interests in the BCGR Cell and Blue Water Re that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Unaudited Condensed Consolidated Financial Statements as non-controlling interests. BCGR's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determinations with respect to the BCGR Cell and Blue Water Re on an ongoing basis.

The following table summarizes the movements in the non-redeemable non-controlling interests balance during the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31,
	2017			2016
Non-controlling interests, beginning of period	$	259,694		$	267,810
Income attributable to third-party investments in the BCGR Cell	4,195			5,741
Income attributable to third-party investments in BCRH	2,760			3,322
Net income attributable to non-controlling interests	6,955			9,063
Net preferred share redemptions attributable to third-party investments in the BCGR Cell⁽¹⁾	(1,402		)	(9,623		)
Net investments attributable to third-parties in BCRH	92			16
Net change in third-party investments in non-controlling interests	(1,310		)	(9,607		)
Dividends declared by BCRH attributable to non-controlling interests	(5,224		)	(9,007		)
Non-controlling interests, end of period	$	260,115		$	258,259

(1) The redemption from the BCGR Cell during the three months ended March 31, 2017 and 2016 was required to fund expenses, repay debt and fund dividends by BCGR.

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


4.	Fair value measurement

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

•

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

•

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

•

Corporate fixed maturity securities – These securities are generally priced by pricing services or index providers. The pricing services or index providers typically use discounted cash flow models that incorporate benchmark curves for treasury, swap and high issuance credits. Credit spreads are developed from current market observations for like or similar securities. The Company generally classifies the fair values of its corporate securities in Level 2. The Company uses models that include unobservable inputs to price its corporate bank loan portfolio. As such, the fair values of the corporate bank loans are generally classified in Level 3.

•

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

•

Structured securities including agency and non-agency, residential and commercial mortgage-backed securities, asset-backed securities and collateralized loan and debt obligations – These securities are generally priced by broker/dealers. Broker/dealers may use current market trades for securities with similar qualities. If no such trades are available, inputs such as bid and offer, prepayment speeds, the U.S. treasury curve, swap curve and cash settlement may be used in a discounted cash flow model to determine the fair value of a security. The Company generally classifies the fair values of its structured securities in Level 2.

•

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


•	Debt – Outstanding debt consists of the Company's 7.0% Senior Notes due July 15, 2034, the 4.7% Senior Notes due October 15, 2022 (together, the "Senior Notes") and the Trust Preferred Securities. The fair values of the Senior Notes

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


4.	Fair value measurement, cont'd.

were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. The fair values of the Trust Preferred Securities were based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of the Senior Notes and the Trust Preferred Securities are classified in Level 2.

The carrying values of cash and cash equivalents, accrued investment income, other investments, net receivable on sales of investments, net payable on purchases of investments and other financial instruments not described above approximated their fair values at March 31, 2017 and December 31, 2016.

Transfers between levels are assumed to occur at the end of each period.

The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at March 31, 2017:



	Fair Value Measurements at March 31, 2017
	Total at March 31, 2017		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	$	960,503	$	23,292	$	937,211	$	—
U.S. state and municipal securities	17,946		—		17,946		—
Foreign government securities	187,542		—		187,542		—
Government guaranteed corporate securities	3,381		—		3,381		—
Corporate securities	2,182,203		—		1,994,513		187,690
Residential mortgage-backed securities	1,463,232		—		1,463,232		—
Commercial mortgage-backed securities	626,851		—		626,851		—
Collateralized loan and debt obligations	412,236		—		412,236		—
Asset-backed securities	510,773		—		510,773		—
Total fixed maturity investments	6,364,667		23,292		6,153,685		187,690
Equity securities
Equity investments	530,014		190,659		339,355		—
Preferred equity investments	126		—		126		—
Total equity securities	530,140		190,659		339,481		—
Short-term investments	92,848		—		92,848		—
Other assets (see Note 7)	235,276		1,945		190,571		42,760
Total assets	$	7,222,931	$	215,896	$	6,776,585	$	230,450
Liabilities
Other liabilities (see Note 7)	$	136,617	$	334	$	98,406	$	37,877
Debt	810,494		—		810,494		—
Total liabilities	$	947,111	$	334	$	908,900	$	37,877

During the three months ended March 31, 2017, no securities were transferred into or out of Level 3. No securities were transferred between Level 3 and Level 2 during the period.

During the three months ended March 31, 2016, $3.6 million of primarily of corporate securities were transferred into Level 3 as no observable inputs were available. $5.0 million of primarily corporate securities were transferred out of Level 3 into Level 2 during the period.

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ENDURANCE SPECIALTY HOLDINGS LTD.

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


4.	Fair value measurement, cont'd.



	Fair Value Measurements at December 31, 2016
	Total at December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Fixed maturity investments
U.S. government and agencies securities	$	1,001,882	$	51,827	$	950,055	$	—
U.S. state and municipal securities	18,357		—		18,357		—
Foreign government securities	178,919		—		178,919		—
Government guaranteed corporate securities	3,917		—		3,917		—
Corporate securities	2,147,693		—		1,968,056		179,637
Residential mortgage-backed securities	1,461,286		—		1,461,286		—
Commercial mortgage-backed securities	618,848		—		618,848		—
Collateralized loan and debt obligations	371,256		—		371,256		—
Asset-backed securities	510,663		—		510,663		—
Total fixed maturity investments	6,312,821		51,827		6,081,357		179,637
Equity securities
Equity investments	500,968		184,251		316,717		—
Preferred equity investments	173		—		173		—
Total equity securities	501,141		184,251		316,890		—
Short-term investments	408,704		—		408,654		50
Other assets (see Note 7)	166,716		1,953		123,681		41,082
Total assets	$	7,389,382	$	238,031	$	6,930,582	$	220,769
Liabilities
Other liabilities (see Note 7)	$	84,069	$	2,772	$	55,051	$	26,246
Debt	770,704		—		770,704		—
Total liabilities	$	854,773	$	2,772	$	825,755	$	26,246

Level 3 assets represented 3.2% and 3.0% of the Company's total fair valued assets at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017 and December 31, 2016, Level 3 securities were primarily comprised of corporate securities and weather derivatives. There were no material changes in the Company's valuation techniques for the three months ended March 31, 2017.

Other assets and other liabilities measured at fair value at March 31, 2017 included Level 3 assets of $42.8 million (December 31, 2016 - $41.1 million) and liabilities of $37.9 million (December 31, 2016 - $26.2 million) related to proprietary, non-exchange traded derivative-based risk management products used in the Company's weather risk management business, and hedging and trading activities related to these risks. In instances where market prices are not available, the Company may use industry or internally developed valuation techniques such as historical analysis and simulation modeling to determine fair value and are considered Level 3.

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

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

temperature, rainfall, windspeed, wave height, snow fall, cyclone category;

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(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


4.	Fair value measurement, cont'd.

•Unobservable inputs: correlation, composite weather variable; and

•Both observable and unobservable: forward commodity price.

The Company's weather curves are determined by taking the average payouts for each transaction within its portfolio utilizing detrended historical weather measurements. The Company's commodity curves are determined using historical market data scaled to currently observed market prices. The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the below table on quantitative information. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data.

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

Below is a summary of quantitative information regarding the significant inputs used in determining the fair value of the net weather and energy related derivative assets classified in Level 3 that are measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016:

March 31, 2017

Fair Value

(Level 3)

Valuation

Techniques

Inputs

Range

Low

High

(Commodity curve in U.S. dollars in thousands)

Net weather and energy related derivative assets

4,883

Historical

Analysis and Simulation

Correlation

Temperature

-15F

115F

Composite weather variable

-25 deg.

45 deg.

Rainfall

Windspeed

0.01 m/s

25 m/s

Wave height

0 m

25 m

Commodity curve

)

December 31, 2016

Fair Value

(Level 3)

Valuation

Techniques

Inputs

Range

Low

High

(Commodity curve in U.S. dollars in thousands)

Net weather and energy related derivative assets

14,836

Historical

Analysis and Simulation

Correlation

Temperature

-15F

115F

Composite weather variable

-25 deg.

45 deg.

Rainfall

Windspeed

0.01 m/s

25 m/s

Wave height

0 m

25 m

Commodity curve

)

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


4.	Fair value measurement, cont'd.

The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31, 2017
	Fixed maturity investments			Other assets			Total assets			Other liabilities
Level 3, beginning of period	$	179,687		$	41,082		$	220,769		$	(26,246	)
Total realized and unrealized gains and losses included in earnings	(95		)	—			(95		)	—
Total income and losses included in other underwriting loss	—			1,237			1,237			(5,335		)
Change in unrealized gains and losses included in other comprehensive income	—			—			—			—
Purchases	27,068			—			27,068			—
Issues	—			4,687			4,687			(6,518		)
Sales	(18,970		)	—			(18,970		)	—
Settlements	—			(4,246		)	(4,246		)	222
Transfers into Level 3	—			—			—			—
Transfers out of Level 3	—			—			—			—
Level 3, end of period	$	187,690		$	42,760		$	230,450		$	(37,877	)

	Three Months Ended March 31, 2016
	Fixed maturity investments			Other assets			Total assets			Other liabilities
Level 3, beginning of period	$	112,453		$	41,503		$	153,956		$	(42,029	)
Total realized and unrealized gains and losses included in earnings	(864		)	—			(864		)	—
Total income and losses included in other underwriting loss	—			(144		)	(144		)	(533		)
Change in unrealized gains and losses included in other comprehensive income	415			—			415			—
Purchases	671			—			671			—
Issues	—			2,692			2,692			(4,093		)
Sales	(2,469		)	—			(2,469		)	—
Settlements	—			(14,080		)	(14,080		)	16,236
Transfers into Level 3	3,629			—			3,629			—
Transfers out of Level 3	(5,034		)	—			(5,034		)	—
Level 3, end of period	$	108,801		$	29,971		$	138,772		$	(30,419	)

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)

5. Reserve for losses and loss expenses

Activity in the reserve for losses and loss expenses for the three months ended March 31, 2017 and 2016 is summarized as follows:



	Three Months Ended March 31,
	2017			2016
Gross reserve for losses and loss expenses, beginning of period	$	4,905,138		$	4,510,415
Reinsurance recoverable on unpaid losses	1,213,129			907,944
Net reserve for losses and loss expenses, beginning of period	3,692,009			3,602,471

Incurred related to:
Current year	335,119			304,437
Prior years	(33,806		)	(61,109		)
Total incurred	301,313			243,328
Paid related to:
Current year	(12,386		)	(7,051		)
Prior years	(439,208		)	(333,227		)
Total paid	(451,594		)	(340,278		)

Foreign currency translation and other	15,774			17,075

Net reserve for losses and loss expenses, end of period	3,557,502			3,522,596
Reinsurance recoverable on unpaid losses	1,277,467			935,593
Gross reserve for losses and loss expenses, end of period	$	4,834,969		$	4,458,189

During the three months ended March 31, 2017, the Company's estimated ultimate losses for prior accident years were reduced by $33.8 million (2016 - $61.1 million) due to lower claims emergence than originally estimated by the Company. During the three months ended March 31, 2017, the Company experienced favorable reserve development of $22.7 million across all lines of business in the Reinsurance segment and $11.1 million of favorable development across all lines of business in the Insurance segment. During the three months ended March 31, 2016, the Company experienced favorable development of $37.9 million across all lines of business in the Reinsurance segment and $23.2 million of favorable development across all lines of business in the Insurance segment.

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 reported to date is not necessarily indicative of expected future results.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


6.	Accumulated other comprehensive loss

The following tables present the changes in accumulated other comprehensive loss balances by component for the three months ended March 31, 2017 and 2016:



	For the Three Months Ended March 31, 2017
	Losses on cash flow hedges			Unrealized gains on available for sale securities		Foreign currency translation adjustments			Total
Beginning balance	$	(1,590	)	$	61,483	$	(118,642	)	$	(58,749	)
Other comprehensive income before reclassifications	—			28,897		5,689			34,586
Amounts reclassified from accumulated other comprehensive loss⁽¹⁾	22			1,211		—			1,233
Net current period other comprehensive income	22			30,108		5,689			35,819
Ending balance	$	(1,568	)	$	91,591	$	(112,953	)	$	(22,930	)

(1)All amounts are net of tax.



	For the Three Months Ended March 31, 2016
	Losses on cash flow hedges			Unrealized gains on available for sale securities			Foreign currency translation adjustments			Total
Beginning balance	$	(1,678	)	(12,638		)	$	(32,318	)	$	(46,634	)
Other comprehensive income before reclassifications	—			55,494			(12,318		)	43,176
Amounts reclassified from accumulated other comprehensive loss⁽¹⁾	22			2,264			—			2,286
Net current period other comprehensive income	22			57,758			(12,318		)	45,462
Ending balance	$	(1,656	)	$	45,120		$	(44,636	)	$	(1,172	)

(1)All amounts are net of tax.

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(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


6.	Accumulated other comprehensive loss, cont'd.

The following tables present the significant items reclassified out of accumulated other comprehensive loss during the three months ended March 31, 2017 and 2016:



Three Months Ended March 31, 2017
Details about accumulated other comprehensive loss components	Amount reclassified from accumulated other comprehensive loss			Affected line item in the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
Losses on cash flow hedges - Debt	$	22		Interest expense
	22			Total before income taxes
	—			Income tax expense
	$	22		Total net of income taxes

Unrealized losses on available for sale securities	$	680		Net realized losses on available for sale securities
	430			Net impairment losses recognized in earnings
	1,110			Total before income taxes
	101			Income tax expense
	$	1,211		Total net of income taxes

Three Months Ended March 31, 2016
Details about accumulated other comprehensive loss components	Amount reclassified from accumulated other comprehensive loss			Affected line item in the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
Losses on cash flow hedges - Debt	$	22		Interest expense
	22			Total before income taxes
	—			Income tax expense
	$	22		Total net of income taxes

Unrealized losses on available for sale securities	$	1,877		Net realized losses on available for sale securities
	623			Net impairment losses recognized in earnings
	2,500			Total before income taxes
	(236		)	Income tax benefit
	$	2,264		Total net of income taxes


7.	Derivatives

The Company regularly transacts in certain derivative-based weather risk management products primarily to address weather and energy risks on behalf of third parties. The markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Generally, the Company's current portfolio of such derivative contracts is of short duration and such contracts are predominantly seasonal in nature. The Company also invests a portion of its investments with third party investment managers with investment guidelines that permit the use of derivative instruments. The Company may enter derivative transactions directly or as part of strategies employed by its external investment managers.

The Company's derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value and gains and losses recognized in net realized and unrealized gains, net foreign exchange gains and other underwriting loss in the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income.

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


7.	Derivatives, cont'd.

The Company's derivatives are not designated as hedges under current accounting guidance.

The Company's objectives for holding these derivatives are as follows:

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

Industry Loss Warranty ("ILW") Swaps - to manage underwriting risk. The Company has entered into ILW swap contracts which provide reinsurance-like protection to the Company for specific loss events associated with certain lines of its business. The Company has also sold ILW protection, which provides reinsurance-like protection to third parties for specific loss events.

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

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

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

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

LIBOR Swap – to establish future net cash flows in connection with the Trust Preferred Securities for the five-year period beginning March 30, 2012 as if these securities bore interest at a fixed rate of 4.905%.

Loss Development Cover – as part of the sale of Montpelier U.S. Insurance Company ("MUSIC") to Selective Insurance Group, Inc. ("Selective"), Montpelier Reinsurance Ltd. ("Montpelier Re", now Endurance Bermuda) entered into a loss development cover with MUSIC which ensures that MUSIC's reserve for losses and loss expenses relating to retained business written on or prior to December 31, 2011 remains adequate. Under the loss development cover, any future adverse development associated with such retained reserves will be protected by Endurance Bermuda and any future favorable development associated with such retained reserves will benefit Endurance Bermuda.

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ENDURANCE SPECIALTY HOLDINGS LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


7.	Derivatives, cont'd.

The fair values and the related notional values of derivatives at March 31, 2017 and December 31, 2016 are shown below.



	March 31, 2017				December 31, 2016
	Fair Value		Notional Principal Amount		Fair Value		Notional Principal Amount
Derivatives recorded in other assets
Foreign exchange forward contracts	$	357	$	29,396	$	629	$	34,630
Credit default swaps	197		3,150		266		5,450
Interest rate swaps	426		8,200		374		7,000
Interest rate futures	47		4,008		—		—
ILWs	14		10,000		1,010		20,000
TBAs	189,530		185,000		121,402		120,300
Energy and weather contracts	44,705		75,060		43,035		101,436
Total recorded in other assets	$	235,276			$	166,716
Derivatives recorded in other liabilities
Foreign exchange forward contracts	$	246	$	31,728	$	1,204	$	32,080
Credit default swaps	221		2,756		21		2,744
Interest rate swaps	59		1,100		59		1,100
Interest rate swaptions	—		—		34		5,400
Interest rate futures	2,969		28,476		—		—
ILWs	—		—		184		14,209
LIBOR swap	—		100,000		27		100,000
TBAs	92,272		90,300		50,704		50,400
Loss development cover	2,639		24,451		2,818		24,451
Energy and weather contracts	38,211		121,419		29,018		162,900
Total recorded in other liabilities	$	136,617			$	84,069
Net derivative asset	$	98,659			$	82,647

At March 31, 2017, the Company's derivative assets of $235.2 million (December 31, 2016 - $166.7 million) and liabilities of $133.6 million (December 31, 2016 - $84.1 million) are subject to master netting agreements, which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. Interest rate futures are not subject to master netting agreements. At March 31, 2017 and December 31, 2016, the Company's derivative instruments were recorded on a gross basis in the Condensed Consolidated Balance Sheets.

At March 31, 2017, the Company held $5.2 million (December 31, 2016 - nil) of reverse repurchase agreements. These agreements were fully collateralized, were generally outstanding for a short period of time and were presented as part of cash and cash equivalents in the Condensed Consolidated Balance Sheets. The required collateral for these agreements was either cash or U.S. treasury securities at a minimum rate of 102% of the principal amount. Upon maturity, the Company received the principal and interest income.

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


7.	Derivatives, cont'd.

The gains and losses on the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for derivatives for the three months ended March 31, 2017 and 2016 were as follows:



	Three Months Ended March 31,
	2017			2016
Total losses included in net foreign exchange gains from foreign exchange forward contracts	$	(300	)	$	(538	)

Interest rate futures	(2,961		)	(282		)
Credit default swaps	88			30
Interest rate swaps	47			(51		)
Interest rate swaptions	—			(13		)
ILWs	(812		)	304
LIBOR swap	26			(144		)
TBAs	(55		)	486
Total (losses) gains included in net realized and unrealized gains	(3,667		)	330

Energy and weather contracts	(4,790		)	(715		)
Loss development cover	(14		)	(867		)
Total losses included in other underwriting loss	(4,804		)	(1,582		)

Total losses from derivatives	$	(8,771	)	$	(1,790	)


8.	Stock-based employee compensation and other stock plans

The Company had a stock-based employee compensation plan, which provided the Company with the ability to grant options to purchase the Company's ordinary shares, share appreciation rights, restricted shares, restricted share units, share bonuses and other equity incentive awards to key employees. The Company recognizes forfeitures of awards as they occur. In accordance with the Company's stock-based employee compensation plan and the Merger Agreement, all of the Company's share-based awards fully vested and were acquired by Sompo upon the acquisition of the Company on March 28, 2017. These awards were settled in cash to employees in April 2017.

A summary of option activity, including options held by employees, during the quarter ended March 31, 2017 is presented below:



	For the Three Months Ended March 31, 2017
Options Outstanding	Number of Options		Weighted Average Exercise Price
Beginning of period	160,000		$	48.20
Granted	—		—
Settled on close of acquisition of the Company by Sompo	(160,000	)	48.20
Forfeited	—		—
Outstanding, end of period	—		$	—

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


8.	Stock-based employee compensation and other stock plans, cont'd.

No options were granted or expired during the quarters ended March 31, 2017 and 2016. 160,000 options vested and were settled during the quarter ended March 31, 2017 (2016 - nil). For the quarter ended March 31, 2017, compensation costs recognized in earnings for all options totaled $0.4 million (2016 - $0.3 million), of which $0.3 million was related to the vesting of options upon the acquisition of the Company by Sompo. At March 31, 2017, there were no (2016 - $0.7 million) compensation costs not yet recognized related to unvested stock options.

A summary of the restricted share and restricted share unit activity during the quarter ended March 31, 2017 is presented below:



	Number of Shares/Units
Unvested, beginning of period	1,466,716
Granted	—
Settled prior to acquisition of the Company by Sompo	(430,129	)
Vested on close of acquisition of the Company by Sompo	(1,033,476	)
Forfeited	(3,111	)
Unvested, end of period	—

During the quarter ended March 31, 2017, the Company granted no (2016 – 560,172) restricted shares and restricted share units. The restricted shares and restricted share units granted during the quarter ended March 31, 2016 had weighted average grant date fair values of $33.3 million. During the quarter ended March 31, 2017, the aggregate fair value of restricted shares and restricted share units that vested was $120.9 million (2016 - $33.0 million). For the quarter ended March 31, 2017, compensation costs recognized in earnings for all restricted shares and restricted share units were $41.4 million (2016 - $9.7 million), of which $34.1 million was related to the vesting of restricted shares and restricted share units upon the acquisition of the Company by Sompo. At March 31, 2017, there were no (2016 - $46.3 million) compensation costs not yet recognized related to unvested restricted shares and restricted share units.

Employee Share Purchase Plan

The Company also had an Employee Share Purchase Plan ("ESPP") under which employees of Endurance Holdings and certain of its subsidiaries were able to purchase the Company's ordinary shares. As a result of signing the Merger Agreement with Sompo, the ESPP was suspended as of January 1, 2017 and was terminated upon the closing of the acquisition by Sompo on March 28, 2017. For the three months ended March 31, 2017, total expenses related to the Company's ESPP were nil (2016 - $0.1 million).


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, which are comprised of the following lines of business:

Insurance segment lines of business

•Agriculture

•Casualty and other specialty

•Professional lines

•Property, marine/energy and aviation

Reinsurance segment lines of business

•Catastrophe

•Property

•Casualty

•Professional lines

•Specialty

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FINANCIAL STATEMENTS - CONTINUED

(Amounts in tables expressed in thousands of United States dollars, except

for ratios, share and per share amounts)


9.	Segment reporting, cont'd.

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

The following table provides a summary of segment revenues and results for the three months ended March 31, 2017 and the reserve for losses and loss expenses as of March 31, 2017:



	Three Months Ended March 31, 2017
	Insurance			Reinsurance			Total
Revenues
Gross premiums written	$	989,897		$	788,964		$	1,778,861
Ceded premiums written	(543,132		)	(216,080		)	(759,212		)
Net premiums written	446,765			572,884			1,019,649
Net premiums earned	224,650			322,382			547,032
Other underwriting loss	—			(5,892		)	(5,892		)
	224,650			316,490			541,140
Expenses
Net losses and loss expenses	149,218			152,095			301,313
Acquisition expenses	41,119			78,005			119,124
General and administrative expenses	48,114			25,843			73,957
	238,451			255,943			494,394
Underwriting (loss) income	$	(13,801	)	$	60,547		46,746

Net investment income							52,850
Corporate expenses							(70,367		)
Net foreign exchange gains							1,157
Net realized and unrealized gains							4,093
Net impairment losses recognized in earnings							(430		)
Amortization of intangibles							(15,934		)
Interest expense							(10,788		)
Income before income taxes							$	7,327

Net loss ratio	66.4		%	47.2		%	55.0		%
Acquisition expense ratio	18.3		%	24.2		%	21.8		%
General and administrative expense ratio	21.4

ENDURANCE SPECIALTY HOLDINGS LTD 10-Q