MANAGEMENT’S DISCUSSION AND ANALYSIS OF

Edgar Online, Inc.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  The following is a discussion and analysis of the financial condition and results of operations for the three months ended March 31, 2013 of Endurance Specialty Holdings Ltd. ("Endurance Holdings") and its wholly-owned subsidiaries (collectively, the "Company"). This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q (this "Form 10-Q") as well as the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2012, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in Endurance Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the "2012 Form 10-K").  Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to the Company's plans and strategy for its business, includes forward-looking statements that involve risk and uncertainties. Please see the section "Cautionary Statement Regarding Forward-Looking Statements" below for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the "Risk Factors" set forth in the 2012 Form 10-K and this Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.  

Overview

Endurance Holdings was organized as a Bermuda holding company on June 27, 2002 and has seven wholly-owned operating subsidiaries:

• Endurance Specialty Insurance Ltd. ("Endurance Bermuda"), domiciled in

Bermuda with branch offices in Switzerland and Singapore;          •   Endurance Reinsurance Corporation of America ("Endurance U.S.          Reinsurance"), domiciled in Delaware;    

• Endurance Worldwide Insurance Limited ("Endurance U.K."), domiciled in

England;    

• Endurance American Insurance Company ("Endurance American"), domiciled in

Delaware;          •   Endurance American Specialty Insurance Company ("Endurance American

         Specialty"), domiciled in Delaware;    

• Endurance Risk Solutions Assurance Co. ("Endurance Risk Solutions"),

         domiciled in Delaware; and    

• American Agri-Business Insurance Company ("American Agri-Business"),

domiciled in Texas and managed by ARMtech Insurance Services, Inc.

(together with American Agri-Business, "ARMtech").

   The Company writes specialty lines of property and casualty insurance and reinsurance on a global basis and seeks to create a portfolio of specialty lines of business that are profitable and have limited correlation with one another. The Company's portfolio of specialty lines of business is organized into two business segments, Insurance and Reinsurance.                                           31

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

Application of Critical Accounting Estimates

  The Company's condensed consolidated financial statements are based on the selection of accounting policies and application of significant accounting estimates which require management to make significant estimates and assumptions. The Company believes that some of the more critical judgments in the areas of accounting estimates and assumptions that affect its financial condition and results of operations are related to the recognition of premiums written and ceded, reserves for losses and loss expenses, other-than-temporary impairments within the investment portfolio and fair value measurements of certain portions of the investment portfolio. For a detailed discussion of the Company's critical accounting estimates, please refer to the 2012 Form 10-K and the Notes to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q. There were no material changes in the application of the Company's critical accounting estimates subsequent to that report. Management has discussed the application of these critical accounting estimates with the Company's Board of Directors and the Audit Committee of the Board of Directors.                                           32 

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Consolidated Results of Operations - For the Three Months Ended March 31, 2013 and 2012

  Results of operations for the three months ended March 31, 2013 and 2012 were as follows:                                                         Three Months Ended March 31,                                                       2013                    2012            Change(1)                                                      (U.S. dollars in thousands, except for ratios) Revenues Gross premiums written                          $       1,177,362$ 1,061,649             10.9  % Ceded premiums written                                   (268,447 )           (218,593 )           22.8  %  Net premiums written                                      908,915              843,056              7.8  %  Net premiums earned                                       420,117              411,635              2.1  % Net investment income                                      49,305               57,075             (13.6 ) % Net realized and unrealized investment gains                6,235                5,203             19.8  % Net impairment losses recognized in earnings                 (806 )               (219 )          268.0  % Other underwriting income (loss)                              749                 (335 )              NM (2)  Total revenues                                            475,600              473,359              0.5  %  Expenses Net losses and loss expenses                              218,970              262,767             (16.7 ) % Acquisition expenses                                       71,636               68,489              4.6  % General and administrative expenses                        66,478               66,041              0.7  % Amortization of intangibles                                 2,101                2,777             (24.3 ) % Net foreign exchange losses (gains)                         2,927              (18,137 )              NM (2) Interest expense                                            9,038                9,047              (0.1 ) % Income tax expense (benefit)                                4,151                 (167 )              NM (2)  Net income                                      $         100,299          $    82,542             21.5  %  Net loss ratio                                              52.1  %              63.9  %           (11.8 ) Acquisition expense ratio                                   17.1  %              16.6  %             0.5 General and administrative expense ratio                    15.8  %              16.0  %            (0.2 )  Combined ratio                                              85.0  %              96.5  %           (11.5 )     

(1) With respect to ratios, changes show increase or decrease in percentage

    points.   (2)  Not meaningful.   Premiums  Gross premiums written in the three months ended March 31, 2013 were $1,177.4 million, an increase of $115.7 million, or 10.9%, compared to the same period in 2012. Net premiums written in the three months ended March 31, 2013 were $908.9 million, an increase of $65.9 million, or 7.8%. The change in net premiums written was driven by the following factors:    

• An increase of $41.7 million in the property line of the Reinsurance

         segment, driven by growth in new business in the Company's London, Zurich          and Singapore offices, as well as modest rate increases on renewed          business;    

• Within the casualty line of the Reinsurance segment, net written premiums

increased $29.8 million as a result of new business written on

international motor and US casualty treaties, together with the shifting

         of a significant professional liability renewal from an April 1st          inception date to January 1st;          •   The other specialty line of the Reinsurance segment expanded its net

written premiums by $19.8 million primarily due to new business generated

by the trade credit and surety team that joined the Company in late 2012,

partially offset by an absence of positive premium adjustments compared to

          2012 and clients reducing their purchase of reinsurance upon renewal of          certain treaties;                                            33 

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• In the agriculture line of the Insurance segment, net premiums decreased

modestly as a result of increased cessions of premiums to the U.S.

Government and third parties partially offset by increased gross premiums

          written resulting from growth in policy counts; and          •   In the Insurance segment, professional lines premiums decreased in 2013

due primarily to the non-renewal of a large program relationship in late

2012.

   The increase in ceded premiums written by the Company in the quarter ended March 31, 2013 as compared to the same period in 2012 was primarily driven by agriculture line of the Insurance segment as the Company has chosen to cede more premiums to the U.S. government and third parties as dry conditions have persisted in certain areas of the United States, which had the potential to adversely impact the results of our agriculture insurance business.  

Net premiums earned for the three months ended March 31, 2013 were $420.1 million, an increase of $8.5 million, or 2.1%, from the first quarter of 2012. The increase in net premiums earned resulted from the growth in premiums primarily in the property reinsurance line of business.

Net Investment Income

  The Company's net investment income of $49.3 million decreased by 13.6% or $7.8 million for the quarter ended March 31, 2013 as compared to the same period in 2012. Investment income generated from the Company's cash and cash equivalents and available for sale investments, which consist of fixed maturity investments, short-term investments and equity securities, declined by $7.5 million for the three months ended March 31, 2013 compared to the same period in 2012. This decline resulted primarily from lower reinvestment rates over the past 12 months. Net investment income during the first quarter of 2013 included net mark to market gains of $23.1 million on other investments, comprised of alternative funds and specialty funds, as compared to mark to market gains of $23.1 million in the first quarter of 2012. Investment expenses, including investment management fees, for the three months ended March 31, 2013 were $3.7 million compared to $3.4 million for the same period in 2012.  

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

                                                    Three Months Ended March 31,                                                     2013                2012

     Annualized net earned yield(1)                      3.13  %          

3.76 %

     Total return on investment portfolio(2)             0.60  %          

1.38  %      Market yield(3)                                     1.50  %           1.69  %      Portfolio duration(4)                          2.78 years        2.64 years    

(1) The actual net earned income from the investment portfolio after adjusting

for expenses and accretion of discount and amortization of premium from the

purchase price divided by the average book value of assets.

(2) Includes realized and unrealized gains and losses.

(3) The internal rate of return of the investment portfolio based on the given

market price or the single discount rate that equates a security price

(inclusive of accrued interest) for the portfolio with its projected cash

flows. Excludes other investments and operating cash.

(4) Includes only cash and cash equivalents and fixed income investments managed

by the Company's investment managers.

   During the first quarter of 2013, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 10 basis point range, with a high of 0.44% and a low of 0.34%. Trading activity in the Company's portfolio during the first quarter included reductions in residential mortgage-backed securities, U.S. government and government agencies securities and short-term investments, and increased allocations to foreign government bonds, corporate securities, commercial mortgage-backed securities, asset-backed securities and equity securities. The duration of the fixed income investments increased to 2.78 years at March 31, 2013 from 2.49 years at December 31, 2012.                                           34

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Net Realized and Unrealized Investment Gains

  The Company's investment portfolio is actively managed on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing and recognition of net realized investment gains and losses as the portfolio is adjusted and rebalanced. Proceeds from sales of investments classified as available for sale during the three months ended March 31, 2013 were $458.1 million compared to $833.3 million during the same period a year ago. Net realized investment gains increased during the three months ended March 31, 2013 compared to the same period in 2012. Realized investment gains and losses and the change in the fair value of derivative financial instruments for the three months ended March 31, 2013 and 2012 were as follows:                                                               Three Months Ended March 31,                                                           2013                     2012                                                            (U.S. dollars in thousands) Gross realized gains on investment sales              $       7,420$       7,248 Gross realized losses on investment sales                    (1,463 )                 (2,347 ) Change in fair value of derivative financial instruments                                                     278                      302  

Net realized and unrealized investment gains $ 6,235

$ 5,203

Net impairment losses recognized in earnings for the three months ended March 31, 2013 and 2012 were $0.8 million and $0.2 million, respectively.

Net Foreign Exchange Gains and Losses

  For the three months ended March 31, 2013, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in a net foreign exchange loss of $2.9 million compared to a net foreign exchange gain of $18.1 million for the same period of 2012. This loss resulted from offsetting exposures across the Company as the U.S. dollar strengthened against the major currencies in the period. In the prior year, the net foreign exchange gain resulted from a decrease in the value of Japanese Yen denominated net liabilities as the U.S. dollar and British Sterling strengthened against the Yen, and an increase in the value of net asset positions in other key currencies as the U.S. dollar generally weakened during the period. In addition, foreign exchange gains were recognized in income for the three months ended March 31, 2012 as revaluations on investments recorded in other comprehensive income were realized.  Net Losses and Loss Expenses  The Company's reported net losses and loss expenses are characterized by various factors and are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. The following table details the impact of the catastrophe related activity for the three months ended March 31, 2013 and 2012.        Three months ended March 31, 2013           Three months ended March 31, 2012          Event               Net Loss                  Event                Net Loss                               (U.S. dollars in millions)   None                     $          -      Windstorms in Kentucky        $     22.5    For the three months ended March 31, 2013, the Company incurred lower levels of catastrophe losses compared to the same period in 2012 due to the absence of any major events in the period. For the three months ended March 31, 2012, the Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals of $22.5 million related to windstorms in Kentucky, which added 5.8 percentage points to the Company's net loss ratio.  Favorable prior year loss reserve development was $50.7 million for the first quarter of 2013 compared to $16.9 million during the same period in 2012. In the first quarter of 2013, prior year loss reserves emerged favorably across the agriculture, property and other specialty lines of the Insurance segment and all lines of business within the Reinsurance segment. Favorable reserve development in the first quarter of 2013 was higher than the first quarter of 2012 principally in the Reinsurance segment as the property line developed favorably compared to the first quarter of 2012 when notable adverse development was recorded on some of the major 2011 loss events. In addition, the Reinsurance segment casualty line has experienced higher favorable development in 2013 following lower than expected reported claims.                                           35

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  The Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are the only valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company's consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Reserve adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss reserves were established by the Company's actuaries and reflect management's best estimate of ultimate losses. See "Reserve for Losses and Loss Expenses" below for further discussion.  Acquisition Expenses  The acquisition expense ratio for the three months ended March 31, 2013 increased by 0.5 percentage points compared to the acquisition expense ratio for the same period in 2012 due to a higher proportion of net earned premiums in 2013 being attributed to the Reinsurance segment which carries a higher acquisition expense ratio.  

General and Administrative Expenses

  The Company's general and administrative expense ratio for the first quarter of 2013 was consistent with the same period in 2012. At March 31, 2013, the Company had a total of 899 employees compared to 840 employees at March 31, 2012.  

Income Tax (Expense) Benefit

The Company recorded a tax expense for the quarter ended March 31, 2013 of $4.2 million compared to a tax benefit of $0.2 million for the quarter ended March 31, 2012. The current period tax expense resulted from adjustments to deferred tax valuation allowances at the Company's United States taxable jurisdictions.

Net Income

  The Company generated net income of $100.3 million in the three months ended March 31, 2013 compared to net income of $82.5 million in the same period of 2012 primarily as a result of an absence of catastrophe losses and increased favorable prior year reserve development during the current period, partially offset by a reduction in foreign exchange gains.  

Reserve for Losses and Loss Expenses

  As of March 31, 2013, the Company had accrued losses and loss expense reserves of $4.0 billion (December 31, 2012 - $4.2 billion). This amount represents management's best estimate of the ultimate liability for payment of losses and loss expenses related to loss events. During the three months ended March 31, 2013 and 2012, the Company's net paid losses and loss expenses were $313.2 million and $153.6 million, respectively.  As more fully described under "Reserving Process" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2012 Form 10-K, the Company incorporates a variety of actuarial methods and judgments in its reserving process. Two key inputs in the various actuarial methods employed by the Company are initial expected loss ratios and expected loss reporting patterns. These key inputs impact the potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company's business segments. The Company's loss and loss expense reserves consider and reflect, in part, deviations resulting from differences between expected loss and actual loss reporting as well as judgments relating to the weights applied to the reserve levels indicated by the actuarial methods. Expected loss reporting patterns are based upon internal and external historical data and assumptions regarding claims reporting trends over a period of time that extends beyond the Company's own operating history.  Differences between actual reported losses and expected losses are anticipated to occur in any individual period and such deviations may influence future initial expected loss ratios and/or expected loss reporting patterns as the recent actual experience becomes part of the historical data utilized as part of the ongoing reserve estimation process. The Company has demonstrated the impact of changes in the speed of the loss reporting patterns, as well as changes in the expected loss ratios, within the table under the heading "Potential Variability in Reserves for Losses and Loss Expenses" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2012 Form 10-K.                                           36

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  Losses and loss expenses for the three months ended March 31, 2013 are summarized as follows:                                           Incurred related to:                                                                         Total incurred                                   Current year       Prior years            losses                                               (U.S. dollars in thousands)   Insurance:   Agriculture                    $       50,692$      (4,733 )    $         45,959   Casualty and other specialty           37,944            (4,577 )              33,367   Professional lines                     24,189               302                24,491   Property                                3,934            (8,287 )              (4,353 )    Total Insurance                       116,759           (17,295 )              99,464    Reinsurance:   Catastrophe                    $       28,443$     (11,911 )    $         16,532   Property                               52,514            (1,205 )              51,309   Casualty                               53,748           (14,156 )              39,592   Other specialty                        18,174            (6,101 )              12,073    Total Reinsurance                     152,879           (33,373 )             119,506    Totals                         $      269,638$     (50,668 )$        218,970    Losses and loss expenses for the three months ended March 31, 2013 included $50.7 million in favorable development of reserves relating to prior accident years. This favorable loss reserve development benefited the Company's reported net loss ratio by approximately 12.1 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in the agriculture, casualty and other specialty and property lines of business within the Insurance segment, and all lines of business within the Reinsurance segment.  For the three months ended March 31, 2013, the Company did not materially alter the two key inputs utilized to establish reserve for losses and loss expenses (initial expected loss ratios and loss reporting patterns) related to prior years for the insurance and reinsurance segments as the variances in reported losses for those segments were within the range of possible results anticipated by the Company.                                           37 

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  Losses and loss expenses for the three months ended March 31, 2012 are summarized as follows:                                           Incurred related to:                                                                         Total incurred                                   Current year       Prior years            losses                                               (U.S. dollars in thousands)   Insurance:   Agriculture                    $       52,514$      (3,069 )    $         49,445   Casualty and other specialty           36,477               852                37,329   Professional lines                     24,992            (1,183 )              23,809   Property                                7,566            (4,447 )               3,119    Total Insurance                       121,549            (7,847 )             113,702    Reinsurance:   Catastrophe                            45,300            (9,050 )              36,250   Property                               42,454            12,030                54,484   Casualty                               52,529            (5,060 )              47,469   Other specialty                        17,836            (6,974 )              10,862    Total Reinsurance                     158,119            (9,054 )             149,065    Totals                         $      279,668$     (16,901 )$        262,767    Losses and loss expenses for the three months ended March 31, 2012 included $16.9 million in favorable development of reserves relating to prior accident years. This favorable development benefited the Company's reported net loss ratio by approximately 4.1 percentage points. This net reduction in estimated losses for prior accident years resulted primarily from lower than expected claims emergence across all lines of business in the Insurance segment and in the catastrophe, casualty, and other specialty lines of business in the Reinsurance segment.  For the three months ended March 31, 2012, the Company did not materially alter the two key inputs utilized to establish reserve for losses and loss expenses (initial expected loss ratios and loss reporting patterns) related to prior years for the insurance and reinsurance segments as the variances in reported losses for those segments were within the range of possible results anticipated by the Company.  Insurance 

Agriculture. For the three months ended March 31, 2013 and 2012, the Company recorded favorable loss emergence due to lower than anticipated agriculture claims settlements for the 2012 and 2011 crop years, respectively.

  Casualty and other specialty. For the three months ended March 31, 2013, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity within the healthcare liability business. This favorable loss emergence was partially offset by adverse loss development within the workers' compensation and U.S. based casualty business. For the three months ended March 31, 2012, the Company recorded modest unfavorable loss emergence within this line of business primarily due to adverse loss development within the professional, workers' compensation and U.S. based casualty businesses. This adverse loss development was partially offset by favorable loss emergence on the Bermuda based healthcare liability and casualty businesses. The Company exited the workers' compensation insurance line of business in 2009.  Professional lines. For the three months ended March 31, 2013, the Company recorded a modest amount of unfavorable loss emergence within this line of business primarily due to slightly higher than expected claims activity. For the three months ended March 31, 2012, the Company recorded favorable loss emergence in professional lines primarily due to lower than expected claims activity.                                           38

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Property. For the three months ended March 31, 2013 and 2012, the favorable loss emergence in the property line of business was primarily due to lower than expected claims reported and favorable case reserve development.

Reinsurance

  Catastrophe. For the three months ended March 31, 2013</chron> and 2012, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity and favorable case reserve development.  Property. For the three months ended March 31, 2013, the Company recorded overall favorable loss emergence within this line of business primarily due to lower than expected claims activity. For the three months ended March 31, 2012, the Company recorded unfavorable loss emergence within this line of business primarily due to higher than expected claims activity and unfavorable case reserve development.  

Casualty. For the three months ended March 31, 2013 and 2012, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims reported.

  Other specialty. For the three months ended March 31, 2013, the Company recorded favorable loss emergence within this reserve category primarily due to lower than expected claims activity in the Company's aerospace and surety businesses. For the three months ended March 31, 2012, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims reported within the aerospace, marine, and surety businesses.  

The total reserves for losses and loss expenses recorded on the Company's balance sheet were comprised of the following at March 31, 2013:

                                                                                       Reserve for losses                                         Case Reserves         IBNR Reserves         and loss expenses                                                          (U.S. dollars in thousands) Insurance: Agriculture                            $       171,382$       135,758       $            307,140 Casualty and other specialty                   327,726               925,188                  1,252,914 Professional lines                             127,426               390,423                    517,849 Property                                        27,993                14,969                     42,962  Total Insurance                                654,527             1,466,338                  2,120,865  Reinsurance: Catastrophe                                    173,606               114,931                    288,537 Property                                       249,203               144,885                    394,088 Casualty                                       290,399               685,422                    975,821 Other specialty                                101,862               145,363                    247,225  Total Reinsurance                              815,070             1,090,601                  1,905,671  Totals                                 $     1,469,597$     2,556,939       $          4,026,536                                             39 

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The total reserves for losses and loss expenses recorded on the Company's balance sheet were comprised of the following at December 31, 2012:

                                                                                       Reserve for losses                                         Case Reserves         IBNR Reserves         and loss expenses                                                          (U.S. dollars in thousands) Insurance: Agriculture                            $       392,457$        71,586       $            464,043 Casualty and other specialty                   308,611               944,289                  1,252,900 Professional lines                             110,441               386,819                    497,260 Property                                        54,196                18,653                     72,849  Total Insurance                                865,705             1,421,347                  2,287,052  Reinsurance: Catastrophe                                    201,105                97,223                    298,328 Property                                       281,681               133,779                    415,460 Casualty                                       296,494               679,982                    976,476 Other specialty                                119,261               144,299                    263,560  Total Reinsurance                              898,541             1,055,283                  1,953,824  Totals                                 $     1,764,246$     2,476,630       $          4,240,876   

Underwriting Results by Business Segments

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

  Management measures the Company's results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company's historic combined ratios may not be indicative of future underwriting performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by the business segments are allocated directly. Remaining general and administrative expenses not directly incurred by the business segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the business segment to which they apply.                                           40 

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Insurance

  The following table summarizes the underwriting results and associated ratios for the Company's Insurance segment for the three months ended March 31, 2013 and 2012.                                                     Three Months Ended March 31,                                                    2013                  2012              Change(1)                                                   (U.S. dollars in thousands) Revenues Gross premiums written                        $      652,943$   635,347                2.8  % Ceded premiums written                              (248,249 )           (207,566 )             19.6  %  Net premiums written                                 404,694              427,781                (5.4 ) %  Net premiums earned                                  151,152              161,630                (6.5 ) % Other underwriting income                                 -                    -                  -   %                                                       151,152              161,630                (6.5 ) %  Expenses Losses and loss expenses                              99,464              113,702               (12.5 ) % Acquisition expenses                                  14,616               16,214                (9.9 ) % General and administrative expenses                   35,627               34,435                3.5  %                                                       149,707              164,351                (8.9 ) %  Underwriting income (loss)                    $        1,445$    (2,721 )                NM (2)  Net loss ratio                                         65.7  %              70.4  %              (4.7 ) Acquisition expense ratio                               9.7  %              10.0  %              (0.3 ) General and administrative expense ratio               23.6  %              21.3  %               2.3  Combined ratio                                         99.0  %             101.7  %              (2.7 )     

(1) With respect to ratios, changes show increase or decrease in percentage

     points.   (2)  Not meaningful.   Premiums. Gross premiums written for the first quarter of 2013 in the Insurance segment increased by $17.6 million over the first quarter of 2012. Gross and net premiums written for each line of business in the Insurance segment for the three months ended March 31, 2013 and 2012 were as follows:                                                    Three Months Ended March 31,                                             2013                             2012                                   Gross                            Gross                                 Premiums       Net Premiums      Premiums       Net Premiums                                  Written         Written          Written         Written                                                  (U.S. dollars in thousands)  Agriculture                    $ 564,474$      341,130$ 533,667$      354,920  Casualty and other specialty      56,467             43,261        55,491             41,823  Professional lines                20,964             14,203        36,345             30,205  Property                          11,038              6,100         9,844                833   Total                          $ 652,943$      404,694$ 635,347$      427,781                                             41 

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The decrease in the Insurance segment's net premiums written for the three months ended March 31, 2013 compared to 2012 was driven by the following factors:

• A modest decrease in the net premiums written in the agriculture line of

business as a result of increased cessions to the U.S. Government and

third parties, partially offset by increased gross premiums written

          resulting from growth in policy counts; and          •   A decrease in professional lines net premiums written in the Insurance

segment primarily driven by the non-renewal of a large program

relationship in late 2012.

   Ceded premiums written by the Company increased in the quarter ended March 31, 2013 as compared to the same period in 2012 as the Company chose to cede more agriculture premiums to the U.S. Government and third parties as dry conditions have persisted in certain areas of the United States and have the potential to adversely impact the results of our agriculture insurance business.  

Agriculture insurance writings are seasonal in nature with the majority of net premiums written recorded in the first and third quarters of the year.

  The net premiums earned by the Company in the Insurance segment reduced in the three months ended March 31, 2013 compared to 2012 due to a modest decline in net written premiums over the last twelve months.  Losses and Loss Expenses. The net loss ratio in the Company's Insurance segment for the three months ended March 31, 2013 decreased 4.7 percentage points compared to the same period in 2012. During the first quarter of 2013 the Company's previously estimated loss and loss expense reserve for the Insurance segment for prior accident years was reduced by $17.3 million, which decreased the net loss ratio by 11.4 percentage points, as compared to reductions of $7.8 million, which decreased the net loss ratio by 4.9 percentage points, for the three months ended March 31, 2012. The higher level of favorable loss development in the first quarter of 2013 compared to 2012 was driven by the agriculture, property and casualty and other lines of business. The higher development in the first quarter of 2012 resulted from lower than expected claims activity within our agriculture, healthcare liability, excess casualty and property insurance businesses.  Partially offsetting the increased levels of current period favorable prior year loss reserve releases was an increase in certain current period accident quarter loss ratios compared to the three months ended March 31, 2012. The current accident quarter loss ratio increased by 1.8 percentage points for the three months ended March 31, 2013 compared to the same period in 2012 due to higher loss ratios in the Company's agriculture, casualty and other specialty and professional lines. In the agriculture line, higher accident year loss ratios were recorded as dry conditions have persisted in certain portions of the United States.  

Acquisition Expenses. The Company's acquisition expense ratio in the Insurance segment in the first quarter of 2013 was comparable to the same period in 2012.

General and Administrative Expenses. The general and administrative expense ratio in the Insurance segment for the first quarter of 2013 increased 2.3 percentage points compared to the same period in 2012 as a result of reduced net earned premiums and an increase in annual incentive expenses.

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Reinsurance

The following table summarizes the underwriting results and associated ratios for the Company's Reinsurance business segment for the three months ended March 31, 2013 and 2012.

                                                    Three Months Ended March 31,                                                   2013                   2012              Change(1)                                                            (U.S. dollars in thousands) Revenues Gross premiums written                       $      524,419$      426,302              23.0  % Ceded premiums written                              (20,198 )              (11,027 )            83.2  %  Net premiums written                                504,221                415,275              21.4  %  Net premiums earned                                 268,965                250,005               7.6  % Other underwriting income (loss)                        749                   (335 )               NM (2)                                                      269,714                249,670               8.0  %  Expenses Losses and loss expenses                            119,506                149,065              (19.8 ) % Acquisition expenses                                 57,020                 52,275               9.1  % General and administrative expenses                  30,851                 31,606               (2.4 ) %                                                      207,377                232,946              (11.0 ) %  Underwriting income                          $       62,337$       16,724             272.7  %  Net loss ratio                                        44.4  %                59.7  %            (15.3 ) Acquisition expense ratio                             21.2  %                20.9  %              0.3 General and administrative expense ratio              11.5  %                12.6  %             (1.1 )  Combined ratio                                        77.1  %                93.2  %            (16.1 )     

(1) With respect to ratios, changes show increase or decrease in percentage

    points.   (2)  Not meaningful.   Premiums. In the first quarter of 2013, net premiums written in the Reinsurance segment increased by 21.4% over the first quarter of 2012. Gross and net premiums written for each line of business in the Reinsurance segment for the three months ended March 31, 2013 and 2012 were as follows:                                             Three Months Ended March 31,                                        2013                        2012                                 Gross          Net          Gross          Net                               Premiums      Premiums      Premiums      Premiums                                Written       Written       Written       Written                                           (U.S. dollars in thousands)             Catastrophe       $ 147,866$ 131,398$ 143,182$ 133,718             Casualty            151,702       150,273       121,674       120,437             Property            148,411       148,411       106,746       106,746             Other specialty      76,440        74,139        54,700        54,374              Total             $ 524,419$ 504,221$ 426,302$ 415,275

The net increase in net premiums written in the Reinsurance segment for the current quarter compared to the same period in 2012 was primarily due to the following factors:

• An increase of $41.7 million in the property line driven by growth in new

         business in the Company's London, Zurich and Singapore offices, as well as          modest rate increases on renewed business;                                            43 

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• Within the casualty line, net written premiums increased $29.9 million as

a result of new business written on international motor and US casualty

         treaties together with the shifting of a significant professional          liability renewal from an April 1st inception date to January 1st; and    

• The other specialty line expanded its net written premiums by $19.8

million primarily due to new business generated by the trade credit and

surety team that joined the Company in late 2012.

   Ceded premiums written by the Company increased in the quarter ended March 31, 2013 as compared to the same period in 2012 because of increased cessions to third parties in the Company's catastrophe reinsurance line of business.  Net premiums earned by the Company for the three months ended March 31, 2013 increased compared to the first quarter of 2012 as a result of the growth in net premiums written in the last twelve months.  Net Losses and Loss Expenses. The net loss ratio in the Company's Reinsurance segment for the three months ended March 31, 2013 decreased compared to the first quarter of 2012 as a result of no major loss events during the period. During the three months ended March 31, 2012, the Company incurred losses, net of reinstatement premiums and other loss sensitive accruals, of $22.5 million in relation to the Kentucky windstorms that occurred during the period, adding 9.7 percentage points to the Reinsurance segment's net loss ratio for the first quarter of 2012.  The Company recorded $33.4 million or 12.4 percentage points of favorable prior year loss reserve development in the first quarter of 2013 compared to $9.1 million or 3.6 percentage points in the same quarter last year. During the first quarter of 2013, increased favorable loss reserve development emanated primarily from the property and casualty lines of business compared to the first quarter of 2012, due to lower than expected claims emergence.  

Acquisition Expenses. The Company's acquisition expense ratio in the Reinsurance segment was consistent between the first quarter of 2013 and 2012.

General and Administrative Expenses. The general and administrative expense ratio experienced by the Reinsurance segment in the three months ended March 31, 2013 reduced in comparison to the same period in 2012 as a result of the increase in net earned premiums.

Liquidity and Capital Resources

Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries. Endurance Holdings relies primarily on dividends and other permitted distributions from its subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its ordinary shares, its 7.75% Non-Cumulative Preferred Shares, Series A ("Series A Preferred Shares") and its 7.5% Non-Cumulative Preferred Shares, Series B ("Series B Preferred Shares"). There are restrictions on the payment of dividends by the Company's operating subsidiaries to Endurance Holdings, which are described in more detail below.  Ability of Subsidiaries to Pay Dividends. The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda's assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. As of March 31, 2013, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $576.0 million (December 31, 2012 - $623.1 million) without prior regulatory approval based upon the Bermuda insurance and corporate regulations. In 2011, Endurance Holdings loaned Endurance Bermuda $200.0 million, which remains outstanding and is callable on demand.                                           44

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  Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance and American Agri-Business is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders' surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2012, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends at March 31, 2013 without the prior approval of the applicable insurance regulator. At March 31, 2013, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $4.3 million without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.  Under the jurisdiction of the United Kingdom'sPrudential Regulation Authority ("PRA"), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The PRA regulatory requirements impose no explicit restrictions on Endurance U.K.'s ability to pay a dividend, but Endurance U.K. would have to notify the PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At March 31, 2013, Endurance U.K. did not have profits available for distributions.  Cash and Invested Assets. The Company's aggregate invested assets, including fixed maturity investments, short-term investments, equity securities, other investments, cash and cash equivalents and pending securities transactions, as of March 31, 2013 totaled $6.5 billion, which is consistent with the aggregate invested assets of $6.6 billion as of December 31, 2012.  The Company's aggregate direct exposure to the indebtedness and equity securities of those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) was $564.5 million at March 31, 2013, compared to $247.1 million at December 31, 2012. The increase in exposures as of March 31, 2013 compared to December 31, 2012 is mainly due to Moody's downgrade of the United Kingdom from "Aaa" to "Aa1" in February 2013.  In addition to the direct exposures above, the Company has indirect exposure to sovereign and non-sovereign investments whose currency is the Euro or whose sovereign debt rating is below AAA through a hedge fund with a primary focus on European indebtedness, principally focused on benefitting from the declining value of European sovereign indebtedness.  Cash Flows                                                              Three Months Ended March 31,                                                             2013                  2012                                                           (U.S. dollars in thousands) Net cash provided by operating activities              $        23,493$   24,905 Net cash used in investing activities                         (237,787 )         (210,336 ) Net cash used in financing activities                          (34,360 )          (25,758 ) Effect of exchange rate changes on cash and cash equivalents                                                    (18,178 )    

(91 )

  Net decrease in cash and cash equivalents                     (266,832 )         (211,280 ) Cash and cash equivalents, beginning of period               1,124,019      

890,914

  Cash and cash equivalents, end of period               $       857,187

$ 679,634

    In the three months to March 31, 2013, the Company's cash and cash equivalents decreased $266.8 million to $857.2 million. In the three months to March 31, 2012, cash and cash equivalents decreased by $211.3 million to $679.6 million.  Cash flows provided by operating activities for the three months ended March 31, 2013 of $23.5 million approximated cash flows provided by operating activities of $24.9 million for the three months ended March 31, 2012.                                           45

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  During the three months ended March 31, 2013, cash flows used in investing activities were $237.8 million, compared to cash flows used in investing activities of $210.3 million for the same period in 2012. The Company actively manages its investment portfolio on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing of investment sales and purchases. The increase in cash flows used in investing activities in 2013 principally reflected increased net purchases of other investments compared to 2012.  Cash flows used in financing activities for the three months ended March 31, 2013 were $34.4 million, compared to cash flows used in financing activities of $25.8 million for the same period in 2012. The cash flows used in financing activities in 2013 were higher than in 2012 principally due to the repurchases of common shares in 2013.  During the three months ended March 31, 2013, the Company used its capital to repurchase 223,152 ordinary shares in the open market for $10.0 million at an average price per share of $44.83. During the three months ended March 31, 2012, the Company repurchased $1.0 million of its 6.15% Senior Notes due October 15, 2015.  As of March 31, 2013 and December 31, 2012, the Company had pledged cash and cash equivalents and fixed maturity investments of $216.8 million and $224.4 million, respectively, in favor of certain ceding companies to collateralize obligations. As of March 31, 2013 and December 31, 2012, the Company had also pledged $345.9 million and $380.0 million of its cash and fixed maturity investments to meet collateral obligations for $291.2 million and $320.4 million in letters of credit outstanding under its credit facility, respectively. In addition, at March 31, 2013 and December 31, 2012, cash and fixed maturity investments with fair values of $279.1 million and $280.0 million were on deposit with U.S. state regulators, respectively.  Credit Facility. Under the Company's credit facility, the Company and its subsidiaries have access to a revolving line of credit of up to $700.0 million which expires April 19, 2016. As of March 31, 2013, there were no borrowings under this facility and letters of credit outstanding under the facility were $291.2 million.  Historically, the operating subsidiaries of the Company have generated sufficient cash flows to meet all of their obligations. Because of the inherent volatility of the business written by the Company, the seasonality in the timing of payments by ceding companies, the irregular timing of loss payments, the impact of a change in interest rates on the Company's investment returns as well as seasonality in coupon payment dates for fixed maturity investments, cash flows from the Company's operating activities may vary significantly between periods. The Company expects to continue to generate positive operating cash flows through 2013, absent the occurrence of additional significant loss events. In the event that paid losses accelerate beyond the ability to fund such payments from operating cash flows, the Company would use its cash balances available, liquidate a portion of its investment portfolio, access its existing credit facility, or arrange for additional financing. However, there can be no assurance that the Company will be successful in executing these strategies.  

Currency and Foreign Exchange

  The Company's functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all operations is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K, which is subject to the PRA's rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.'s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience gains or losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company's results of operations.  Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.  

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

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Effects of Inflation

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

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;                                            47 

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• 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 Holdings or Endurance Bermuda becomes subject to income taxes in

         jurisdictions outside of Bermuda;    

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

          brokers or customers;          •   state, federal and foreign regulations that impede our ability to charge

         adequate rates and efficiently allocate capital;    

• changes in insurance regulations in the U.S. or other jurisdictions in

which we operate, including the establishment of the Federal Insurance

Office and other regulatory changes mandated by the Dodd-Frank Wall Street

Reform and Consumer Protection Act of 2010 in the United States and the

         implementation of Solvency II by the European Commission;       •   reduced acceptance of our existing or new products and services;    

• loss of business provided by any one of a few brokers on whom we depend

for a large portion of our revenue, and our exposure to the credit risk of

          our brokers;          •   actions by our competitors, many of which are larger or have greater

         financial resources than we do;    

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

      •   the impact of acts of terrorism and acts of war;       •   the effects of terrorist related insurance legislation and laws;       •   loss of key personnel;       •   political stability of Bermuda;    

• changes in the political environment of certain countries in which we

         operate or underwrite business;       •   changes in accounting regulation, policies or practices;       •   our investment performance;    

• the valuation of our invested assets and the determination of impairments

          of those assets, if any;          •   the breach of our investment guidelines or the inability of those

         guidelines to mitigate investment risk;    

• the possible further downgrade of U.S. or foreign government securities by

credit rating agencies, and the resulting effect on the value of U.S. or

foreign government and other securities in our investment portfolio as

          well as the uncertainty in the market generally;          •   the need for additional capital in the future which may not be available

         or only available on unfavorable terms;    

• the ability to maintain the availability of our systems and safeguard the

          security of our data in the event of a disaster or other unanticipated          event; and                                            48 

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• changes in general economic conditions, including inflation, foreign

currency exchange rates, interest rates, and other factors.

   The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in our 2012 Form 10-K, including the risk factors set forth in Item 1A 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.                                           49 

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