S&P Affirms Endurance Specialty ‘A-‘ Ratings; Rates $1.8 Billion Offering ‘BBB,’ to ‘BB+’

June 17, 2004

Standard & Poor’s Ratings Services announced that it has assigned its “BBB” counterparty credit rating to Endurance Specialty Holdings Ltd. and its preliminary “BBB” senior debt, “BBB-” subordinated debt, and “BB+” preferred stock ratings to the company’s $1.8 billion universal shelf registration.

At the same time, S&P affirmed its “A-” counterparty credit and financial strength ratings on Endurance Specialty Insurance Ltd., Endurance Worldwide Insurance Ltd., and Endurance Reinsurance Corp. of America (collectively referred to as Endurance). All the ratings carry a “stable” outlook.

“The ratings on Endurance are based on its strong competitive position, which is supported by a diversified business platform,” said S&P. “In addition, Endurance maintains strong capital adequacy and strong operating performance.”

As “offsetting factors,” S&P noted that it has “concerns about Endurance’s exposure to catastrophes and minimal reinsurance protections. Endurance also is a relatively new operation, and management has not been tested through difficult market cycles.”

The shelf registration allocates $500 million for potential securities issuance and registers 38,069,699 common shares currently owned by founding investors in Endurance (See IJ Website June 16). S&P expects “to maintain debt leverage of less than 20 percent and interest coverage of more than 10x in support of nonstandard notching.”

The rating agency added that the stable outlook is “based on Standard & Poor’s expectation that Endurance will maintain strong earnings. Capital adequacy is expected to remain strong at more than 155 percent. In addition, the company is expected to exhibit the risk-management skills and underwriting discipline to appropriately control the volume and profitability of business in a softening market, but this will be proven over the next few years.”

A summary of the “Major Rating Factors” considered by S&P is as follows:
— Strong competitive position based on its market position, scale, and diversified operations. Endurance ranks in the Top 10 in the Bermuda insurance market based on total equity.
— Capitalization is viewed as strong, as demonstrated by the company’s 171 percent capital adequacy ratio in 2003 (including bank debt of $103 million), adequate reserves, and minimal reinsurance.
— Strong operating performance with pretax income that grew to $258 million in 2003 from $101 million in 2002.
— Endurance’s management team has not been tested through difficult market cycles. Management has yet to demonstrate its ability to appropriately control the volume of business–including managing exposures–in a softening market.
— Endurance’s minimal reinsurance protection (utilization below 1 percent in 2003) accentuates the possibility for losses to affect earnings and capital adequacy. In addition, Endurance writes property catastrophe risks that could increase volatility.

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