The following is a discussion and analysis of the financial condition and results of operations for the three and six months ended June 30, 2012 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, 2011, 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, 2011 (the "2011 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 2011 Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

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

In the Insurance segment, the Company writes agriculture, professional lines, casualty, property, healthcare liability and surety and other specialty insurance. In the Reinsurance segment, the Company writes catastrophe, casualty, property, aerospace and marine and surety 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 2011 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 the 2011 Form 10-K. 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.

Consolidated Results of Operations - For the Three Months Ended June 30, 2012 and 2011

Results of operations for the three months ended June 30, 2012 and 2011 were as follows:

                                                      Three Months Ended June 30,
                                                       2012                    2011             Change(1)
                                                      (U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written                           $         604,076          $   502,924               20.1 %
Ceded premiums written                                    (119,663 )            (61,166 )             95.6 %

Net premiums written                                       484,413              441,758                9.7 %

Net premiums earned                                        519,340              486,578                6.7 %
Net investment income                                       31,766               39,842              (20.3 )%
Net realized and unrealized investment gains                14,958               21,532              (30.5 )%
Net impairment losses recognized in earnings                  (407 )               (932 )            (56.3 )%
Other underwriting income                                       19                1,088              (98.3 )%

Total revenues                                             565,676              548,108                3.2 %

Expenses
Net losses and loss expenses                               345,897              361,970               (4.4 )%
Acquisition expenses                                        72,128               67,887                6.2 %
General and administrative expenses                         62,609               65,886               (5.0 )%
Amortization of intangibles                                  2,777                3,026               (8.2 )%
Net foreign exchange (gains) losses                           (336 )              3,348                 NM (2)
Interest expense                                             9,044                9,057               (0.1 )%
Income tax expense (benefit)                                 1,074               (4,143 )               NM (2)

Net income                                       $          72,483          $    41,077               76.5 %

Net loss ratio                                                66.5 %               74.4 %             (7.9 )
Acquisition expense ratio                                     13.9 %               14.0 %             (0.1 )
General and administrative expense ratio                      12.1 %               13.5 %             (1.4 )

Combined ratio                                                92.5 %              101.9 %             (9.4 )

(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 June 30, 2012 were $604.1 million, an increase of $101.2 million, or 20.1%, compared to the same period in 2011. Net premiums written in the three months ended June 30, 2012 were $484.4 million, an increase of $42.7 million, or 9.7%. The change in net premiums written was driven by the following factors:

• An increase in the catastrophe line of the Reinsurance as a result of improved pricing on renewals in both the U.S. and International markets;

• Growth in the agriculture line of the Insurance segment arising from an increase in policy count and increased premium levels per policy, partially offset by lower commodity prices;

• Growth in the casualty line of the Reinsurance segment resulting from one large contract being expanded at renewal, an increase in positive premium adjustments compared to the prior year, and one contract having the renewal date transitioned to the second quarter; and

• A decline in the property line of the Insurance segment as the Company significantly curtailed premiums in several products within this line of business in an effort to reallocate capital to more profitable lines of business.

Growth in ceded premiums written by the Company in the quarter ended June 30, 2012 as compared to the same period in 2011 was primarily driven by increased cessions in the agriculture insurance line to the Federal Crop Insurance Corporation as a result of the growth in gross premiums written and increased cessions of risks.

Net premiums earned for the three months ended June 30, 2012 were $519.3 million, an increase of $32.8 million, or 6.7%, from the second quarter of 2011. The increase in net premiums earned resulted principally from growth in net written premiums recorded in more recent periods.

Net Investment Income

The Company's net investment income of $31.8 million decreased by 20.3% or $8.1 million for the quarter ended June 30, 2012 as compared to the same period in 2011. Investment income generated from the Company's fixed income investments, which consist of fixed maturity investments and short-term investments, declined by $7.2 million for the three months ended June 30, 2012 compared to the same period in 2011. This decline resulted primarily from lower reinvestment rates over the past 12 months driven by lower market yields. Net investment income during the second quarter of 2012 included net mark to market losses of $0.1 million on Other Investments, comprised of alternative funds and specialty funds, as compared to mark to market gains of $1.2 million in the second quarter of 2011. Investment expenses, including investment management fees, for the three months ended June 30, 2012 were $3.2 million compared to $3.5 million for the same period in 2011.

The annualized net earned yield and total return of the investment portfolio for the three months ended June 30, 2012 and 2011 and market yield and portfolio duration as of June 30, 2012 and 2011 were as follows:

                                                 Three Months Ended June 30,
                                                    2012               2011
     Annualized net earned yield(1)                      2.06 %            2.62 %
     Total return on investment portfolio(2)             0.90 %            1.32 %
     Market yield(3)                                     1.63 %            2.18 %

(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 second quarter of 2012, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 49 basis point range, with a high of 1.12% and a low of 0.62%. Trading activity in the Company's portfolio during the second quarter included reductions in short-term investments, U.S. government and government agencies securities, government guaranteed corporate securities, corporate securities and non-agency residential mortgage-backed securities, and increased allocations to agency mortgage-backed securities, U.S. state and municipal securities, foreign (non-European) government bonds, non-agency commercial mortgage-backed securities, asset-backed securities, equity securities and other investments. The duration of the fixed income investments increased to 2.60 years at June 30, 2012 from 2.39 years at December 31, 2011, partly due to lower cash balances.

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 June 30, 2012 were $719.6 million compared to $799.5 million during the same period a year ago. Net realized investment gains decreased during the three months ended June 30, 2012 compared to the same period in 2011. Realized investment gains and losses and the change in the fair value of derivative financial instruments for the three months ended June 30, 2012 and 2011 were as follows:

                                                           Three Months Ended June 30,
                                                           2012                   2011
                                                           (U.S. dollars in thousands)
Gross realized gains on investment sales               $      15,613          $      22,086
Gross realized losses on investment sales                       (822 )                 (485 )
Change in fair value of derivative financial
instruments                                                      167                    (69 )

Net realized and unrealized investment gains in
earnings                                               $      14,958          $      21,532

Net Impairment Losses Recognized in Earnings

During the three months ended June 30, 2012, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. The Company considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at June 30, 2012. The Company did not identify any such securities meeting these criteria. As such, the Company performed various analyses and reviews, which are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in our 2011 Form 10-K, to determine whether the securities in an unrealized loss position were other-than-temporarily impaired as a result of credit related factors or non-credit related factors. Net impairment losses recognized in earnings for the three months ended June 30, 2012 and 2011 were as follows:

                                                            Three Months Ended June 30,
                                                            2012                     2011
                                                            (U.S. dollars in thousands)
Total other-than-temporary impairment losses            $        (148 )            $   (484 )
Portion of loss recognized in other
comprehensive income                                             (259 )                (448 )

Net impairment losses recognized in earnings            $        (407 )            $   (932 )

The $0.4 million and $0.9 million of other-than-temporary impairment ("OTTI") losses recognized by the Company in the second quarters of 2012 and 2011, respectively, relating to specific credit events occurred primarily due to reductions in expected recovery values on residential mortgage-backed securities during the period. A total of $0.3 million was shifted from a non-credit OTTI loss previously recognized in comprehensive income to a credit OTTI loss recorded in net income for the second quarter of 2012.

The Company assessed its intent and ability to hold certain equity securities that were in an unrealized loss position at June 30, 2012 and 2011 and determined it did not need to recognize any OTTI losses in the three months ended June 30, 2012 and 2011.

Net Foreign Exchange Gains and Losses

For the three months ended June 30, 2012, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in a net foreign exchange gain of $0.3 million compared to a net foreign exchange loss of $3.3 million for the same period of 2011. This gain resulted from offsetting exposures across the Company as the U.S. dollar weakened against the Japanese Yen and strengthened against other major currencies in the period. In the prior year, the net foreign exchange gain was due to offsetting exposures across the Company as the U.S. dollar weakened against other major currencies.

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. For the three months ended June 30, 2012, the Company incurred lower levels of catastrophe losses compared to the prior year. The Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals, of $14.4 million in relation to an earthquake in Italy and windstorms in the United States, which added 2.8 percentage points to the Company's net loss ratio for the second quarter of 2012. For the three months ended June 30, 2011, the Company recorded losses, net of reinsurance, reinstatement premiums and other loss sensitive accruals, of $61.8 million in relation to tornadoes in the United States, which added 13.0 percentage points to the Company's net loss ratio for the second quarter of 2011. In addition, the Company recorded lower reserves for attritional losses relative to earned premiums in the Insurance segment overall in the second quarter of 2012 compared to 2011.

Favorable prior year loss reserve development was $19.6 million for the second quarter of 2012 compared to $44.8 million during the same period in 2011. In the second quarter of 2012, prior year loss reserves emerged favorably across each line of the Insurance segment and the short and long tail lines of the Reinsurance segment. Favorable reserve development in the second quarter of 2012 was less than the second quarter of 2011 principally due to the agriculture line of business, which experienced a later and stronger harvest in the 2010 crop year than in the 2011 crop year. The impact of the later and stronger harvest in the 2010 crop year was an extension of claims settlements into the first half of 2011, which consequently experienced significant favorable development.

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 June 30, 2012 was generally consistent with the acquisition expense ratio for the same period in 2011.

General and Administrative Expenses

The Company's general and administrative expense ratio for the second quarter of 2012 decreased compared to the same period in 2011 due to higher earned premiums primarily in the property line of the Reinsurance segment and agriculture line of the Insurance segment together with a reduction in expenditure. General and administrative expense was lower in the second quarter of 2012 compared to 2011 due to increased third party ceding commissions and expense reimbursement offsets in the agriculture line of the Insurance segment and favorable compensation cost adjustments generally arising from a lower headcount and a lower concentration of more senior staff. Lower expenditure was partially offset by increased consulting and facilities costs. At June 30, 2012, the Company had a total of 849 employees compared to 856 employees at June 30, 2011.

Income Tax Expense (Benefit)

The Company recorded a tax expense for the quarter ended June 30, 2012 of $1.1 million compared to a tax benefit of $4.1 million for the quarter ended June 30, 2011. The current period tax expense resulted from income generated in the current period by the Company's United States taxable jurisdictions that were impacted by the higher levels of catastrophe losses in the same period of 2011.

Net Income

The Company produced net income of $72.5 million in the three months ended June 30, 2012 compared to net income of $41.1 million in the same period of 2011 primarily as a result of higher earned premiums and a decrease in catastrophe losses during the current period.

Consolidated Results of Operations - For the Six Months Ended June 30, 2012 and 2011

Results of operations for the six months ended June 30, 2012 and 2011 were as follows:

                                                  Six Months Ended June 30,
                                                2012                     2011               Change(1)
                                                 (U.S. dollars in thousands, except for ratios)
Revenues
Gross premiums written                    $       1,665,725         $     1,503,282               10.8 %
Ceded premiums written                             (338,256 )              (262,652 )             28.8 %

Net premiums written                              1,327,469               1,240,630                7.0 %

Net premiums earned                                 930,975                 869,411                7.1 %
Net investment income                                88,841                  92,343               (3.8 )%
Net realized and unrealized
investment gains                                     20,161                  25,307              (20.3 )%
Net impairment losses recognized in
earnings                                               (626 )                (2,579 )            (75.7 )%
Other underwriting (loss) income                       (316 )                    19                 NM (2)

Total revenues                                    1,039,035                 984,501                5.5 %

Expenses
Losses and loss expenses                            608,664                 763,823              (20.3 )%
Acquisition expenses                                140,617                 133,505                5.3 %
General and administrative expenses                 128,650                 131,847               (2.4 )%
Amortization of intangibles                           5,554                   5,824               (4.6 )%
Net foreign exchange gains                          (18,473 )                (3,570 )               NM (2)
Interest expense                                     18,091                  18,111               (0.1 )%
Income tax expense (benefit)                            907                 (18,699 )               NM (2)

Net income (loss)                         $         155,025         $       (46,340 )               NM (2)


Net loss ratio                                         65.4 %                  87.9 %            (22.5 )
Acquisition expense ratio                              15.1 %                  15.4 %             (0.3 )
General and administrative expense
ratio                                                  13.8 %                 15.1  %             (1.3 )

Combined ratio                                         94.3 %                 118.4 %            (24.1 )

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

(2) Not meaningful.

Premiums

Gross premiums written in the six months ended June 30, 2012 were $1,665.7 million, an increase of $162.4 million, or 10.8%, compared to the same period in 2011. Net premiums written in the six months ended June 30, 2012 were $1,327.5 million, an increase of $86.8 million, or 7.0%, compared to the same period in 2011. The increase in net premiums written was driven by the following factors:

• Growth in the Reinsurance segment where property premiums were higher due to new premiums and growth in renewals, particularly at the Company's Zurich branch;

• Increased catastrophe premiums as a result of improved pricing during mid-year renewals;

• Growth in casualty premiums due to increased participation on a large contract, an increase in positive premium adjustments and the transition of a significant renewal to the second quarter;

• Increase in the agriculture line of the Insurance segment where policy count and increased premium levels per policy, partially offset by the impact of lower commodity prices; and

• Decline in the property line of the Insurance segment as the Company significantly curtailed premiums in several products in an effort to reallocate capital to more profitable lines of business.

Net premiums earned for the six months ended June 30, 2012 were $931.0 million, an increase of $61.6 million, or 7.1%, from the six months ended June 30, 2011 principally due to growth in net premiums written experienced over the last twelve months compared to the same period last year.

Net Investment Income

The Company's net investment income of $88.8 million decreased by 3.8% or $3.5 million for the six months ended June 30, 2012 as compared to the same period in 2011. Net investment income during the first six months of 2012 included net mark to market gains of $23.1 million on Other Investments, comprised of . . .