CEO Cash: ‘Strong Year For Endurance’

Endurance Specialty Holdings Ltd. yesterday [Feb.9] reported net income of $111.2 million and $2.09 per diluted common share for the fourth quarter of 2010 versus net income of $154.8 million and $2.56 per diluted common share for the fourth quarter of 2009.

Based out of Wellesley House on Pitts Bay Road, Endurance Specialty Holdings Ltd. is a global specialty provider of property and casualty insurance and reinsurance. Through its operating subsidiaries, Endurance writes property, casualty, healthcare liability, agriculture, workers’ compensation, professional lines of insurance and property, catastrophe, casualty, agriculture, marine, aerospace, and surety and other specialty lines of reinsurance.

For the year ended December 31, 2010, net income was $364.7 million and $6.38 per diluted common share versus net income of $536.1 million and $8.69 per diluted common share for the year ended December 31, 2009.

Operating highlights for the quarter ended December 31, 2010 were as follows:

• Net premiums written of $158.1 million, an increase of 8.0% over the same period in 2009;
• Combined ratio of 84.6%, which included 5.2 percentage points of favorable prior year loss reserve development;
• Net investment income of $56.9 million, a decrease of $2.4 million from the same period in 2009;
• Operating income, which excludes after-tax realized investment gains and losses and foreign exchange gains and losses, of $108.3 million and $2.04 per diluted common share;
• Operating return on average common equity for the quarter of 3.9%, or 15.6% on an annualized basis; and
• Book value of $52.74 per diluted common share, up 1.76% from September 30, 2010.

Operating highlights for the year ended December 31, 2010 were as follows:

• Net premiums written of $1,763.7 million, an increase of 9.8% over 2009;
• Combined ratio of 88.7%, which included 7.3 percentage points of favorable prior year loss reserve development;
• Net investment income of $200.4 million compared to $284.2 million for full year 2009;
• Operating income, which excludes after-tax realized investment gains and losses and foreign exchange gains and losses, of $345.5 million and $6.03 per diluted common share;
• Operating return on average common equity of 12.6%; and
• Book value of $52.74 per diluted common share, an 18.2% increase from December 31, 2009.

Endurance CEO David Cash commented, “2010 was a strong year for Endurance both financially and strategically. The Company earned a 12.6% operating return on equity despite a number of large industry catastrophe losses and historically low fixed income yields, launched several strategic initiatives that will help extend our portfolio of specialty businesses and grew book value per share significantly.”

Insurance Segment

Operating highlights for Endurance’s Insurance segment for the quarter ended December 31, 2010 were as follows:

• Net premiums written of $81.6 million, a decrease of 7.7% from the fourth quarter of 2009;
• Combined ratio of 86.7%, an improvement of 0.5 percentage points from the fourth quarter of 2009; and
• Favorable prior year loss reserve development of 5.6 percentage points during the current period, compared to 11.2 percentage points of favorable prior year loss reserve development in the fourth quarter of 2009.

Operating highlights for Endurance’s Insurance segment for the year ended December 31, 2010 were as follows:

• Net premiums written of $829.9 million, an increase of 12.1% from the prior year;
• Combined ratio of 90.6%, an improvement of 1.4 percentage points from 2009; and
• Favorable prior year loss reserve development of 5.7 percentage points during the current period, compared to 11.2 percentage points of favorable prior year loss reserve development in 2009.

The decline of $6.8 million in net premiums written in the Insurance segment in the fourth quarter of 2010 compared to the fourth quarter of 2009 was predominantly due to reduced premiums in the property and professional lines of business, as pricing pressure led to the non-renewal of business that no longer met our return objectives. Partially offsetting this reduction was modest growth in the agriculture, casualty and healthcare lines of business. For the year ended December 31, 2010, net written premiums increased $89.6 million compared to a year ago as significant growth within the agriculture and property lines resulted from retaining more business on a net basis in the current year. The Company also experienced modest growth within the casualty and healthcare liability lines of business, partially offset by a decline in the professional line of business.

The improvement in the Insurance segment combined ratio in the current year and quarter ended December 31, 2010 compared to the same periods in 2009 was driven by lower acquisition expense ratios, partially offset by higher net loss and general and administrative expense ratios. The current periods’ acquisition expense ratios improved over the prior periods largely due to agriculture net premiums written, which maintain lower acquisition expenses, constituting a greater proportion of net premiums written. The modest increases in the net loss ratios were driven by lower levels of favorable prior year loss reserve development in the current periods compared to a year ago, which was predominantly offset by improved loss experience in the current periods’ agriculture and property lines of business. The current periods’ general and administrative expense ratios increased compared to the same periods a year ago as less ceding commission was received as the Company utilized less reinsurance in the agriculture and property lines of business.

Reinsurance Segment

Operating highlights for Endurance’s Reinsurance segment for the quarter ended December 31, 2010 were as follows:

• Net premiums written of $76.5 million, an increase of 31.8% from the fourth quarter of 2009;
• Combined ratio of 82.8%, an increase of 19.7 percentage points from the fourth quarter of 2009; and
• Favorable prior year loss reserve development of 4.9 percentage points during the current period, compared to 9.7 percentage points of favorable prior year loss reserve development in the fourth quarter of 2009.

Operating highlights for Endurance’s Reinsurance segment for the year ended December 31, 2010 were as follows:

• Net premiums written of $933.9 million, an increase of 7.9% from 2009;
• Combined ratio of 86.9%, an increase of 11.0 percentage points from the prior year; and
• Favorable prior year loss reserve development of 8.7 percentage points during the current period, compared to 7.3 percentage points of favorable prior year loss reserve development in 2009.

The $18.5 million increase in net premiums written in the Reinsurance segment during the fourth quarter of 2010 over the fourth quarter of 2009 resulted primarily from growth in the casualty, catastrophe, and aerospace and marine lines of business. Partially offsetting this growth were modest declines in net premiums written within the property line of business. The largest change in the quarter was experienced in the casualty line of business from a higher level of favorable premium adjustments than a year ago and from one new non-standard auto reinsurance treaty with an existing client that incepted in the fourth quarter. For full year 2010, net premiums written increased $68.1 million compared to full year 2009 driven by growth across all lines of business. While the catastrophe, property, and aerospace and marine lines of business recorded modest growth, the casualty and surety lines of business posted more robust growth due to writing a few select new contracts during the year paired with higher favorable premium adjustments.

The combined ratios in the Reinsurance segment for the current periods increased compared to the same periods in 2009 due to higher net loss ratios, as the industry experienced a greater frequency of large loss events during 2010, including the earthquake in Chile and European Windstorm Xynthia in the first quarter and the earthquake in New Zealand in the third quarter. Partially offsetting the increase in the net loss ratio in the current year was the recognition of greater favorable prior year loss reserve development within the short and long tail lines of business compared to the same period in 2009.

The Company’s acquisition expense ratios declined in the current periods compared to the same periods in 2009 due to reduced profit and loss sensitive commissions. The general and administrative expense ratios declined in the current periods due to a higher earned premium base and lower variable incentive compensation compared to prior year periods. Lower variable compensation was driven by lower corporate profitability in the current year, which was caused by higher catastrophe losses and reduced investment yields compared to a year ago.

Investments

Endurance’s net investment income decreased 4.0% or $2.4 million for the quarter ended December 31, 2010 and 29.5% or $83.8 million for the year ended December 31, 2010 compared to the same periods in 2009. During the fourth quarter and year ended December 31, 2010, Endurance’s net investment income included gains of $16.4 million and $40.3 million on its alternative investment funds and high yield loan funds which are included in other investments, as compared to gains of $16.8 million and $98.1 million in the fourth quarter and year ended December 31, 2009. Investment income generated from Endurance’s fixed maturity investments declined by $1.4 million and $20.8 million for the three months and year ended December 31, 2010 compared to the same periods in 2009. This decrease resulted from lower reinvestment rates during 2010, driven by lower market yields, partially offset by higher average investment portfolio balances. For the same reasons, the ending book yield on Endurance’s fixed maturity investments at December 31, 2010 was 3.13%, down from 3.29% at December 31, 2009.

At December 31, 2010, Endurance’s fixed maturity portfolio, which comprises 93.2% of Endurance’s investments, had an average credit quality of AA and a duration of 2.39 years. Endurance’s fixed maturity portfolio was in an unrealized gain position of $129.8 million at December 31, 2010, an improvement of $91.6 million from December 31, 2009. Endurance recorded net realized gains on investment sales, including impairment losses recognized in earnings, of $6.6 million and $18.5 million during the fourth quarter and full year of 2010 compared to net realized investment gains of $2.2 million and losses of $13.9 million during the same periods in 2009.

Endurance ended the fourth quarter of 2010 with cash and invested assets of $6.2 billion, which represents a 3.6% increase from December 31, 2009. Net operating cash flow was $407.2 million for the year ended December 31, 2010 versus $471.9 million for the year ended December 31, 2009.

Capitalization and Shareholders’ Equity

At December 31, 2010, Endurance’s shareholders’ equity was $2.85 billion or $52.74 per diluted common share versus $2.79 billion or $44.61 per diluted common share at December 31, 2009. During the three months ended December 31, 2010, Endurance repurchased 2.5 million of its common shares and share equivalents for an aggregate repurchase price of $107.5 million. For the full year of 2010, Endurance repurchased 8.7 million common shares and share equivalents for an aggregate repurchase price of $338.1 million and an average price of $38.96.

Subsequent Event

On January 24, 2011, Endurance announced that it had entered into an agreement to repurchase the ordinary shares and options held by two affiliated funds of Perry Corp., which was a founding shareholder of Endurance, for $44.99 per ordinary share. Endurance repurchased 7,143,056 ordinary shares and options to purchase an additional 10,000 ordinary shares which represented approximately 15% of the Company’s ordinary shares outstanding as of December 31, 2010. The aggregate repurchase price for the shares and the options was $321.5 million and the transaction was completed on January 28, 2011.

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