Endurance Earnings Call Remarks

Operator

Good morning everyone and welcome to the Endurance Specialty Holdings Fourth Quarter Earnings Results Conference Call. This call is being recorded. Your lines will be in listen-only mode during the presentation. You will have an opportunity to ask questions after the presentation. Instructions will be given at that time.

I’d now like to introduce your call to Mr. Greg Schroeder, Senior Vice President of Investor Relations and Corporate Development. Please go ahead sir.

Greg Schroeder

Thank you, Nikki and welcome to our call. David Cash, Chief Executive Officer; and Mike McGuire, Chief Financial Officer will deliver our prepared remarks. To the question-and-answer portion of our call, joining David and Mike will be Bill Jewett, President; Mike Angelina, Chief Risk Officer; and Mark Silverstein, Chief Investment Officer.

Before turning the call over to David, I’d like to note that certain of the matters discussed here today are forward-looking statements. These statements are based on current plans, estimates, and expectations and include but are not necessarily limited to various elements of our strategy, business plans growth prospects, market conditions, capital management initiatives, information regarding our premiums loss reserves, expenses and asset portfolio.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the markets in which we operate, the economy, the other future conditions and involving other risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in the forward-looking statements and we therefore caution against relying on any of these forward-looking statements. Forward-looking statements are sensitive to many factors including those identified in Endurance’s most recent Annual Report on Form 10-K, quarterly report on Form 10-Q and other documents unfiled with the SEC that can cause actual results to differ materially from those contained in forward-looking statements. Forward-looking statements speak only as of the date on which they are made, Endurance undertakes no obligation publicly to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise. In addition, this presentation contains information regarding operating income, number of measures that are non-GAAP financial measures. For reconciliation of these items to the most directly comparable GAAP financial measures please refer to our press release which we can be found on our website at www.Endurance.bm.

I’ll now turn the call over to David Cash.

David Cash

Thank you, Greg. Good morning and welcome to our call. The fourth quarter was once again a challenging one for the insurance and reinsurance industry, with significant catastrophe loss activity dominating company results. As was announced on January 19th, Endurance experienced its fair share of those losses and this is reflected in the results we reported last night. 2011 was a tough year and it’s one that we’re happy to put behind us.

Looking forward, I’m pleased to say that we’re seeing positive underwriting and pricing trends across our different businesses. And it’s clear that we’re moving into an improved underwriting environment. Given the positive direction of the market and the strength of our underlying businesses, I believe that Endurance is well positioned for a strong 2012.

Turning to our results. For the fourth quarter, Endurance’s diluted book value per share shrank to 2.1% and now stands at 50.56. After adding back dividends paid, book value per share is down 1.9% for the year 2011. For 2011, Endurance produced a net loss of $94 million, while experiencing 467 million of catastrophe losses.

In the fourth quarter, the company posted a combined ratio of 112.5%, a number which included 22 percentage points of current year catastrophe losses. Year-over-year, fourth quarter written premiums grew materially, with a 39% increase in the gross premiums and a 19% increase in net premiums. These premium increases were attributable both to price increases and growth in policy counts, both in our Insurance and Reinsurance businesses.

Net investment income for the fourth quarter was 41 million, down from the 57 million we generated in the fourth quarter of 2010, as a result of lower alternative returns and fixed income yields. Finally, our balance sheet and capital position remained strong with our loss reserves generating 42 million of positive development in the fourth quarter and our P&L position is being comfortably within our risk tolerances. Later in the call I’ll provide further commentary on our performance for the quarter as well as some thoughts on our positioning for the 2012 year.

With that I’ll pass the call over to Mike McGuire, who will review our financial results in more detail.

Mike McGuire

Thanks, David, and good morning everyone. Endurance generated a net loss of $27.4 million and $0.88 per diluted share for the fourth quarter and an operating loss of $31.3 million and $0.98 per diluted share. For the full-year we generate a net loss of $93.7 million or $2.95 per share and an operating loss of $128.2 million or $3.81 per share. Our diluted book value per share ended the year at $50.56, down 4.1% for the year. Adding back the $1.20 per share in dividends paid in the year, the decline in book value was 1.9%.

In comparison to the fourth quarter and full-year of 2010, the decline in our results was primarily due to a higher level of catastrophe losses in our Reinsurance segment, reduced current accident year results in our crop insurance business due to drought conditions in Texas and other southern states, and lowered net investment income primarily due to lower hedge fund returns and the very low investment yield environment.

Starting with premium writings, the fourth quarter is typically our lightest premium quarter for both our segments. Net premiums written were $187.9 million, an increase of 18.8% over the same period in 2010. Our insurance segment generated net written premiums of $96.5 million or 8.2% higher than the fourth quarter of 2010 due to premium growth in our agriculture, professional and casualty lines of business, partially offset by declines in our property and healthcare liability lines of business. Agriculture net written premiums were up from a year ago due to an increase in the price of wheat and growth in policy accounts.

For the full-year, net premiums written in the Insurance segment were $1 billion, or 21.2% higher than full-year 2010. The growth was predominantly driven by higher commodity prices, which increased the agriculture premiums and increase premiums in the casualty line of business from a recently launched contract binding authority unit.

Fourth quarter Reinsurance segment, net premiums written were $91.4 million, up 19.5%. Growth in the casualty and property lines of business was offset by declines in the catastrophe, at Aerospace and Marine lines of business. For the full-year, Reinsurance premiums of $974.3 million increased 4.3% over 2010 as growth in our short tail catastrophe and property lines of business was partially offset by declines in Casualty, Surety, and other specialty lines of business.

Our combined ratio for the fourth quarter was 112.5%, up 28 points from the fourth quarter of 2010. The major drivers of this increase were $112 million, or 22 points of current year catastrophe losses recognized in the quarter. This included $76 million from the Thailand floods and $36 million from increases to earlier 2011 catastrophes, primarily the Japan and New Zealand earthquakes. It should be noted that our favorable prior year reserved development included $9.4 million in reductions to 2010 named catastrophe losses.

We also experienced reduced margins in our crop insurance business year-over-year. Continued drought conditions in Texas and the southern U.S. resulted in about a 4 point increase to our overall company loss ratio for the quarter compared to the fourth quarter of 2010.

Higher attritional loss estimates in our Property and Professional insurance lines also added about 2 points to our overall loss ratio. These impacts are partially offset by 3.2 points of increased favorable prior year reserve development.

For the full-year of 2011, our combined ratio was 112.9%, up 24.2 points for the full-year. Drivers of the full-year increase included $467 million in catastrophe losses from 2011 events, which added 24.5 points to the current accident year loss ratio. This compares to $96 million of catastrophe losses in all of 2010. Higher attritional loss estimates in our Property and Professional insurance lines also added about two points to our overall loss ratio. Draught conditions in Texas and the southern U.S. on our crop insurance business, which increased our overall full-year combined ratio by approximately three points year-over-year.

The fourth quarter was about break-even for ARMtech. And the full-year was slightly better than break-even for the accident year. For the full-year in 2011, we made a profit within our crop business with an overall combined ratio of 92% for the calendar year and 98% for the accident year.

Turning to investments, our portfolio’s total return was a positive 88 basis points in the quarter and 3.5% for the full-year. Our portfolio results for this quarter included mark-to-market gains on our alternative and equity portfolios as the markets improved in the fourth quarter offset by declining yields on the fixed income portfolio as new money rates remain below our book yield which was 2.7% at year-end.

Our fixed income portfolio duration remained short at 2.4 years due to our view that the rewards of longer duration securities do not match the attended risks due to the historically low interest rates at this time. During the fourth quarter, we increased our allocations to equities and alternative investments as a means of achieving greater portfolio diversification and return potential without dramatically changing our risk profile.

We ended the year strongly reserved with $432 million of IBNR for short-tailed lines held as of year-end. Excluding reserves for named catastrophes, at year-end we maintained $147 million of short-tailed IBNR for the 2011 accident year, consistent with the levels we held for 2010 at this point last year. In addition, 1.9 billion or 74% of our long-tailed reserves are IBNR.

As we have done in prior years, we published our global loss triangles last night to provide greater detail of our loss reserves and IBNR by accident year and by products. Our capital position remained strong with total shareholders’ equity of 2.6 billion and total capital of 3.1 billion at year-end. Compared to mid-year, our peak zone PMLs are lower relative to our capital and we continue to hold our capital at levels significantly in excess of rating agency minimum requirements, giving us ample capacity for the opportunities we expect to see in the balance of 2012.

During 2011, we repurchased 7.6 million shares or approximately 16% of our beginning of the year shares outstanding for $341 million. In the near-term, given the increasingly broad-based improvements we are starting to see across many of our businesses, it is likely that our repurchases will be less than in 2011 to ensure we have the excess capacity to expand as conditions warrant.

With that, I’ll turn the call back to David for some additional comments.

David Cash

Thank you, Mike. I’ll now take some time to review the following areas; January 1 underwriting activity, crop insurance and capital resources. Turning to current underwriting conditions, I’m pleased to say that we’re seeing consistent signs of market tightening and improved pricing, terms and conditions across all of our full portfolio. This is true in catastrophe exposed lines of business and also for our various casualty insurance line of business. This is the first time since 2003 that we are in a position to talk about improved pricing across almost all segments of our business.

At January 1, we were able to expand our underwriting footprints and improved pricing in returns across most of our reinsurance businesses. At 1/1 our Bermuda catastrophe book of business grew modestly. At the same time we reduced our overall limits in PMLs across the business and we increased our model returns on equity.

Across London, Zurich and Singapore our 1/1 renewal portfolio also grew in size. The bulk of this growth came in Europe where we were effective in expanding existing client relationships and pick up new clients and programs as we have expanded our product offerings out of Zurich. The early results coming out of Zurich showed pleasing growth both in the size of our client base and our sidelines.

In Singapore, based on our discussions with key Japanese clients there’s a clear understanding that the Japanese interest of broad risks will either be excluded from treaties in the future or materially restructured including catastrophe standalone covers rather than risk and proportional covenants. If we cannot achieve these changes, we will withdraw from these covers at 4/1.

Finally in the U.S., at 1/1 we saw a modest written premium growth. In this market there was a good amount of turnover in programs and in places we cut back participation significantly, whilst where we found opportunities to grow. It’s fair to say the market conditions in the U.S. remained sure, still have a way to go before we view the situations as attractive.

In summary, we found Reinsurance market conditions generally favorable at 1/1. We had a good deal of its success at raising rates where we felt it was needed and we were also able to expand our presence in markets by virtue of expanding our product offerings. This was particularly true in Europe.

Looking forward to 4/1, 6/1 and 7/1, I believe that we will continue to see improved pricing across our reinsurance lines of business and as pricing does improve, we have the capital resource to expand our ratings in line with the opportunities that may present themselves.

Shifting focus away from Reinsurance to Insurance, January 1 is not a significant renewal date for most of our Insurance business. That being said, if one looks at underwriting activity for the fourth quarter and for January 1, a picture of strengthening rates does emerge.

Beginning in October, we’ve seen steady increases in pricing on many of our Insurance products. This is true for catastrophe exposed property products and also for casualty insurance products. These increases were first seen in our smaller risk lines of business such as contract binding authority business, but it expanded to include most of our middle market risks, and are increasingly being seen in the larger risks in our Bermuda insurance book of business.

As of today, the only places where we’ve not seen positive price movement are in higher excess coverage for healthcare and certain professionalized classes. In these markets, competition remains tough and loss emergence has been consistently benign. My sense is that in time, we’ll see price increases here, too. But for now, there’s enough capacity and perhaps less reliance on investment income such that rates are not yet moving.

Beyond the obvious benefits to insurance of pricing increases on our insurance business, it’s also important to note that these increases will additionally filter into our Reinsurance book through 2012. Our Reinsurance pricing assumptions at 1/1 gave little credit for potential insurance price increases. And so the shift in the insurance market will have a modest positive ripple effect on our portfolio.

Turning to crop insurance, I just like to take a few minutes in this call to share some observations on the performance of our portfolio for the 2011 crop year. Prior to 2011, the worst year we had experienced as a crop insurer was the 2008 crop year when we experienced dramatic drops in commodity and crop price at the end of 2008.Those price drops generated very significant losses in the Midwestern corn growing states causing ARMtech to produce a net after cover insurance loss ratio at 89% for the year. In 2011, we experienced a severe draught in Texas, the single largest state in our portfolio. Before the benefits of federal reinsurance, our Texas loss ratio for the year stands at 230% on 280 million of gross premiums for the state, while our overall loss ratio for the full country on a gross basis before federal reinsurance stands at 130%.

Notwithstanding the very challenging experience in Texas and the country as a whole, ARMtech’s net after federal reinsurance loss ratio for the 2011 crop year is 91% including IBNR. This is only modestly worst than the 89% recorded in 2008. The preceding comparison clearly points out just how protective against single state volatility MBCI insurers are.

For the 2012 crop year, we expect to use the FCIC reinsurance plan even more aggressively in Texas than we did in 2011. Last year, we see that approximately 60% of our risks and 50% of our premiums with the FCIC in Texas. This year we’ll be closer to an accident sessions rates of 75% of risks and 60% of premiums.

Further, we’ve improved our knowledge about farmers’ irrigation resources, which will enable us to better pick and choose the risks we hold and was received to the FCIC in Texas. Putting the pieces together, you can see why view ARMtech as a long-term generator of value and as a source of stability within our overall business mix.

Finally, turning to capital resources, I just like to provide an update on our capital position versus 7/1 of last year. At mid-year last year, I indicated that Endurance held between 400 million and 500 million of capital, in excess to the levels required of us by rating agencies. Since that date, we’ve seen a number of changes both in our capital position and our risk position. So it makes sense to update the group on our capital adequacy as of today.

At June 30, 2011, the company reported total shareholders’ equity of 2.67 billion. And at year-end, that number had declined to 2.61 billion. Over the same period of time, we have reduced our PMLs through targeted portfolio optimization efforts. When you combine the current capital base with the reduced PMLs along with other risk capital items such as loss reserve changes to our overall capital position, our capital position has improved modestly since June.

As a consequence I can say that Endurance is more than adequately capitalized in the business we have in our balance sheet today, and I feel confident that should market conditions continue their trajectory of improvement, we expect to have ample resources to expand even our most capital-intensive lines of business.

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