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Endurance Reports First Quarter 2013 Financial Results

PEMBROKE, Bermuda - May 1, 2013 - Endurance Specialty Holdings Ltd. (NYSE:ENH) today reported net income available to common shareholders of $92.1 million and $2.13 per diluted common share for the first quarter of 2013 versus net income of $74.4 million and $1.72 per diluted common share for the first quarter of 2012.  

Operating highlights for the quarter ended March 31, 2013 were as follows:

  • Net premiums written of $908.9 million, an increase of 7.8% over the same period in 2012; 

  • Combined ratio of 85.0%, which included 12.1 percentage points of favorable prior year loss reserve development; 

  • Net investment income of $49.3 million, a decrease of $7.8 million from the same period in 2012;  

  • Operating income, which excludes after-tax realized investment gains and losses and foreign exchange gains and losses, of $89.8 million and $2.08 per diluted common share;  

  • An operating return on average common equity for the quarter of 3.9% or 15.6% on an annualized basis; and  

  • Fully diluted book value per share of $54.10 as of March 31, 2013, an increase of 2.3% from year end 2012 and up 2.9% when adjusting for dividends paid during the first quarter. 

David Cash, Chief Executive Officer, commented, "We had an excellent start to the year with strong financial performance and solid progress in the ongoing development of our businesses.  Net premiums written increased as a result of a successful January 1st renewal season in our reinsurance segment as we saw the benefit from our international expansion and the addition of specialty underwriting teams hired in 2012.  Strategically, momentum is accelerating as we have attracted several new leaders and teams to our global insurance and reinsurance operations."

 

Insurance Segment

Operating highlights for Endurance's Insurance segment for the quarter ended March 31, 2013 were as follows:

  • Net premiums written of $404.7 million, a decrease of 5.4% from the first quarter of 2012; 

  • Combined ratio of 99.0%, an improvement of 2.7 percentage points from the first quarter of 2012; and 

  • Favorable prior year loss reserve development of 11.4 percentage points during the current period, compared to 4.9 percentage points of favorable prior year loss reserve development in the first quarter of 2012. 

Net premiums written in the Insurance segment decreased $23.1 million for the first quarter of 2013 compared to the same period in the prior year primarily due to declines in agriculture and professional lines premiums.  Within the agriculture line of business, net premiums written declined 3.9% compared to a year ago as a result of the cession of more premiums to the U.S. Government and third parties. Estimated policy count growth in excess of 9% in agriculture over the first quarter of 2012 was more than offset by reduced premium retentions in this line of business.  The current quarter also reflects the decline in net premiums written in our professional line of business as a result of exiting a program relationship in late 2012.  

The improvement in the Insurance segment combined ratio for the quarter ended March 31, 2013 compared to the same period in 2012 was predominantly driven by a lower net loss ratio, partially offset by a higher general and administrative expense ratio.  The net loss ratio in the first quarter of 2013 benefited from $17.3 million, or 11.4 percentage points, of favorable prior year loss reserve development, compared to $7.8 million, or 4.9 percentage points, for the same period a year ago.  Partially offsetting this improvement in the net loss ratio was an increase in the current year net loss ratio in the professional and agriculture lines of business.  The general and administrative expense ratio was higher in the current quarter due to a smaller earned premium base and strategic investments being made to our U.S. specialty insurance operations.  

Reinsurance Segment

Operating highlights for Endurance's Reinsurance segment for the quarter ended March 31, 2013 were as follows:

  • Net premiums written of $504.2 million, an increase of 21.4% from the first quarter of 2012; 

  • Combined ratio of 77.1%, an improvement of 16.1 percentage points from the first quarter of 2012; and 

  • Favorable prior year loss reserve development of 12.4 percentage points compared to 3.6 percentage points of favorable prior year loss reserve development in the first quarter of 2012. 

The $88.9 million increase in net premiums written within the Reinsurance segment during the first quarter of 2013 over the first quarter of 2012 resulted primarily from increases within the property, casualty and other specialty lines of business.  The current quarter increase was generated by the property line of business, driven by the combination of rate increases as well as growth in new business in our London, Zurich and United States offices.  Within our casualty line of business, net written premiums increased $29.8 million from a year ago as a result of new business written in our Zurich and U.S. offices and a change in renewal date on one large treaty, partially offset by a decline in Bermuda based clash business as some contracts were non-renewed due to returns no longer meeting targeted profitability levels.  Our other specialty line of reinsurance business expanded its net written premiums $19.8 million from a year ago, primarily due to new business generated by the trade credit and surety team that joined Endurance in late 2012.

The Reinsurance segment combined ratio in the first quarter of 2013 improved compared to the same period in 2012 predominantly due to a lower net loss ratio.  The net loss ratio for the first quarter of 2013 included less than one point of catastrophe losses compared to 9.7 percentage points of catastrophe losses recorded in the first quarter of 2012 related to tornadoes in Kentucky.  The net loss ratio in the first quarter of 2013 also benefited from 12.4 percentage points of favorable prior year loss reserve development across all lines of business, compared to 3.6 percentage points for the same period a year ago.  Also modestly contributing to the improved combined ratio in the current quarter compared to a year ago were lower general and administrative expenses on a larger earned premium base.

Investments

Endurance's net investment income for the quarter ended March 31, 2013 was $49.3 million, a decrease of $7.8 million compared to the same period in 2012.  The total return of Endurance's investment portfolio was 0.6% for the quarter ended March 31, 2013, compared to 1.38% for the quarter ended March 31, 2012.  Investment income generated from Endurance's fixed maturity investments declined by $7.5 million for the three months ended March 31, 2013 compared to the same period in 2012 due to lower reinvestment rates during 2013 and the short duration of Endurance's fixed maturity portfolio.  During the first quarter of 2013, Endurance's net investment income included gains of $23.1 million on its alternative investment funds and high yield loan funds, which are included in other investments, as compared to gains of $23.1 million in the first quarter of 2012.  The ending book yield on Endurance's fixed maturity investments at March 31, 2013 was 2.36%, down from 2.68% at March 31, 2012.

At March 31, 2013, Endurance's fixed maturity portfolio, which comprises 88.2% of Endurance's investments, had an average credit quality of AA and a duration of 2.78 years.  Endurance's fixed maturity portfolio was in a net unrealized gain position of $136.9 million at March 31, 2013, a decrease of $4.8 million from December 31, 2012.  Endurance recorded net realized gains on investment sales, net of impairment losses recognized in earnings, of $5.4 million during the first quarter of 2013 compared to net realized investment gains of $5.0 million during the same period in 2012.  

Endurance ended the first quarter of 2013 with cash and invested assets of $6.5 billion, which represents a 0.5% decrease from December 31, 2012.  Net operating cash flow was $23.5 million for the quarter ended March 31, 2013 versus $24.9 million for the same period in 2012.  

Capitalization and Shareholders' Equity

At March, 31, 2013, Endurance's shareholders' equity was $2.77 billion or $54.10 per diluted common share versus $2.71 billion or $52.88 per diluted common share at December 31, 2012.  For the quarter ended March 31, 2013, Endurance declared and paid common dividends of $0.32 per share.  During the first quarter of 2013, the Company repurchased 223,152 common shares at an average cost of $44.83 for a total amount of repurchases of $10.0 million.

Earnings Call

Endurance will host a conference call on May 2, 2013 at 8:30 a.m. Eastern time to discuss its financial results.  The conference call can be accessed via telephone by dialing (888) 596-2611 or (913) 312-0710 (international) and entering pass code: 8944519.  Those who intend to participate in the conference call should register at least ten minutes in advance to ensure access to the call.  A telephone replay of the conference call will be available through May 16, 2013 by dialing (888) 203-1112 or (719) 457-0820 (international) and entering the pass code: 8944519.

The public may access a live broadcast of the conference call at the "Investors" section of Endurance's website, www.endurance.bm.  Following the live broadcast, an archived version will continue to be available on Endurance's website.

A copy of Endurance's financial supplement for the first quarter of 2013 will be available on Endurance's website at www.endurance.bm shortly after the release of earnings.

Operating income, operating return on average common equity, operating income per diluted common share, operating income allocated to common shareholders and the combined ratio excluding prior year net loss reserve development are non-GAAP measures.  Reconciliations of these measures to the appropriate GAAP measures are included in the attached tables.  

About Endurance Specialty Holdings

Endurance Specialty Holdings Ltd. is a global specialty provider of property and casualty insurance and reinsurance. Through its operating subsidiaries, Endurance writes agriculture, casualty and other specialty, professional lines and property lines of insurance and catastrophe, property, casualty, and other specialty lines of reinsurance. We maintain excellent financial strength as evidenced by the ratings of A (Excellent) from A.M. Best (XV size category) and A (Strong) from Standard and Poor's on our principal operating subsidiaries.  Endurance's headquarters are located at Wellesley House, 90 Pitts Bay Road, Pembroke HM 08, Bermuda and its mailing address is Endurance Specialty Holdings Ltd., Suite No. 784, No. 48 Par-la-Ville Road, Hamilton HM 11, Bermuda.  For more information about Endurance, please visit www.endurance.bm.

Safe Harbor for Forward-Looking Statements

Some of the statements in this press release may include forward-looking statements which reflect our current views with respect to future events and financial performance. Such statements may include forward-looking statements both with respect to us in general and the insurance and reinsurance sectors specifically, both as to underwriting and investment matters. Statements which include the words "should," "expect," "intend," "plan," "believe," "project," "anticipate," "seek," "will," and similar statements of a future or forward-looking nature identify forward-looking statements in this press release for purposes of the U.S. federal securities laws or otherwise.  We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the Private Securities Litigation Reform Act of 1995.

All forward-looking statements address matters that involve risks and uncertainties.  Accordingly, there are or may be important factors that could cause actual results to differ from those indicated in the forward-looking statements.  These factors include, but are not limited to, the effects of competitors' pricing policies, greater frequency or severity of claims and loss activity, changes in market conditions in the agriculture insurance industry, termination of or changes in the terms of the U.S. multiple peril crop insurance program, a decreased demand for property and casualty insurance or reinsurance, changes in the availability, cost or quality of reinsurance or retrocessional coverage, our inability to renew business previously underwritten or acquired, our inability to maintain our applicable financial strength ratings, our inability to effectively integrate acquired operations, uncertainties in our reserving process, changes to our tax status, changes in insurance regulations, reduced acceptance of our existing or new products and services, a loss of business from and credit risk related to our broker counterparties, assessments for high risk or otherwise uninsured individuals, possible terrorism or the outbreak of war, a loss of key personnel, political conditions, changes in insurance regulation, changes in accounting policies, our investment performance, the valuation of our invested assets, a breach of our investment guidelines, the unavailability of capital in the future, developments in the world's financial and capital markets and our access to such markets, government intervention in the insurance and reinsurance industry, illiquidity in the credit markets, changes in general economic conditions and other factors described in our Annual Report on Form 10-K for the year ended December 31, 2012.

Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation publicly to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

ENDURANCE SPECIALTY HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
 (In thousands of United States dollars, except share and per share amounts)
March 31, December 31,
2013  2012 
Assets
Cash and cash equivalents $  857,187  $  1,124,019 
Fixed maturity investments, available for sale, at fair value  5,008,753   4,868,150 
Short-term investments, available for sale, at fair value  1,400   42,230 
Equity securities, available for sale, at fair value  188,927   86,997 
Other investments  554,715   517,546 
Premiums receivable, net  1,193,578   601,952 
Insurance and reinsurance balances receivable  106,222   105,663 
Deferred acquisition costs  212,953   168,252 
Prepaid reinsurance premiums  340,066   166,702 
Reinsurance recoverable on unpaid losses  588,576   691,783 
Reinsurance recoverable on paid losses  11,891   83,159 
Accrued investment income  24,865   27,166 
Goodwill and intangible assets  169,899   172,000 
Deferred tax asset  41,505   43,501 
Net receivable on sales of investments  35,608   9,144 
Other assets  95,336   86,708 
Total Assets $  9,431,481  $  8,794,972 
Liabilities
Reserve for losses and loss expenses $  4,026,536  $  4,240,876 
Reserve for unearned premiums  1,625,883   965,244 
Deposit liabilities  22,533   22,220 
Reinsurance balances payable  203,048   110,843 
Debt  527,421   527,339 
Net payable on purchases of investments  111,969   81,469 
Other liabilities  147,841   136,384 
Total Liabilities  6,665,231   6,084,375 
Shareholders' Equity
Preferred shares
Series A, non-cumulative - 8,000,000 issued and outstanding (2012 - 8,000,000)  8,000   8,000 
Series B, non-cumulative - 9,200,000 issued and outstanding (2012 - 9,200,000)  9,200   9,200 
Common shares
43,169,336 issued and outstanding (2012 - 43,116,394)  43,169   43,116 
Additional paid-in capital  520,257   527,915 
Accumulated other comprehensive income  137,439   152,463 
Retained earnings  2,048,185   1,969,903 
Total Shareholders' Equity  2,766,250   2,710,597 
Total Liabilities and Shareholders' Equity $  9,431,481  $  8,794,972 
Book Value per Common Share
Dilutive common shares outstanding  43,181,370   43,130,075 
Diluted book value per common share [a] $  54.10  $  52.88 
Note: All financial information contained herein is unaudited, except the balance sheet data for the year ended December 31, 2012, which was derived from Endurance's audited financial statements.
[a] Excludes the $430 million liquidation value of the preferred shares.



ENDURANCE SPECIALTY HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of United States dollars, except share and per share amounts)
Quarter Ended
March 31, March 31,
2013  2012 
Revenues
Gross premiums written $  1,177,362  $  1,061,649 
Net premiums written $  908,915  $  843,056 
Change in unearned premiums  (488,798)  (431,421)
Net premiums earned  420,117   411,635 
Other underwriting income (loss)  749   (335)
Net investment income  49,305   57,075 
Net realized and unrealized gains  6,235   5,203 
Total other-than-temporary impairment losses  (806)  - 
Portion of loss recognized in other comprehensive (loss) income  -   (219)
Net impairment losses recognized in earnings  (806)  (219)
Total revenues  475,600   473,359 
Expenses
Net losses and loss expenses  218,970   262,767 
Acquisition expenses  71,636   68,489 
General and administrative expenses  66,478   66,041 
Amortization of intangibles  2,101   2,777 
Net foreign exchange losses (gains)  2,927   (18,137)
Interest expense  9,038   9,047 
Total expenses  371,150   390,984 
Income before income taxes  104,450   82,375 
Income tax (expense) benefit  (4,151)  167 
Net income  100,299   82,542 
Preferred dividends  (8,188)  (8,188)
Net income available to common and participating common shareholders $  92,111  $  74,354 
Per share data
Basic earnings per common share $  2.14  $  1.72 
Diluted earnings per common share $  2.13  $  1.72 



ENDURANCE SPECIALTY HOLDINGS LTD.
RESULTS BY SEGMENT
(in thousands of United States dollars, except ratios)
For the quarter ended March 31, 2013
Insurance Reinsurance Reported Totals
Revenues
Gross premiums written $  652,943  $  524,419  $  1,177,362 
Ceded premiums written  (248,249)  (20,198)  (268,447)
Net premiums written  404,694   504,221   908,915 
Net premiums earned  151,152   268,965   420,117 
Other underwriting income  -   749   749 
Total underwriting revenues  151,152   269,714   420,866 
Expenses
Net losses and loss expenses  99,464   119,506   218,970 
Acquisition expenses  14,616   57,020   71,636 
General and administrative expenses  35,627   30,851   66,478 
 149,707   207,377   357,084 
Underwriting income $  1,445  $  62,337  $  63,782 
Net loss ratio 65.7  % 44.4  % 52.1  %
Acquisition expense ratio 9.7  % 21.2  % 17.1  %
General and administrative expense ratio 23.6  % 11.5  % 15.8  %
Combined ratio 99.0  % 77.1  % 85.0  %



ENDURANCE SPECIALTY HOLDINGS LTD.
RESULTS BY SEGMENT
(in thousands of United States dollars, except ratios)
For the quarter ended March 31, 2012
Insurance Reinsurance Reported Totals
Revenues
Gross premiums written $  635,347  $  426,302  $  1,061,649 
Ceded premiums written  (207,566)  (11,027)  (218,593)
Net premiums written  427,781   415,275   843,056 
Net premiums earned  161,630   250,005   411,635 
Other underwriting loss  -   (335)  (335)
Total underwriting revenues  161,630   249,670   411,300 
Expenses
Net losses and loss expenses  113,702   149,065   262,767 
Acquisition expenses  16,214   52,275   68,489 
General and administrative expenses  34,435   31,606   66,041 
 164,351   232,946   397,297 
Underwriting (loss) income $  (2,721) $  16,724  $  14,003 
Net loss ratio 70.4  % 59.7  % 63.9  %
Acquisition expense ratio 10.0  % 20.9  % 16.6  %
General and administrative expense ratio 21.3  % 12.6  % 16.0  %
Combined ratio 101.7  % 93.2  % 96.5  %



ENDURANCE SPECIALTY HOLDINGS LTD.
CONSOLIDATED FINANCIAL RATIOS
As Reported
For the quarter ended March 31,
Insurance Reinsurance Total
2013  2012  2013  2012  2013  2012 
Net loss ratio 65.7  % 70.4  % 44.4  % 59.7  % 52.1  % 63.9  %
Acquisition expense ratio 9.7  % 10.0  % 21.2  % 20.9  % 17.1  % 16.6  %
General and administrative expense ratio 23.6  % 21.3  % 11.5  % 12.6  % 15.8  % 16.0  %
Combined ratio 99.0  % 101.7  % 77.1  % 93.2  % 85.0  % 96.5  %
Effect of Prior Year Net Loss Reserve Development
Favorable / (Unfavorable)
For the quarter ended March 31,
Insurance Reinsurance Total
2013  2012  2013  2012  2013  2012 
Net loss ratio 11.4  % 4.9  % 12.4  % 3.6  % 12.1  % 4.1  %
Net of Prior Year Net Loss Reserve Development
For the quarter ended March 31,
Insurance Reinsurance Total
2013  2012  2013  2012  2013  2012 
Net loss ratio 77.1  % 75.3  % 56.8  % 63.3  % 64.2  % 68.0  %
Acquisition expense ratio 9.7  % 10.0  % 21.2  % 20.9  % 17.1  % 16.6  %
General and administrative expense ratio 23.6  % 21.3  % 11.5  % 12.6  % 15.8  % 16.0  %
Combined ratio 110.4  % 106.6  % 89.5  % 96.8  % 97.1  % 100.6  %
The combined ratio is the sum of the loss, acquisition expense and general and administrative expense ratios.  Endurance presents the combined ratio as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of its financial information.  The combined ratio, excluding prior year net loss reserve development, enables investors, analysts, rating agencies and other users of its financial information to more easily analyze Endurance's results of underwriting activities in a manner similar to how management analyzes Endurance's underlying business performance.  The combined ratio, net of prior year net loss reserve development, should not be viewed as a substitute for the combined ratio.  



ENDURANCE SPECIALTY HOLDINGS LTD.
GROSS AND NET PREMIUMS WRITTEN BY SEGMENT
(in thousands of United States dollars)
The following tables show Endurance's gross and net premiums written for the quarters ended March 31, 2013 and 2012:
Quarter Ended March 31, 2013 Quarter Ended March 31, 2012
Gross Premiums Written Net Premiums Written Gross Premiums Written Net Premiums Written
Insurance
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 
Subtotal Insurance $  652,943  $  404,694  $  635,347  $  427,781 
                 
Reinsurance
Catastrophe $  147,866  $  131,398  $  143,182  $  133,718 
Property  148,411   148,411   106,746   106,746 
Casualty  151,702   150,273   121,674   120,437 
Other specialty  76,440   74,139   54,700   54,374 
Subtotal Reinsurance $  524,419  $  504,221  $  426,302  $  415,275 
Total $  1,177,362  $  908,915  $  1,061,649  $  843,056 



ENDURANCE SPECIALTY HOLDINGS LTD.
RECONCILIATIONS
(in thousands of United States dollars, except share, per share amounts and ratios)
The following is a reconciliation of Endurance's net income, net income per diluted common share, net income allocated to common shareholders under the two-class method and annualized return on average common equity to operating income, operating income per diluted common share, operating income allocated to common shareholders
under the two-class method and annualized operating return on average common equity (all non-GAAP measures) for the quarters ended March 31, 2013 and 2012:
March 31, March 31,
2013  2012 
Net income $  100,299   82,542 
Add (less) after-tax items:
Net foreign exchange loss (gains)  2,909   (16,260)
Net realized and unrealized gains  (5,992)  (4,967)
Net impairment losses recognized in earnings  772   219 
Operating income before preferred dividends $  97,988  $  61,534 
Preferred dividends  (8,188)  (8,188)
Operating income allocated to common and participating
common shareholders $  89,800  $  53,346 
Operating income allocated to common shareholders under the
two-class method $  88,328  $  52,417 
Weighted average diluted common  42,443,936   42,488,850 
Operating income per diluted common share [b] $  2.08  $  1.23 
Average common equity [a] $  2,308,424  $  2,217,852 
Operating return on average common equity 3.9  % 2.4  %
Annualized operating return on average common equity  15.6  %  9.6  %
Net income $  100,299  $  82,542 
Preferred dividends  (8,188)  (8,188)
Net income available to common and participating
common shareholders $  92,111  $  74,354 
Net income available to common shareholders under the
two-class method $  90,601  $  73,059 
Net income per diluted common share $  2.13  $  1.72 
Return on average common equity, Net income  4.0  %  3.4  %
Annualized return on average common equity, Net income  16.0  %  13.4  %
[a] Average common equity is calculated as the arithmetic average of the beginning and ending common equity balances for the stated period, which excludes the $430 million liquidation value of the preferred shares
[b] Represents diluted losses per share calculated under the two-class method which was the lower of the treasury stock method and the two-class method.

Operating income and operating income per diluted common share are internal performance measures used by Endurance in the management of its operations.  Operating income allocated to common shareholders (excludes unvested restricted shares outstanding which are considered participating) per diluted common share represents operating income divided by weighted average dilutive common shares, which has been calculated in accordance with the two-class method under U.S. GAAP.  Operating income represents after-tax operational results excluding, as applicable, after-tax net realized capital gains or losses and after-tax net foreign exchange gains or losses because the amount of these gains or losses is heavily influenced by, and fluctuates in part, according to the availability of market opportunities.  Endurance believes these amounts are largely independent of its business and underwriting process and including them distorts the analysis of trends in its operations.  In addition to presenting net income and net income per dilutive common share determined in accordance with the two-class method under GAAP, Endurance believes that showing operating income and operating income per dilutive common share enables investors, analysts, rating agencies and other users of its financial information to more easily analyze Endurance's results of operations in a manner similar to how management analyzes Endurance's underlying business performance.  Operating income and operating income per dilutive common share should not be viewed as substitutes for GAAP net income and net income per dilutive common share, respectively.         

Endurance presents return on equity as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of its financial information.

Contact:
Investor Relations
Phone: +1 441 278 0988
Email: investorrelations@endurance.bm

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