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Coverage Initiation: Endurance Specialty Holdings
Value Line has initiated coverage of Endurance Specialty Holdings (ENH) in its flagship product, The Value Line Investment Survey. The company focuses on underwriting specialty lines of personal and commercial property and casualty insurance and reinsurance worldwide. It began operations in 2001, and was incorporated in Bermuda in 2002. In March of 2003, it completed its initial public offering of its shares, which are traded on the NYSE. As of December 31st, 2012, it had 881 employees. Endurance has its principal office in Pembroke, Bermuda, with other offices in the United States, the United Kingdom, Switzerland, and Singapore. It has seven wholly-owned operating subsidiaries.
The company generates revenues primarily from premiums from its insurance policies and reinsurance contracts. These premiums are priced on risks assumed and are based on many assumptions. It prices these risks before the ultimate costs are known, which may be several years in the future. Revenues are also generated from the company’s investment portfolio, which includes fixed-income and equity investments.
The company has two business segments: Insurance and Reinsurance. The Insurance division, which accounted for 56% of gross premiums written in 2012, is comprised of four business lines: agriculture, casualty and other specialty, professional lines, and property. The agriculture line is the largest part of the group, and focuses on traditional multi-peril crop insurance, livestock risk protection, and other agricultural risk management products, all offered through independent agents in the United States. Casualty and other specialty includes healthcare liability insurance and contract and commercial surety insurance. Professional lines is involved with directors’ and officers’ liability, errors and omissions, and environmental liability. Property primarily covers earthquake and flood coverage.
The Reinsurance segment accounted for the remaining 44% of gross premiums in 2012, and includes catastrophe, property, casualty, and other specialty. The catastrophe line reinsures catastrophic perils, including hurricanes, earthquakes, and floods, for ceding firms primarily for property and workers’ compensation business. The property group reinsures property insurance policies for both personal and commercial exposures, and protects against fire, explosion, and vandalism, among others. Casualty includes reinsurance of automobile, professions, and workers compensation liabilities. Finally, other specialty provides reinsurance of aerospace, marine, and trade credit products.
Most of Endurance’s business is obtained directly by the company or through intermediaries, including independent agents and insurance and reinsurance brokers throughout the world. In 2012, the largest single broker in its Insurance business was Marsh & McLennan, which accounted for 7.6% of net premiums written. The largest single broker in the Reinsurance group was Aon Benfield, which accounted for 29.2% of net premiums written.
The insurance and reinsurance industries are highly competitive, and compete on many factors, including premiums charged, general reputation, and perceived financial strength. Speed of claims payments and terms and conditions of products offered are also important. Competitors include established global insurance companies, along with smaller start-ups.
The primary risks facing Endurance, and the insurance and reinsurance industry as a whole, include the fact that it is vulnerable to catastrophic losses. Since many scientists believe the earth’s atmosphere and ocean temperatures are rising, the severity and frequency of natural disasters have increased in recent years. These catastrophic losses could clearly cause significant negative results at Endurance, since certain premiums may not be enough to cover these risks. Additional concerns include potential losses from war, terrorism, and political unrest. Mass tort claims are also on the rise.
Overall business prospects for Endurance remain mixed. The global economy remains challenging, and pricing continues to be competitive in many markets. The low levels of economic activity will likely continue to hinder significant growth in demand for insurance and reinsurance. Nevertheless, the company has a solid reinsurance franchise and its crop insurance business remains robust. In addition, the company continues to support shareholder returns with ongoing stock repurchases and a solid dividend yield.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.