Spitzer Spurs Endurance D&O Loss Reserving

For the fourth quarter, net income was $113.1 million, or $1.71 per share, up from $88.9 million in fourth-quarter 2003.

The firm said it is also increasing reserves on some prior-year casualty treaty business.

Endurance Specialty Holdings recorded net income of $355.6 million, or $5.28 per share, for 2004, compared to $263.4 million in 2003. Operating income (excluding realized investment gains) was $348.4 million, up 37.6 percent from 2003.

Both 2004 figures got a boost from a 72 percent jump in investment income (from interest and dividends), which at $122.1 million, represented roughly one-third of the income recorded for the year.

During a conference call today, executives explained that positive developments on prior years' losses outweighed precautionary reserves put up for potential losses related to the New York attorney general's investigations, and adverse development on some national account casualty business.

In total, Endurance benefited from $25.7 million in positive reserve development for the fourth quarter of 2004 from prior years, compared to $8.5 million in the fourth quarter of 2003. The reduction in estimated losses for prior years was heavily driven by lower than anticipated claim frequency in the two property reinsurance segments.

Mr. Carlsen noted that Endurance's fourth-quarter results were also impacted by a 7.8 percent increase in loss estimates for third-quarter 2004 U.S. hurricane losses.

Also impacting the numbers were precautionary casualty reserves set up for claims that might emerge for the New York attorney general's investigation of brokers and companies and SEC charges against mutual funds for inappropriate trading activities, he said, without quantifying the amount.

A $10 million prior-year reserve charge for generic casualty business, together with the regulatory-related loss charges which Endurance executives declined to quantify, boosted the casualty-treaty combined ratio to 117 for the fourth quarter, and 103 for the year.

All other businesses reported combined ratios below 100, with the overall result coming in at 86 for the year.

David Cash, president of Endurance Specialty Insurance and Endurance's chief actuary, said that while loss experience deteriorated on treaty casualty business for the 2002 and 2003 accident years?prompting an $11.2 million hike in casualty treaty reserves for the two prior years?property reserves for those years were taken down by $25.4 million, with smaller takedowns recorded for specialty and other casualty business.

Breaking down the $11.2 million reserve boost, he said that $10 million was related to mainstream casualty business for national accounts, while the rest related to investigations by regulators.

"While $10 million may not feel like a big number, it's something we take seriously?When deficiencies are identified, we recognize underperformance right away?It shows up straightaway in our numbers," Mr. Cash said.

While Mr. Cash noted that the precautionary reserves related to the N.Y. attorney general's investigations are an accident-year 2004 event (explaining the small contribution to the prior-year reserve hike), he would not quantify how much of the combined ratio deterioration related to the investigations. He said only that more of the deterioration was skewed to the national accounts issue.

Looking ahead, Kenneth LeStrange, Endurance's chairman and chief executive officer, predicted that the company would generate a 16 percent return-on-equity in 2005, assuming normal catastrophe activity.

Noting that gross written premiums were flat during the fourth quarter, owing to soft market conditions and increased buyer retentions, Mr. LeStrange said strategies are already in place to achieve success in 2005 despite these conditions.

In particular, he highlighted the launch of four new specialty reinsurance units in 2004?focused on marine and energy, personal accident, agricultural, surety?as potential contributors to future success.

Endurance also announced two capital management initiatives this morning: a 19 percent increase in its quarterly dividend, and board authorization of shares authorized for repurchase.

The board approved an increase of 2,000,000 shares to the number of shares authorized under the share repurchase program. And the quarterly dividend was hiked to 25 cents per share, payable on Mar. 31 to shareholders of record on Mar. 17.