After being hit with hurricane losses of $600m in 2005, Endurance was quick off the mark to make some necessary changes to its risk profile, discovers Lilla Zuill.

Kenneth LeStrange, chairman and chief executive of Endurance Specialty Holdings, a Bermuda-based insurance and reinsurance company, faced the daunting task of guiding the company through its most tumultuous period, and so far appears to have more than risen to the challenge.

Endurance was left with expected claims in the region of $600m from last year's devastating trio of hurricanes - Katrina, Rita and Wilma. The loss, equal to about 30% of Endurance's capital, was an unwelcome development for a company just celebrating its fifth year in business.

Like many of its peers, the large losses left Endurance scrambling to tap the capital markets for funds to replenish tarnished balance sheets. The company raised some $200m by selling additional common shares, and a further $200m was raised in an offering to preferred shareholders.

Having guided Endurance through its most troubled period since the company's 2001 formation, LeStrange could have been forgiven for wanting to take a breather. But as the CEO of a publicly-traded insurer with close to $2bn in shareholders' equity, he had too much weighing on the line to take his eye off the ball.

Endurance isn't the only firm to be recovering from a bad year. Last year's hurricane season left insurers and reinsurers across the board with record losses. But it may have been one of the earliest to scrutinise how to better protect its balance sheet. LeStrange explained that Endurance had made changes to its risk profile before 2006 had even begun. "As we began the year, in advance we had a number of priorities," said LeStrange. "We wanted to address the lessons learned from KRW (Katrina, Rita and Wilma), and particularly from Katrina."

LeStrange said the "unprecedented" losses had taught the industry an important lesson, and one that wasn't lost on Endurance. "It demonstrated the correlation of risk that we had underestimated." And Endurance reacted to that lesson by conducting "a ground-up analysis on all our books. We had appreciated the correlation, it is more the magnitude that caught the company by surprise," LeStrange said.

The company, which uses models from the industry's three major vendors - AIR, RMS and EQECAT - also relies on proprietary modelling to assess risk. "There were some particular categories of risk where losses did not perform as we had expected." It was a good test, however, for the system Endurance had developed in-house. "The proprietary tools did well," said LeStrange. "In essence we were heading in the right direction, but we didn't get the magnitude."

Endurance positioned itself ahead of the pack, LeStrange added, by being one of the first to factor in changes to vendor models by the end of 2005 in readiness for the 1 January renewal period. In contrast, most of Endurance's peers waited for the modelling firms to make the changes. "The new versions of the models have meaningfully different assumptions but we had clear visibility of the changes, and the magnitude and we pre-emptively adjusted our models and underwriting on 1 January in keeping with the new parameters," LeStrange said.

Why did this put Endurance ahead of the pack? LeStrange said that most of Endurance's peers, by waiting to see what changes had been made may have under priced policies during the pivotal renewal period. "A number of our competitors have been quite surprised at the magnitude of the changes."

He said apart from Endurance he was aware of only two or three of its Bermuda peers taking into account some of the vendor model changes before they were rolled out. "What we saw on 1 January in terms of property insurance and reinsurance was a correction but not nearly to the extent it needed to be," he said. "We offered equivalent amounts of capacity (to prior periods) but we quoted quite a bit higher relative to the market price, which actually allowed us to shift down our risk profile."

When terms and conditions didn't reach Endurance's thresholds, the company declined to write the business. While this meant business levels fell, LeStrange is comforted that his company is protecting itself from a repeat of last year.

In hypothetical terms, LeStrange said Endurance's altered risk profile would reduce losses to 65% of those incurred last year, in the event that a trio of hurricanes as damaging as last year's Katrina, Rita and Wilma would strike again.

LeStrange is upbeat about Endurance's prospects for the rest of the year. "I'm feeling very good right now," he said. "The portfolio we have constructed has much less risk and a much better return portfolio." An increasing hardening of the market is also likely to bear well on Endurance in 2006. "Just after April, (rates) started to correct," said LeStrange. He added that rates for policies that include wind and earthquake coverage were seeing the biggest price increases.

So far so good

After the economic chaos of 2005, Endurance started out the year on a solid footing. First quarter earnings grew to $107m, an 11% jump versus a year earlier when earnings were $96.3m.

The result was an improvement over the same period a year ago, and returning to a profit must have been welcome news after the company saw its balance sheet hit last year by the record losses. In total, Endurance ended 2005 with a net loss for the year of $220.5m, compared to a profit of $355.6m a year earlier.

Not wanting to be hit so badly again, LeStrange said the company has instituted measures to ensure underwriting controls are firmer and kept in check. He said the company is being run as a tighter ship from within, choosing not to follow the path of about ten other insurers and reinsurers setting up sidecar vehicles in recent months, under ceding arrangements that move high risks off the insurers' balance sheet.

Endurance's new risk profile led it to walk away from renewing certain policies. In total, first quarter gross premiums written fell $131m to $571m."This decrease in gross premiums written was largely due to the non-renewal of certain contracts in our property per risk treaty reinsurance and casualty treaty reinsurance segments that did not meet our return criteria or our underwriting and claims review recommendations," LeStrange said, in the company's quarterly earnings report.

Endurance managed to post stronger earnings despite having to boost its reserves in the first quarter by a further $35m, adding to funds set aside to cover claims from last year's storms. Positive reserve development of $42.5m helped to offset this.

While not in line for its own sidecar, Endurance, like many others, does appear to be partly insulating its balance sheet with the purchase of greater reinsurance protection. Like another peer, Montpelier Re, Endurance's purchase of reinsurance had traditionally been kept to a minimum.

In the fourth quarter, Endurance showed signs of reversing that pattern, buying enough reinsurance to effectively spread the risk of nearly $20m of its business to third-party reinsurers. For the year, reinsurance protection in the order of $50m was secured. In comparison, a year earlier, Endurance ceded less than $15m of all the business it wrote onto reinsurers.

Measuring up

LeStrange may have felt some pressure to put Endurance ahead of the pack after Endurance came up short on 2005 underwriting measures, compared to its peers.

Bermuda's major insurers and reinsurers posted an aggregate combined ratio in 2005 of 118%, according to data compiled by UK broker Benfield, a firm that also supplies research information to the sector. Endurance's level of underwriting profitability measured four percentage points higher than the Bermuda average at 122%.

However, when it came to investment returns, Endurance recorded improvements of nearly 50%. For the year, investment income grew to $181m, up from $122m in 2004.

- Lilla Zuill is a freelance journalist.


Kenneth LeStrange has served as chairman, chief executive and president of Endurance Specialty Holdings from the time it was formed as a Bermuda-based insurer and reinsurer in 2001. He came to Endurance with more than two decades of experience in the property-casualty industry. LeStrange has significant experience as a treaty and facultative underwriter, including managing the treaty underwriting facilities at Swiss Re and American Re. He began his underwriting career with Hartford, and later went on to join Swiss Re. He rose into the senior ranks while at American Re, serving as its executive vice president, and president, Am Re Managers, American Re's alternative market subsidiary. In 1996, LeStrange joined Aon as chairman and chief executive of its alternative market operations. He was later promoted to chairman and CEO of Aon's retail brokerage operations for the Americas region. LeStrange has a BA degree in economics and English from Colgate University. And he has pursued graduate studies in finance at New York University and Fordham University.