Endurance Specialty Holdings Ltd. Earnings Call Insights: Incremental Capital Generation and Crop Insurance
Endurance Specialty Holdings, Ltd. (NYSE:ENH) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Incremental Capital Generation
Matthew Carletti – JMP Securities: Dave, I was just hoping you could kind of refresh us on your thinking on capital management thinking about – you guys are putting up some growth and thinking about kind of incremental capital generation. How should we think about it in terms of what’s going to be allocated to growing the business? What’s going to be allocated to a return to shareholders and kind of just an ecstatic basis, how you feel about your capital as it stands at the moment?
David S. Cash – CEO: As listeners will recall back in 2011 we did a very significant share repurchase of block of shares and after that we made the decision to scale back our share repurchases essentially to zero. We’ve been in that position really through 2011 into 2012 and that was driven as much as anything by just challenging loss experience for us and for the industry. Our position has always been that we would like to be a steady manager of capital both in terms of having a steady dividend and to repurchase steadily over time and I am pleased to say in the fourth quarter we got back on track. But I think we did about $10 million worth of repurchase in the quarter, and we continue to maintain our high dividend level – I think our dividend yielded something in 3% to 4% and little bit lower of that. Turning to 2013, I would see us staying on that path of steady repurchases through the year maintaining a strong dividend, but then frankly taking the balance of our capital and deploying it in growth, which you saw at 1/1 on the reinsurance side was pretty significant growth about 25%. I think it will be hard to see that sustain, that rate of growth and the reinsurance book sustain through this year, but I am expecting growth in that book. Turning to our Insurance book of business we’ve been adding new teams of individuals and obviously with the addition of Jack Kuhn as the leader of that business, I am seeing growth there. So, I wouldn’t expect a slowing of our rate of capital management, but by the same token I can see many uses of that capital going forward. So, I think between this quarter and the next quarter you will see what this sort of long-term trend for capital management it will be pretty clear I would say by the end of the next quarter.
Matthew Carletti – JMP Securities: I mean, just to play devil’s advocate a little bit. When I look at where your stock is trading and kind of the accretion and kind of your return on that investment of buying back your shares. Can you help me understand how that compares to the ROEs that you think you are garnering in the businesses that you are putting it into because at the surface it seems that even take what I think is maybe commonly viewed as one of the better returns in the markets property cat or some lines around that. It seems that the return from repurchasing shares at 20% or more discount to book value would arguably be greater?
David S. Cash – CEO: I think it’s a fair question. I think the answer to that lies in the difference between taking a sort of strictly kind of short-term financial view and taking a longer term view of what your strategy has to be as a company. Over the last couple of years, we’ve been clear that we think reinsurance companies are going to become increasingly international and global and we do think that it’s important for companies to have strong and robust insurance capabilities. 1/1 you saw growth in our Reinsurance business internationally that was consistent with that strategy. When I also look at 1/1 what I’m seeing is evidence that insurance companies hold premium back where they think the returns are strong. That just gives me a caution about the need to have an insurance strategy or desire to have an insurance strategy and the caution about being call strictly a short-term player in the market. So for that reason, we think over the long-term it’s important to accumulate capital and to reinvest in our business. We have sort of short-term and even long-term blips in terms of valuation. It’s important to be able to manage capital through that and buy back which you don’t want to do it at expense of your long-term strategy, that’s where we sit and that’s the message we are being consistently delivering over the last few years.
Amit Kumar – Macquarie: Maybe we can start-off with a few questions on our favorite topic Crop Insurance. In terms of when you look at your crop book for 2013 and based on what has happened over 2012, how do you foresee that book turning out to be – and I know it’s early and then there are lot of moving parts, but all else being equal just the size remain the same, expand, contract, what is your view, just based on the loss experience we’ve seen in the past?
David S. Cash – CEO: Let me take it in two parts. Let me talk about size and the we can talk about loss experience. On the size side, this business is really – the dominant strategy is the scale strategy. Companies that are more efficient and do a better job of servicing become larger, and it is just there’s no sense in trying to resist that trend, and so I think our model is the good one. I think we will tend to see policy count grow steadily over time. Pick a number of 5% policy count growth, and so I wouldn’t seek to stop that happening. We do want to see it happen more in the group to states which are ones that performed relatively speaking better this year, but we’re certainly not against growing the group one stage and so that’s sort of as where we have always been and where I think we will be going forward. When you look at loss experience in this industry, you’ve got a couple of things that are sort of out there that are very visible to investors. Some years, you have very good weather, 2010 was a year where weather was good. In some years, you have bad weather and the results would vary accordingly. What’s a little less evident to investors when they look at the book of business, but gives me quite a bit of comfort is where we see a tough season shaping up. There’re often tools that are available to us to manage the losses to a degree that you can’t quite appreciate on the outside, and so, at the beginning of last year, we knew that Texas was in a tough spot. We’d just come off of a very pronounced drought the year before in Texas. So, we took a much more – not much, we were already relatively cautious, but we took an even more cautious approach to how we handled sessions in Texas last year. Texas wasn’t a much better year than the year before. We actually generated a profit in Texas. What we didn’t have the benefit of back in April, when we were setting session strategy, the sort of the foreknowledge there was going to be a tough year in the Midwest in 2012. So, we’ve set ourselves some strategy accordingly. Coming to this year, we do know it’s going to be a relatively speaking, drier year in 2013. So, we can take more precautions than we were able to take last year. So, I do think that gives us the ability to manage given what will be a slightly sort of tough (indiscernible) normal. I doubt it can be as toughest year that we’ve just experienced. So, I tend to have sort of an optimistic view of this business do generally have an appreciation for the volatility. I think what’s challenge for all of us is the weather changes, and so it makes a part of our sort of returns a little bit less predictable for investors (indiscernible). I appreciate it. I think the long-term value in that though is real for investors and that’s why we stay in the course in this sector.
Amit Kumar – Macquarie: I guess, that’s the point I am trying to make. Investors generally don’t give you credit for the crop book and hence don’t you think that perhaps the size of the company in some senses is limiting the understanding of the book and maybe it is better to merge with larger platform to really unlock the value in this business?
David S. Cash – CEO: I think looking at the question for when the idea of say shrinking a part of your business to make your overall complexion better doesn’t make sense to me, so the idea of sort of say shrinking crop relative to the rest of our book doesn’t make sense. In terms of how best to move the business for it, the businesses that we operate in are relatively complicated and I think in some ways many management teams feel that the better company model to work with is when we have a great deal of control over internal infrastructure and you are building organically. I think that’s what most management teams would say is desirable. And the idea of trying to merge to sort of resolve a kind of a scale issue comes with a cost of a great deal of complexity and integration challenge. So, from my side I like the idea of organic growth and organic building that’s the model that we’re on right now.
Amit Kumar – Macquarie: But at the same time there are several options available in Bermuda in a similar market capital range which might have a slightly, I would say, simpler business model and hence it becomes a deterrent based on my conversations for many investors to sort of dig deep and understand the book than they can look at another company which has somewhat of a binary business model. And I am just wondering, we’ve been talking about this book, we’ve gone through this in great detail, but the reality is that many investors find understanding the crop book a bit daunting, especially as it relates to the market cap of the Company?
David S. Cash – CEO: I think the question is to valuation today is the legitimate one and I think where we are today as investors are a little bit cautious about where we are on our growth and our build out, so as a result our evaluation is little lower than, I think, it should be right now and I think it’s very much lower than it should be in the long run. Starting from that point, I don’t think that’s the right point to think about discussions of combinations of mergers. I’d really rather see our value grow which I think it will grow over the next couple of years and then reevaluate. I think I understand the point, but I don’t think the time is the time.
Amit Kumar – Macquarie: The only other question is, did you mention a growth number from the new teams and all the new the hires? I think you mentioned a growth number sort of premium expectation. I might have missed that. How much was that number for 2013?
David S. Cash – CEO: The numbers that I mentioned was at January 1 our reinsurance book of business grew. Last year our written premiums for reinsurance were about $390 million, and this year, January 1, there’s about $485 million, $486 million of premium, about $30 million of that came from our new type credit and surety business on the reinsurance side, and the balance of the growth there was really organic growth in our different businesses, the international, the North American and the cat businesses. Our weather team, that came online, they joined us late last year. We would expect to see their impact really in the first quarter of this year in terms of premium. So, I didn’t provide any kind of more breakout than that in my comments earlier.