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Endurance Specialty Holdings Ltd. (NYSE:ENH)

Q4 2013 Earnings Conference Call

February 7, 2014 08:30 AM ET

Executives

Gregg Schroeder - SVP, IR & Corporate Development

John Charman - Chairman and CEO

Mike McGuire - CFO

Analysts

Amit Kumar - Macquarie

Ryan Byrnes - Janney Capital

Scott Frost - Bank of America Merrill Lynch

Matt Carletti - JMP Securities

Meyer Shields - KBW

Jay Cohen - Bank of America Merrill Lynch

Operator

Good morning and welcome to the Endurance Specialty Holdings Fourth Quarter 2013 Earnings Results Call. (Operator Instructions). I would now like to turn the call over to Gregg Schroeder, Senior Vice President of Investor Relations and Corporate Development. Please go ahead sir.

Gregg Schroeder

Thank you Jake and welcome to our call. John Charman, Chairman and Chief Executive Officer; and Mike McGuire, Chief Financial Officer, will deliver our prepared remarks.

Before turning the call over to John, I would like to note that certain of the matters that we discuss here today are forward-looking statements. These statements are based on current plans, estimates and expectations and include but are not necessarily limited to various elements of our strategy, business plans, growth prospects, market conditions, capital management initiatives, information regarding our premiums, loss reserves, expenses and investment portfolio. Forward-looking statements are based on our current expectations and assumptions regarding our business, the market in which we operate, the economy and other future conditions, and involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in the forward-looking statements and we therefore caution you against relying on any of these forward-looking statements. Forward-looking statements are sensitive to many factors including those identified in Endurance's most recent Annual Report on Form 10-K, that could also cause the actual results to differ materially from those contained in forward-looking statements. Forward-looking statements speak only as of the day on which they were made and Endurance undertakes no obligation publicly to update or revise any forward-looking statement whether as a result of new information, future developments, or otherwise.

In addition, this presentation contains information regarding operating income and other measures that are non-GAAP financial measures. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release, which can be found on our website at www.endurance.bm.

I would now like to turn the call over to John Charman.

John Charman

Thank you Gregg and a wonderfully warm and sunny good morning everyone. Welcome to our fourth quarter earnings call. We have made great progress in the transformation of Endurance in 2013 and have a reasonably strong finish to the year. Against the backdrop of the strategic re-underwriting and rebalancing of our entire business Endurance generated a full year operating return on equity of 11.9%, a combined ratio of 90.2% and improved accident year loss ratios in both our insurance and reinsurance segments. We have substantially improved our risk adjusted profitability and rebalanced our portfolios in the short period of time. Strategically we significantly improved our relevance and standing in the market. We quickly and effectively integrated new leadership and underwriting teams with industry leading track records and extensive profitable experience. While we still have a few more individuals and teams to join us the core of our underwriting leadership is in place and we begin 2014 well positioned with the right people, the right products, the right capital and the absolute determination to deliver for our shareholders.

Endurance can be viewed as having three distinct phases. The first is the business which existed prior to 2013, the second is the 2013 business which has been fundamentally transformed during the year and the last is the Endurance that will emerge in 2014 which will fully reflect all of the positive changes we have been implementing.

Later in the call I will discuss these critical developments in more detail and I’ll provide an update on our current and prospective underwriting activities and our view of the market. But first I will turn the call over to Mike to provide some additional comments on our fourth quarter results. Mike?

Mike McGuire

Thanks John and good morning everyone. In the fourth quarter Endurance generated net income to common shareholders of $59 million and $1.33 per diluted share and operating income of $59.9 million and $1.35 per diluted share. For the full year Endurance generated net income to common shareholders of $279.2 million and $6.37 per diluted share and a full year operating return on equity of 11.9%. Premiums written in the fourth quarter were $371 million gross and $280 million net, an increase of 41.5% gross and 49% net compared to the fourth quarter of last year.

Growth was driven by new opportunities generated by our expanded underwriting teams particularly in our U.S. insurance and reinsurance businesses. For the full year premiums written were nearly $2.7 billion gross and $2 billion net. The modest increases of 4.6% gross and 1% net compared to full year 2012 matched the significance across the board re-underwriting activities that we implemented throughout the year. Within our insurance segment, fourth quarter gross premiums written were $201 million up 13.3% while net written premiums were $112 million, an increase of 5% compared to a year ago. Our professional lines and casualty and other specialty lines of business drove the growth as the teams we hired in 2013 are gaining momentum.

The growth was partially offset by modest reductions in agriculture and property lines of business due to reduced commodity prices on fall crops and the non-renewal of some property business as we further reduced limits in peak exposure zones.

Within the reinsurance segment net premiums written were $168 million in the quarter, an increase of 106.8% over 2012 as we wrote several new historically profitable professional lines quota share contracts in the United States.

Thanks to the reputation and market leadership the underwriting team that joined us recently was able to secure these participations without having to compromise on price or terms and conditions. These contracts have higher expected margins in the business that we have been non-renewing and we will continue to rebalance the portfolio through the first half of 2014.

Looking to 2014 premium writings it is worth noting that while we expect to continue gaining market share in agriculture we also expect our agriculture insurance premiums to be impacted by lower commodity prices. It should also be noted that lower based commodity prices would result in lower exposures and reduce the chance of further downside price risk in 2014. Outside of our agriculture business as the reunderwriting of our portfolio is completed we expect our businesses will show continued profitable growth. Our combined ratio for the fourth quarter was 93% compared to 119.2% in the fourth quarter of 2012.

The improvement was driven by light catastrophe activity and increased levels of favorable prior year reserve development which continues to come largely from our short tail lines. These improvements were partially offset by an increase in the loss ratio in our agriculture insurance business due to lower harvest yields in a few states combined with a significant decline in corn prices.

Our agriculture results reflected full year net loss ratio of 97.6% and we expect to generate an underwriting gain for the 2013 crop year. More importantly in another heavy claims year for crop insurance our industry leading technology and claim service have once again positioned us well for the upcoming sales cycle in 2014.

We continue to believe that this is a great business which has proven over the long term to generate strong profits with loss ratios on average in the mid-80s. For the full year our ex-cat accident year loss ratios improved in both our insurance and reinsurance segments as attritional losses were lower and our business mix continues to improve.

Loss ratio improvements were offset by higher expense ratios from increased corporate expenses related to restructuring activities, our CEO transition, the hiring of new teams of underwriters and higher variable compensation expenses due to improved company performance.

We expect that 2014 and beyond will see significant improvements in our loss and expense ratios as our business expands and we continue to drive operating efficiencies throughout the company.

Turning to investments, our portfolio’s total return was 74 basis points in the fourth quarter and 1.43% for the full year. Net investment income in the fourth quarter was $46.3 million an increase of $7.7 million from a year ago driven by a $10.3 million increase in income from other investments which was offset by a lower book yield on our fixed income portfolio.

We expect investment income for fixed income securities to stabilize around current levels as reinvestment rates are closed to our book yield. Our duration remains relatively short at 3.1 years. We believe we’re well positioned to reinvest at higher yields when rates rise.

Turning to reserves we have maintained a strong reserve position with $384 million of IBNR in non-agriculture short tail insurance and reinsurance lines of business. In addition, $2.1 billion or 74% of our casualty and professional lines of insurance and reinsurance reserves are IBNR.

As a reminder we will publish our Global Loss Triangles later this month when we file our 10-K. Our capital position remain strong with total shareholders’ equity of $2.9 billion and total capital of $3.4 billion. Book value per share ended the quarter at $55.18 up from $52.88 at the end of 2012.

Risk based capital levels improved significantly during 2013 as our shareholder’s equity grew and our catastrophe risk decreased substantially. Our 1-1 P&Ls reported in our supplement last night reflect the continued reduction involves lines of business and greater use of reinsurance.

Illustrated by the significant year-over-year declines in our U.S. and Europe wins and California earthquake PMLs at the 1 in 100 year return period from the year ago. The growth in our capital and decline in PMLs positions us very well to pursue our growth initiatives over the next several years.

I will now turn the call back to John for some additional comments.

John Charman

Thank you Mike. And for the remainder of the call I will discuss the highlights of our ongoing transformation initiatives. Our underwriting activities and finally our view of current market conditions. Starting with our transformation efforts the fourth quarter included a continuation of the significant repositioning of our business activities. Our efforts remain focused on three critical areas. First, we have significantly and effectively expanded and upgraded our global underwriting leadership and talent to improve our positioning and relevance in the underwriting market. Second, we are enhancing the profitability balanced and diversification of our underwriting portfolio to improve our risk-adjusted returns.

And third we’re restructuring and realigning our infrastructure to improve the cost efficiency and effectiveness of our operations. Starting with our underwriting leadership and talent 2013 was a year of fundamental change which encompasses significant leadership and organizational changes within Endurance.

In our insurance businesses we added experienced leadership and expanded product capabilities in professional lines, primary and excess casualty and inland and ocean marine. Within our U.S. business alone we added over 50 new exceptional underwriters with a collective underwriting experience of over 1000 years.

The vast majority of these underwriters are known to us through having worked with them earlier in our careers. We have counter balanced this addition by reducing a number of existing underwriting staff in some of these areas.

Internationally we have recently launched a strategically important London based insurance operations which will start generating premiums in the first quarter of 2014.

Within our reinsurance business, we have strengthened our leadership team and significantly upgraded our underwriting and analytical capabilities particularly in professional lines and casualty, marine and energy and other specialty lines.

We have strengthened the footprint of our specialty business into Asia. In addition to key hires in our established hubs in the US, Bermuda and Europe. With more focus leadership and accountability across all our insurance and reinsurance businesses we’ve globally improved our positioning and relationships with our brokers and clients. While the company has historically been more of a follower, we’re now actively influencing our business activity.

While we still have some people and teams yet to join us, our core underwriting leadership team is in place and they are driving underwriting improvements across our business. In the second critical focus area, enhancing the underwriting profile over the past six months we have completely reunderwritten the majority of our portfolio. Rebalanced exposures and fundamentally changed our reinsurance purchasing to achieve greater risk-adjusted profitability and reduce future volatility of earnings.

In our reinsurance business since the June 1st of 2013 we have non-renewed approximately 35% or a $165 million of renewable in areas that either had adequate margins or excessive potential volatility. This premium has been largely replaced with several professional lines, casualty and property treaties written by new teams where we believe the long-term return potential is significantly better.

Across both our business segments these reunderwriting efforts have been strengthened with a much more controlled and strategic approach to the purchase of reinsurance and retrocessional protection. These impacts can already be seen in our significantly reduce PMLs. The third area of focus for us over the last six months has been our corporate infrastructure and operations. Upon my joining we’ve immediately restructured our leadership team, improved our decision-making processes and realigned our organizational structure. We made immediate cost reductions in our corporate operations to fund our underwriting expansion. We have begun the process to drive continuing efficiencies throughout our operations to enable our businesses to grow significantly without a corresponding increase in our operating expense base.

We are determined to see these efforts drive our expense ratio down significantly over the next several years. Turning to the market, our business development has been strong in spite of the broadly competitive conditions we are facing globally. In our insurance lines during the fourth quarter we continued to see modest rate increases within the casualty and professional lines while property rates remained flat or modestly down.

Our fourth quarter premium rising started to show the positive impact of the new leaders and teams that we have brought on board over the last year. Although we did see some rate pressure in December as weaker competitors appeared to focus on achieving year-end premium budgets, these pressures seem to have eased in January. While it's early days 2014 is progressing as we expected and as we planned.

In our reinsurance segment we showed very strong growth in the fourth quarter as we were often supporting shares on several large proportional treaties in professional lines and casualty reinsurance. These were mostly established treaties priced by the long standing incumbents with very few new entrants being invited to participate. These contracts maintain good margin potential that our teams are able to secure based on their reputation, market leadership and established client relationships.

Looking to 2014 we had a successful 1-1 renewal cycle in our reinsurance business. On a renewal base of $480 million we’re wrote approximately $460 million in gross written premiums, a decline of approximately 4%. Our property catastrophe business was down about $14 million or 10% due to rate declines, and limit reductions in North America that was partially offset by some targeted expansion with key clients with exposure in Europe and Asia. Inspite of a significant and well publicized competition in the catastrophe space, we still assembled an attractive, well-balanced, regionally focused portfolio and maintain preferred signings with our key clients. We deliberately abstained from the commoditized business as well as the contracts where terms and conditions were fundamentally weakened.

Our international casualty reinsurance premiums were down $63 million or 48% driven by our fundamental reunderwriting of the portfolio as we eliminated a significant amount of UK motor business and other casualty treaties with unacceptably low margins. Offsetting these declines our professional property and our other international specialty reinsurance lines such as trade credit and surety and engineering grew strongly at 1-1 due to our expanded expertise and standing in these areas. The net result of the significant changes we have made to our underwriting portfolios in 2013 and the 1-1 is expected driving ratio that is materially improved compared to a year ago across our portfolio of businesses.

While the premium reductions now reunderwriting and premiums written by a teams have been largely offsetting. The underlying risk reward characteristics of our portfolio is meaningful improved. As we planned last autumn, our portfolio is now more balanced as low margin business and volatile exposures with all risk reward characteristics have been reduced or eliminated. PMLs are down substantially and we have a much greater concentration of our specialty business with higher expected margins.

Looking forward to 2014 and 2015 we continue to expect challenging market conditions and in fact our business plans over the next few years were predicated on the assumptions that markets will remain highly competitive. We have purposely positioned ourselves with a greater emphasis on specialty lines of business that are less influenced by market forces than commoditized highly competitive lines of business. As our business grows we expect we will strategically utilize reinsurance to balance our limits, aid capital management and optimize our returns.

As we expect the markets to remain competitive it is critical that we continue to drive further cost efficiencies through our operations.

In closing Endurance has been transformed in 2013 as we expanded our presence, our profile and the strength of our Company in order to drive improvements in our long term performance. There is still much to do and so much to demonstrate. But with our strong balance sheet our fundamentally improved underwriting focus and our change in leadership as well as the determination and discipline of our management team I’m confident in our ability to meet our enhanced profitability objectives for our shareholders over the next several years.

And with that operator we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will hear first from Amit Kumar with Macquarie Holdings

Amit Kumar - Macquarie

A follow up to your opening comments on growth in professional lines, I guess the one question we were getting last night was some companies are going back and reunderwriting or cutting their writings or taking reserve actions. How should we think about the profitability of this businesses being written at?

John Charman

Well I think firstly I would say you look at the track record of my colleagues and myself in those lines of business over many, many years. In my previous company and Jack Kuhn previous company, we developed over a $1 billion annually of fully diversified highly profitable, global professional lines business with a very long track record of profitability and stability and that is what we intend to do here at Endurance. I would also like to add that most of the issues that seem to have emerged recently seem to be of a primary issue which is where we’re not engaged as a company.

So it is not something we’re obviously watching it but it is not something that we expect to directly impact our business activity for the foreseeable future.

Amit Kumar - Macquarie

So I guess a follow-up to that would be, would it be fair to say that the market conditions now are different than the past I guess when the $1 billion of diversified portfolio was written?

John Charman

I’m not sure I would characterize it as different. There is intense competition as there always is. I think the financial crisis that the markets went through between 2007 and really 2010 I think that portfolio of business globally held up pretty well and actually did what the stress test certainly that in my previous life we ran, performed as expected and performed as at that time we had reserved and we had reserved very conservatively just as we do at Endurance. So I believe and Jack Kuhn does very, very strongly and professional lines business is a key part of our specialty insurance businesses and a key part of our future profitability and a great differentiator as a business if you have the expertise.

Amit Kumar - Macquarie

I guess the only other question, and I will stop after this, is would it be possible to ballpark the impact of new teams in terms of percentage of premiums or some metric, that we can segment out the impact from new teams and then sort of look at the organic premiums?

John Charman

Yeah, it's a difficult thing because it's not only new premiums but we work as a group of people; we have had fundamental change in both our insurance business and reinsurance business over the last 12 months but we’re a team of people. So there are some - a lot of very new people into our business but there are also some existing staff and so those groups are acting as teams within their respective portfolios. Without a shadow of a doubt I cannot underestimate to you the complete rebalancing and reunderwriting of both portfolios in insurance and reinsurance and I know I can’t think in my recent life time of any other company that has had such a fundamental amount of change in such a short period of time but it's positive and it was needed and it has set us up extraordinarily well for the future.

Operator

And next we will hear from Ryan Byrnes with Janney Capital.

Ryan Byrnes - Janney Capital

Just had a question if you guys could quantify maybe the onetime expenses because obviously the expense ratio uptick in both kind of the core insurance as well as the reinsurance segments, just wanted to see how we should think about that from maybe the run rate going forward.

Mike McGuire

There is a lot of one-offs and other items in our expenses in the quarter and for the full year. Our focus is on the full year number because I think it gives you a better sense of all the moving parts. One of the biggest change is certainly year-over-year will be the impact of how we account for equity compensation and obviously you guys are familiar with the equity package that John received upon joining the company and the significant portion of that expense was recognized in 2013 by itself was about $20 million for the full year and that represents a little over 40% of the full value of that 5 year package. So that will be diminishing over time. In addition this year we had a fair bit of restructuring activities throughout the company that resulted in payment of severance and other costs, it was close to $12 million of severance related cost for the full year and so those are things that I would consider to be largely one-offs.

And then our bonus expenses, incentive compensation expenses in the year were up substantially over last year; one was driven by company performance but then last year we also had actually reductions in our 2011 accruals because of bonuses that were paid in 2012 for the prior year that were lower. So there was a double impact we had lower performance last year and then we had accrual reductions last year that did not repeat. Those two items combined were close to $20 million the number for the full year.

As I look forward about our expense ratios, I think we said in our prepared remarks we think that 2013 should be a high bar for expense ratio and in terms of run rate we would be looking to drive our expense ratio down several points over the next several years.

Ryan Byrnes - Janney Capital

And then shifting to the insurance ex-crop, the retentions falling down to about 61% from kind of low 70%s before. Should we think about that as a good run rate going forward? Obviously you guys are planning on doing some growth there.

Mike McGuire

Yeah as John said a key part of our insurance strategy and particularly in the early years as we grow those portfolios is a more strategic use of reinsurance and so across our portfolios we have added proportional protections and other protections that really cost the majority of our insurance lines and that is not something that we had done across the portfolio previously. So I think you’re starting to see a truer run rate of retention rate.

John Charman

Just to add to Mike’s comment one of the good things about it is the fact that it acts as a validation to the core competencies that the teams have brought in. The new underwriting business where really high quality reinsurers are prepared to partner with those new teams in terms of future reinsurance protection being provided for them. So that gives me a lot of comfort as well. So it's not just a matter of limit management, capital management and that we have commission coming through. But it also validates strongly to me the people that we bought in.

Ryan Byrnes - Janney Capital

And then just my last one. You guys didn't give or I didn't notice any kind of 1-1 reinsurance commentary. I just wanted to get your thoughts on how those renewals panned out for you guys?

Mike McGuire

Actually Ryan, John did cover in a fair bit of detail our 1-1 renewals in his prepared remarks.

Operator

And next we will hear from Scott Frost from Bank of America Merrill Lynch.

Scott Frost - Bank of America Merrill Lynch

I wanted to ask how you think about your, I know they are not due to be called for a couple of years, but how do you think about your preferreds that are outstanding right now, how do you feel about that in terms of cost of capital?

John Charman

Well our professional preferred securities as a nice permanent source of capital. Clearly the non-call periods expire we will be evaluating whether or not we keep those instruments in our capital structure of if there is a more efficient way, a cheaper way to fund the capital structure but for now I think it's a good part of the capital structure. We get full regulatory and for the most part full rating agency capital treatment for those securities in a debt like cost. Clearly refinance rates currently are lower than the coupon rates that we’re currently paying. So if those conditions remain I think we would have a nice opportunity to reduce our cost to capital just by refinancing it at current market rates.

Operator

And now we will hear from Matt Carletti with JMP Securities.

Matt Carletti - JMP Securities

Two questions, first one for you, John. You made a comment in your opening remarks, and I probably won't get the wording exactly right, but you alluded to making progress and expanding your footprint in Asia. Can you provide some more color there?

John Charman

Well I think that quite frankly that our Asian operations were not as strong and not as focused as they should have been and we had not used the embedded relationships that we now have within the Company with Asian cedants to the full extent that we should have done. And so as part of the complete refocusing of our business activity Jerome and I have repositioned our agent business, we have strengthened the underwriting capability in our Singapore office but we have substantially changed the business activity and the business trends to target and strengthen the relationships that we know will produce very good business over a long period of time

Matt Carletti - JMP Securities

And then my other question relates to some of the large quota share treaties entered into in the U.S. professional liability side. Any color you can provide there on ceding commissions that are being paid? There's a lot of talk about the market being very competitive in that sense, talking with some intermediaries the numbers and the…

John Charman

There is a lot of noise, forgive me and naturally is at the year-end and it's just part of it. But let me say on the treaties that we wrote, we were very happy to write them. We knew the people well, these are long established teams of people that have very good reputations in the marketplace and by the way the ceding companies were still retaining pretty well half of the business themselves. So it is natural that if you’re an extraordinary good underwriting business and you’re putting proportional reinsurance into a marketplace you would expect to be paid for the quality of that business just as I said earlier about my comments about the business we’re putting into the marketplace being validated by some very high quality reinsurance businesses. So I think that there is lot of noise around, people then have lot to talk about at the moment certainly not as positive and I rarely would not get too fussed about it. For us it was great because again it meant that our new teams of underwriters were programmed to be wanted in the market. We weren’t out there competing aggressively on pricing or terms and conditions we were wanted by the market and we wanted for continuity sake.

Matt Carletti - JMP Securities

I guess one other thing to ask on it is, those books are established, as you said, by market leading underwriters. What sort of loss ratios have those books produced in the most recent accident years?

John Charman

We don’t talk about individual customers but these rather like I said when I was talking about in our prior life, Jack Kuhn and I ran a $900 million professional lines globally diversified portfolios that was highly profitable. There are lots of examples that you can go back and look at the loss triangles of these companies and you can just see how continuously profitable these businesses have been.

Matt Carletti - JMP Securities

Thanks for the answer John and best of luck in 2014.

John Charman

Thanks a lot but don’t take too much notice of all the noise about that stuff.

Matt Carletti - JMP Securities

Thanks.

Operator

(Operator Instructions). And now we will move to Meyer Shields with KBW.

Meyer Shields – KBW

Two, I think, relatively simple approach questions. One, do you expect your reserving process to be more conservative than Endurance has been in the past with regard to professional lines?

John Charman

Well our reserving process hasn’t changed. That’s a fair thing, some of the things about reserving is the fact that the Endurance historically has always reserved conservatively and appropriately so across all of its lines in business and that has continued since I became the CEO and Chairman and will continue. Of course like everything in life if you try to evolve and refine any process especially has the more experience that Endurance actually has you would naturally over a longer period of time expect to roll in your own actual experience as well as the market experience that we are garnering. But our process remains unchanged, it is robust and I’m very comfortable about the solidity of our reserves as well as the process in establishing them.

Meyer Shields – KBW

Okay. And as you shift away on a proportional basis from shorter tail lines to medium and longer tail lines, would that itself extend your fixed-income investment portfolio duration or?

John Charman

I just like to, we are balanced, we haven't thrown ourselves at property business if that’s where the first part of your question was. It is quite frankly on a risk adjusted basis we don’t believe that in either primary or a lot of reinsurance business at this stage of the market cycle we have been properly rewarded for a lot of those property exposures. So we have gently stepped back from that activity and we expect that position to be the same for the next couple of years. But Mike perhaps you want to answer the latter part?

Mike McGuire

Yeah Meyer your question is, all else being equal which never is. If we did have a significant extension in the duration of our liabilities that would certainly give us something to think about in terms of asset portfolio and the duration thereof. Although we will see our current bias in our portfolio management is a short one. Right now we’re a little bit shorter than our target duration and given their interest rate environment that we’re in there is more downside than there is upside in terms of interest rate risk and duration risk. So even if our liability duration moved out a little bit I wouldn't expect that to see directly move our asset duration unless we saw the rate environment improved to be more in balance.

John Charman

And I think with the portfolios that we have now within Endurance I don’t see a material change in that duration. Most of the liability business we’re underwriting is still within that 5 to 7 year window. You’re not talking about 25 year uncertainty.

Operator

Next question will come from Jay Cohen with Bank of America.

Jay Cohen - Bank of America Merrill Lynch

I guess the question I have is on the margin. I guess what I have been taught over the years is excessive loss business, property business has a lower expected loss ratio than a quota share long tail business. The return characteristics might be different obviously, but from specifically a margin standpoint when is that right? And two, as you make this shift shouldn't you feel some upward pressure on the loss ratio simply because of that business mix change?

John Charman

Well I’m not sure I would agree with you and your statement especially at a certain point in the cycle, especially at the bottom end of the life because quite frankly the extra volatility that can be within an excessive loss program can far outweigh any potential risk-reward characteristics that might appear to be modeled there. That’s from my personal experience Jay. And so I think having the solidity of a broad diversified portfolio of underwritings which have been grouped together into a quota share I think takes an awful lot of that unknown volatility out of it, because you are looking at a portfolio of business. I think some of the pricing on the other side of excessive loss side of the business has become very, very aggressive relative to the known than the unknown exposure sort of contain within those portfolios. So on a risk adjusted basis I know where I’m happy to be.

Mike McGuire

I would add to that if you think about the unique experience of Endurance and what we have been doing, we’re underwriting the portfolios. If I look at our reinsurance business even though your point on cat [ph] going down, a margin on premium would generally be higher on cat [ph] than it would be on a liability line but if you put that aside and look at the shifts in our portfolio particularly as John talked about it 1-1 the reductions in some of our casualty reinsurance treaties were in areas that had very, very low margins and the treaties that we have been replacing on a professional liability side and others will have higher margin. So we’re getting that margin expansion inspite of the fact that our pure cat writings are down modestly which would have all else being equal negative margin. So there is a big mix shift going on that you’ve to get under the covers to really see that.

Jay Cohen - Bank of America Merrill Lynch

Got it. No, that make some sense. And I guess the second question on the professional liability treaty, what kind of business are we talking about? Is this D&O insurance? Is this miscellaneous professional liability?

John Charman

Well it's a broad portfolio and that’s what’s attracted to us. It's a portfolio by different product lines which can be up to 20 different product lines within some of these companies and it's also broad portfolio geographically. It is not all focused on financial lines.

Operator

And with no additional questions in the queue that will conclude our question and answer session. I would like to turn the call back over to John Charman, CEO and Chairman for any additional or closing remarks.

John Charman

Well once again thank you very much ladies and gentlemen for taking the time to listen to us and we very much look forward to catching up with you again in May. Thank you.

Operator

Ladies and gentlemen this will conclude your conference for today. We do thank you for your participation.

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