Endurance Specialty Holdings Ltd. Q1 2008 Earnings Call Transcript

| About: Endurance Specialty (ENH)

Endurance Specialty Holdings Ltd. (NYSE:ENH)

Q1 FY08 Earnings Call

May 2, 2008, 8:30 AM ET

Executives

Gregory Schroeter - VP of IR and Corporate Development

Kenneth J. LeStrange - Chairman, President and CEO

Michael J. McGuire - CFO

David S. Cash - Chief Underwriting Officer

Michael Angelina - Chief Actuary & Chief Risk Officer

Analysts

Matthew Heimermann - JPMorgan

Susan Spivak - Wachovia Capital Markets, LLC

Ronald Bobman - Capital Returns

Jay Cohen - Merrill Lynch

Vinay Misquith - Credit Suisse

Operator

Good morning, everyone, and welcome to the Endurance Specialty Holdings first quarter 2008 earnings results conference call. This call is being recorded. Your lines will be in a listen-only mode during the presentation. You will have an opportunity to ask questions after the presentation, instructions will be given at that time.

I would now like to turn the call over to Mr. Greg Schroeter, Vice President of Investor Relations and Corporate Development. Please go ahead.

Gregory Schroeter - Vice President of Investor Relations and Corporate Development

Thank you, Alexandria and welcome to our call. Hosting this call will be Ken LeStrange, Chairman, President and Chief Executive Officer, Mike McGuire, Chief Financial Officer, David Cash, Chief Underwriting Officer, and Mike Angelina, Chief Actuary and Chief Risk Officer.

Before I turn the call over to Ken, I would like to note that certain of the matters that we will discuss here today, are forward-looking statements. These statements are based on current plans, estimates and expectations. Forward-looking statements involve inherent risk and uncertainties and number of factors could cause actual results to differ materially from those contained in the forward-looking statements.

Forward-looking statements are sensitive to many factors, including those identified in Endurance’s annual report on Form 10-K and other documents on filed with the SEC that could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements speak only as of the date on which they are 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.

I would now like to turn the call over to Ken LeStrange.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Thank you, Greg. Good morning, and welcome to our first quarter conference call. Endurance has reported first quarter 2008 net income of $77.8 million, representing $1.15 per diluted common share. Annualized operating return on equity was 14.7% for the quarter. Our book value on March 31 was $36 per diluted common share, an increase of 2.7% from year end.

Our underwriting performance was strong, as evidenced by our combined ratio of 84.4%. This result was driven in part by $41 million of favorable development, $39 million from shot tail lines and agricultural reinsurance. You can see in our investor supplement that we have taken a cautious approach to our initial loss ratio estimates for the first quarter 2008, reflecting more competitive market conditions than we have experienced in the past.

Gross written premiums grew by nearly 50% over the last year, to $868.6 million. This increase was driven by $413 million from ARMtech, the crop insurance company we acquired at the end of 2007. Our reinsurance underwriting results continue to be strong, albeit on a stronger base of premium. We are pleased with the execution of our cycle management strategy. Our investment income was less this quarter than last year, due to mark to market reductions in the value of our alternative investment portfolio. In addition, we had other than temporary impairment charges on our fixed income portfolio.

I would now like to turn the call over to Mike McGuire, who will discuss our financial results in more detail.

Michael J. McGuire - Chief Financial Officer

Thank you, Ken, and good morning, everyone. For the first quarter, Endurance earned net income of $77.8 million and $1.15 per diluted common share. Operating income for the first quarter of 2008 was $89.5 million and $1.33 per diluted common share. Our combined ratio was 84.4% in the first quarter, an improvement of approximately 2 points over the first quarter of 2007. Strong underwriting results were driven by $41 million, or 11 points of favorable reserve development and lower than expected catastrophe losses in our reinsurance segment.

Our gross written premiums were $868.6 million, almost 52% higher than the first quarter a year ago. The primary driver of this growth was the $413 million of agricultural insurance premiums written by arm tech. Agricultural insurance is seasonal and written premiums are generally recorded at the beginning of the related crops growing season. Our first quarter writings capture a large portion of what we expect to write for crops planted in early spring and represent a large majority of our expected full year writings. Given that the premiums are earned over the growing season, much of what we wrote in the first quarter was unearned at quarter end. As we said in our last call, we expect earned premiums from agricultural insurance to be concentrated in the second, third and fourth quarters of the year.

Moving to other lines of business, the first quarter saw continued growth in our workers’ compensation line of business, as we had strong renewal retentions and good new business hit ratios. In our reinsurance segment, we saw reductions in our casualty business, as we non-renewed accounts that did not meet our underwriting requirements. Our catastrophe line of business experienced reductions due to non-renewals of some international catastrophe exposures, where we saw increased competition and from the absence of reinstatement premiums. We also saw a significant reduction in our agriculture reinsurance, due to some expected attrition stemming from our acquisition of ARMtech, increased client retentions, and meaningful softening and reinsurance terms and conditions. During the quarter, we took advantage of the competitive reinsurance market to purchase reinsurance on our own agricultural insurance book that provides us with significant downside protection.

Moving on to investments, our investment portfolio generated a positive total return of 75 basis points this quarter in a very challenging market environment. Net investment income was $46.9 million in the first quarter, down 37% from the same period in 2007, primarily due to a decline in the performance of the company’s alternative investments. Investment income generated in the company’s fixed income portfolio was consistent period over period. The credit quality of our fixed income portfolio, which represents 93% of our total investment portfolio, remains very high, with 85% and U.S. government or AAA rated securities.

Our portfolio has not been materially impacted by the downgrades or defaults and our book yield ended the quarter at 5%, a modest reduction from year end yields. Our other investments, which include our alternative portfolio experienced a mark to market loss of approximately 4%, or $16 million compared to a gain of 5%, or $12 million for the same period in 2007. The loss recorded this quarter, while disappointing, was not surprising, given the broadly negative credit and equity market performance in the quarter. In spite of the recent mark to market losses we’ve experienced in our alternatives, our returns from these investments since inception have been approximately 11% annualized compared to 6.7% and 5.4% for the S&P 500, and [inaudible] indices respectively.

Our net income was impacted by $11.5 million of net investment losses from our fixed income portfolio. In the quarter, we recorded other than temporary impairment losses, referred to as OTTI, of $14.3 million, which were partially offset by $2.8 million of actual net realized gains on sales of investments. It should be noted that these unrealized OTTI losses were primarily driven by the market volatility on spread widening that occurred in the quarter and not from actual credit losses. Although these assets have currently depressed market values, which we have prudently written down, we believe the underwriting credits remain good.

On the capital management front, we repurchased 1 million common shares and share equivalents for $41 million and paid a quarterly dividend of $0.25 per common share. We ended the first quarter with total shareholders equity of $2.5 billion. Our annualized operating return on equity was 14.7% for the first quarter. Despite the volatility in the credit markets, our investment portfolio was accretive to book value in the quarter. Our diluted book value per share ended the quarter at $36, up almost 3% from year end and over 19% from a year ago.

I will now turn the call over to Mike Angelina.

Michael Angelina - Chief Actuary & Chief Risk Officer

Thank you, Mike, and good morning, everyone. Our loss ratio for the current accident year was 58%, which translates into a 78% underwriting ratio for the first quarter of 2008. This figure is consistent with our current view of accident year 2007. The 2008 underwriting ratio is comprised of 93% for the insurance segment and 68% for the reinsurance segment, driven by lower level of catastrophe losses. Across both segments, our book loss ratio for our short tailed lines of business is 43% for accident year 2008.

The largest component of the 2008 underwriting ratio of 93% in our insurance segment is the accident year loss ratio of 76%. This may initially appear higher than anticipated, but it is driven by the following factors. Casualty and agriculture business accounts for 90% of the insurance segment 2008 accident year net premium base, which is reserved at an 89% underwriting ratio. For the casualty lines, this is considerably higher than our inception to date results, but it is consistent with our historical reserving philosophy for less mature accident years.

As we have discussed in the past, for our long tail lines of business, a significant portion, and in this case, approximately 70 loss ratio points of our 2008 accident year underwriting ratio, is comprised of IBNR reserves, totalling $85 million. Secondly, third party reinsurance purchases, which includes both proportional and excessive loss covers, contribute 10 points to the insurance segment’s net underwriting ratio. Since there was no activity to trigger the non-proportional covers. As we have built out our U.S. insurance platform, we have used third party reinsurance capital to protect both our U.S. insurance business and our corporate balance sheet against significant peak risks on both the property and the casualty exposures.

As part of our ongoing enterprise risk and our capital management strategy, we continue to evaluate the risk versus the reward trade-offs for this form of capital relative to our corporate risk appetite and market conditions. To date, we have allowed some of these programs to expire and the effects are included in our one-one value at risk curve.

Our loss reserves across all prior periods developed favorably in total by $41 million in the first quarter of 2008, with the majority of arising from the short tailed lines of business, particularly in our reinsurance segment. This development is comprised of $4 million from the insurance segment and $37 million from the reinsurance segment. For the reinsurance segment, only 3.6 million, or 10% of the favorable development came from our long tail lines and other lines of business. As we continue to prudently reserve for our casualty reinsurance exposures.

For the insurance segment, the modest amount of favorable development was split evenly between our short tail and our long tail lines of business. Within our long tail lines of business in the insurance segment, favorable development this quarter was lower compared to prior quarters. In prior quarters, claims activity was significantly below expectation and sometimes nonexistent. This quarter we observed some claim activity in our Fortune 500 excess casualty book produced in Bermuda. With regard to this total Bermuda casualty insurance business, we currently hold approximately $725 million of IBNR in addition to reported case reserves of $39 million, all relative to $1.3 billion of inception to date on premium.

For our casualty lines in both our insurance and our reinsurance segments, IBNR reserves represent approximately 84% of our total long tailed reserves of $1.8 billion. The treaty casualty IBNR in the reinsurance segment is 841 million, or 71% of the total reserves for this class. The book loss ratio for long tailed lines in our reinsurance segment is about 63% across all accident years, or within a point of our initially price loss ratio. In the treaty casualty reserves and reinsurance segment, 34% of our case reserves, or additional case reserves, or ACRs, which are supplemental to those reported to us by our seating company clients.

Moving on to our property lines, in our property and our other short tail lines of business in both the insurance and the reinsurance segment, we are currently holding approximately $128 million of IBNR for the 2007 accident year, relative to the $213 million of case incurred losses. In addition, we are holding $110 million of IBNR for the accident years 2006 and prior for our short tail lines of business. Lastly, with regard to the pricing environment for the first quarter of 2008, our overall rate monitoring highlights a decrease in pricing across all business lines. Along with decreases in pricing, we have seen unfavorable changes in terms and conditions. We believe we have experienced milder decreases than industry trends would suggest, as we continue to implement changes in our mix of business in reaction to the current market conditions. As in the past, we will continue to monitor rate levels, pricing trends, underwriting targets, and the external environment, as we seek to most official deploy our capital and our resources.

I would now like to turn the call over to David Cash.

David S. Cash - Chief Underwriting Officer

Thank you, Mike, and good morning, everyone. The first quarter was a good one for Endurance. We made some significant moves this regards to positioning [ph] and dodged some bullets that hit others. Given all that happened in the quarter, we were very pleased with how it turned out. The quarter was marked by material softening, as well as the occurrence of some significant industry losses. Focusing on Endurance, Q1 was a transitional one particularly in the insurance segment.

In the quarter, Endurance’s mix of business shifted to a more even split between reinsurance and insurance, a move we’ve been anticipating for sometime now. At the same time, as insurance grew, we experienced reductions in our reinsurance segment that resulted for weakness in those markets. Against that backdrop of change we’re pleased to see to our underwriting income for the quarter increased 30% to over Q1 2007. Market conditions are in places very challenging, but we feel we have a strong core of business that will carry us through this period in the market.

With the preceding thoughts in mind, I’ll use the remainder of the call to provide commentary on the following areas. Market conditions and line of business performance of Q1, the Florida homeowners kind of cap market, as well as the state of play in the professional lines market with respect to the credit crisis, and I’ll overview the current positioning of Endurance’s portfolio.

Market condition, from an industry perspective market conditions at January 1, with the softest they’ve been since the formation of the company. While these conditions were universally felt, portions of the market held up better than others. The first quarter was a good one for our insurance business. This was particularly highlighted by our strong showing in the agricultural insurance marketplace. Year-over-year, this business grew significantly. Policy count for 2008 was up approximately 7% over 2007, with 17% of all policies issued being new to the company. When one combines this increase in policy count with current crop prices, the result has been significant growth in premium for 2008.

For agricultural group in Lubbock to have achieved this growth in policy count in their first year at Endurance, in an environment where farm consolidation is norm, says a lot about the business and the team. Elsewhere in the segment, our insurance lines were mostly flat or up. Our large risk casualty lines and retail property lines were flat year-over-year, while our small risk workers’ compensation line of business grew in California, a market that continues to show sound underwriting margin. We recognize the California workers’ comp market has a mixed history and so we certainly don’t expect these conditions to persist forever.

In one area of our insurance business, we did find ourselves pulling back from the market. That being the portion of our U.S. business derived from wholesale of brokers. This reduction is not unexpected, as the wholesale channel tends to experience the underwriting cycle more acutely than others. As a result, you tend to see experienced underwriters in this market, pull back a little sooner than is the case for other portions of the insurance market. Approximately 8% of Endurance’s growth in forced [ph] premiums are derived from this space, and so this weakness is quite contained. Switching to the reinsurance segment, the first quarter was a tough one. Trends in pricing, terms and conditions continued to soften. Against that backdrop, the segment largely performed as expected.

Items warranting some specific commentary were as follows. Working from the gross written premium exhibit on page 12 of our financial supplement, agricultural premiums were down $82 million to $11 million. A portion of this change can be attributed to clients choosing to direct premiums away from Endurance as a result of the ac impact of the acquisition ARMtech. That aside, we saw most of the January final reinsurance term, and what we saw confirmed for us the appropriateness of repositioning as an agricultural insurer. For reinsurers in this line of business as become quite competitive, with some new entrants waiting more aggressively and perhaps they understand and such an environment, reduced writings are not a bad thing.

In casualty, our premiums for the quarter were down from 92 million to 69 million. Pricing in this line of business is down in places substantially. Most of this premium remained in the market and was available to us to renew if we chose to. In the end, the prices did not make sense until we let the businesses go. Finally, in the catastrophe line of business, premium was down from $140 million to $105 million. This was due to a few different things.

We continue to work to refine the book of business, resulting in a $14 million reduction in premiums this quarter. The bulk of this came in Europe where we pulled back on some large mega treat. Next year, as our Zurich branch ramps up, we would expect to see this change reverse, as we have greater contact with smaller regional insurers. Aside from changes in our client base, pricing is one and one was off over 2007, this change alone accounted for 14 million in premium reductions in the quarter. And finally, in Q1 of ‘07, our premium base included $5 million of reinstatement premium to [inaudible]. That number was not repeated this year.

Moving on from the first quarter conditions, looking at Florida and subprime, just make a few minutes. In Florida, it may not be win season, but as always, it’s the political season. Based on the news and feedback from our clients, we are expecting a renewal season that is a little more competitive than last year. As of this week, the FATS [ph] looks like it will continue at last year’s size as opposed to shrinking. Premium continues to shift from larger national writers to smaller Florida companies and citizens looks set to purchase more from the commercial market. This suggests to us roughly flat purchasing activity.

From the supply perspective, we see other reinsurers deploying a little more capital in this market, and so, we are expecting pricing reductions at June 1. As respects to the credit were subprime issues that runs the last six months, little changed in the quarter. Since December 31, there’s been an increase in client companies providing insurers with claims notices. However, this noticing of claims is a normal part of the client renewal process. For Endurance, the claims we have received did not result in any material changes in our reserving at year end.

In closings, I would just like to overview the positioning of the company’s business. It’s a tough market that we’re operating in. However, when one steps back from the individual members and looks at the individual mix of business we’ve developed, one can see why we feel the company is well positioned for the market conditions we face today. Starting with March 31, gross in-force premiums for our insurance segment, one can see that our book is now disproportionately either small risk independent agent-originated business or large risk retail originated business. The breakout is as follows. $455 million and rising of agricultural premium. This business has stable prices and is sticky, independent agent-originated business. $285 million of small risk workers’ compensation premiums, again, independent agent originated business. $279 million of retail originated large risk casualty and property premiums. Here, the underwriting cycle has an impact, but the rate erosion we experience comes off very high absolute levels of profitability. And finally, 161 million of middle market wholesaler originated premiums, a tough, but manageable marketplace.

Looking at gross in-force premiums for our reinsurance segment, we have the following. $310 million of catastrophe lines business. Here, margins, while reduced, are still very strong. $207 million of specialty classes of reinsurance, aviation, surety, marine and others. Inception to date, these lines of business have performed well for the company at lower rates of price erosion than other lines are being experienced.

Finally, $407 million of general property and casualty treaty business. Here, prices are reducing, but our book is built around a strong set of clients and we feel that when the tale is told, our margins will have held up well. When one looks at the complete picture, two important features show through. In a tough market, the company’s achieved a pleasing level of growth. March 31 growth in-force premiums of $2.1 billion are up 18% over our calendar year 2007 gross written premiums. And the book is positioned away from the most challenged portions of the market. At a time when there are a lot of silly things one could do, our book of business is prudent well balanced field to us.

With that, I’ll turn the call over to Ken for his concluding remarks.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Thank you, David. Our first quarter earnings release and the information provided in our investor supplement have begun to demonstrate the benefits of Endurance’s strategy and our execution of this strategy. When we founded the company at the end of 2001, we had a deep appreciation of the history and drivers of the PNC cycle. We also understood the challenge of generating attractive returns to our investors over and underwriting cycle. Over the past six years, the mix of our business has evolved significantly in response to a very dynamic market environment.

I would like to highlight just a few recent accomplishments. At the beginning of 2008, we have balanced the revenue we derive from our insurance and reinsurance segments. The timing and magnitude of cyclical factors can vary significantly between insurance and reinsurance over time. Having strong capabilities in each is an important strategic advantage in our ability to deploy capital at attractive returns. The distribution network for our insurance and reinsurance products has become more diverse. A significant portion of our portfolio is now sourced through independent agents and wholesale brokers, balancing our historical concentration with major brokers.

Our California workers’ compensation initiative was well timed and implemented. It continues to generate attractive results, despite a more competitive pricing environment. The acquisition of ARMtech late last year has positioned Endurance well, in an attractive specialty segment. As an insurer, we can better leverage our specialized knowledge, capabilities, and technology to control our own destiny and generate substantial value. The competitiveness of the reinsurance market for this product line at one-one has validated arm tech as an attractive investment.

At the end of the first quarter, we hold a net unearned premium reserve of about $1 billion. A portfolio business that is well priced, underwritten, and risk managed. We continue to grow our business organically, through investments in new U.S. specialty insurance offices, and through international expansion in reinsurance. We will continue to seek out opportunities for expansion.

Our catastrophe and [inaudible] reinsurance businesses are strong and have produced attractive results overtime. Our approach to reinsurance is sustainable and very scalable in the right market conditions. The first quarter was a painful period for investments, with performance low our long-term expectations. But taken in context to recent history, our results are fine, turning in a positive 75%, 75 basis point total return. Alternative investments have performed in line with expectation over the long run, earning more than 11% annually since inception. Fixed income continued to produce steady income at 5%.

In summary, the portfolio was well positioned for the conditions we experienced and contributed to the growth of book value in the quarter. We expect it to continue being the meaningful contributor to earnings in the future. Our financial position is strong and we continue to focus on capital management as a key driver of accomplishing our financial goals. Over the last 12 months, we have increased book value per share by almost $6, or 19%, while returning $386 million of capital to shareholders through share repurchases and dividends. When one stands back from all of these accomplishments, I think Endurance is off to a fine start in 2008.

Operator, I would now like to open the line for questions.

Question and Answer

Operator

Certainly, sir. [Operator Instructions].

Our first question is from Matthew Heimermann with JPMorgan.

Matthew Heimermann - JPMorgan

Hi, everyone. A couple questions. One, Ken, I was wondering if you could just opine a little bit on the agriculture business. This is something you’ve been in for a while and obviously the ARMtech acquisition was pretty significant, but specifically with respect to what seems to be every other company conference call, I’m on where people are talking about increasing AG. Should we be worried that maybe the rush into this market by some competitors could be a sign that the industry’s missing something?

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

It is in the context of Endurance, no. We very intentionally steered the development of our portfolio long-term towards insurance, though we continue to be active in reinsurance. And it’s important to know that for the MPCI programs, the prices are basically fixed, and the way that one succeeds in that business is by having data, technology, access to the business, and to be able to conduct a session strategy that is effective, given the growing conditions that we see. And that is the set of characteristics that we saw at ARMtech, an organization and people we’ve known for many years through our agricultural reinsurance team.

One other of our peers, I know, has acquired an MGA that they do business with, and by reputation, they are a fine organization as well. I think what we were pointing to in our script was that the reinsurance market conditions were pretty competitive in AG reinsurance at one-one, so a lot of pro rata business that has been purchased historically. My view is maybe mid single digit margins would be what you would expect on the insurance portfolios and the pro rata sector. The XOLs, they tent to be volatile, just like cap business cap business, highly dependent upon what we experienced in terms of weather conditions and crop conditions. We’ve also taken the step of protecting our insurance portfolio this year from the volatility that we know we can experience in the agricultural insurance base and we were able to, if you will, official buy reinsurance to support that risk management part.

Matthew Heimermann - JPMorgan

And is it fair based on your comments to assume that that reinsurance purchase was an XOL cover of some type?

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

It’s a combination of both pro rate and XOL.

Matthew Heimermann - JPMorgan

Okay. The other question I had was just, and this is another industry question, so I apologize, but you know, where... we know that clients are increasing retention and we know that prices are falling in reinsurance and so when I look at your numbers, it seems sensible given both those trends, but a lot of other companies, books of business aren’t shrinking quite that much and I was curious whether or not, there’s any particular market, I guess how much of that is just individual differences in books relative versus, a sign maybe that competitive appetites are really starting to diverge for the business?

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Well, Matt, I think you were asking me to contrast perhaps what you’re seeing in the Endurance portfolio with the industry at large. And if that’s the context, I’ll take a stab.

Matthew Heimermann - JPMorgan

That’s a better worded question, thank you.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

In terms of how we approach the reinsurance business, we believe very strongly that an intimate knowledge of our clients and their portfolios of business are really the key starting point for everything else that ensues. And overtime, particularly as the market has gotten more competitive, our focus in terms of the number of clients that we serve has really tightened and I think we’re aligned, by and large, with companies that are specialized and represent us to breath in their particular categories of specialization. We put a lot of time and effort into auditing, underwriting audits, pricing audits, claims audits, and that activity gives us a very different insight than one would have if you were just working from the submissions that come at renewal time.

And Mike Angelina pointed to the level of ACR, so we are we’re carrying on the casualty business. If you wanted to bridge our point of view versus somebody, who, say, growing in the casualty reinsurance business, I point to that as a key driver of difference, in that the level of ACRs that we’re carrying are indicating a lower level of profitability historically than most people would be working from. And we’ve built that into our pricing. We’ve trended it. We’ve developed it, and that often will take us out of a competitive position on a renewal. So be it. That’s the way we look at the business.

On the property side, you know, we’ve had the spike from the ‘05 activity, but as we all know, that was pretty focused on Florida and to a degree, California quake exposure. It’s been pretty steady price erosion and non-cat exposed lines. Again, we tried to position ourselves with people who we think really understand what they are doing with the property insurance business. They tend to be very specialized, and those portfolios have been very, very good for us.

So you’ve heard from us, from our foundation. We’re not top line-focused. We’re bottom line-focused. You can see us walking, the walk in terms of the shape and size of our reinsurance portfolio.

Matthew Heimermann - JPMorgan

And is most the business you’re walking away from going to relatively new reinsurance markets or more established markets?

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

No, I would say, for instance the class of ‘05. I wouldn’t point to them as a group or any particular individual company as driving that competitive posture. And I would say that it tends to be kind of diverse still.

There isn’t any particular company I would point to, acting irrationally. But companies do have different points of view on different categories or risk, and maybe even different margin requirements. I think ours tend to be higher than most, really given our respect for the volatility of the reinsurance business.

So when you combine all of those things, I think that some of the more well-established reinsurers in the market are really the source of competition, as well as increased client retention. We’re certainly seeing that as well.

Matthew Heimermann - JPMorgan

Okay. Thank you. And one just one quick one for Mike, it looks like the equity balances increased in the investment portfolio this quarter and if I’m not mistaken, I think that’s all your alternative, so was that a reflection of higher allocations, or am I just missing something?

Michael J. McGuire - Chief Financial Officer

I’m not sure I got your question. Matt, are you referring to the change in the unrealized gain and loss that goes through?

Matthew Heimermann - JPMorgan

No. If you look at the absolute equity assets at the end of the first quarter and contrast them with 4Q, I believe they increased.

Michael J. McGuire - Chief Financial Officer

I’m sorry. You’re talking about our other investments?

Matthew Heimermann - JPMorgan

Correct. And despite the negative marks. So I just didn’t know if there was normal increased allocations?

Michael J. McGuire - Chief Financial Officer

Yeah. There’s a couple of things going on there. We did have a modest write-down there and this portfolio is essentially a mark-to-market portfolio through net investment income. There’s a few things going on there. Those are not equity exposures. They are a mix of credit and opportunistic hedge funds, as well as some high yields fixed income funds.

Matthew Heimermann - JPMorgan

Okay. So they are not in that bucket?

Michael J. McGuire - Chief Financial Officer

They are in that bucket, and there was a few things. We did have some marks that were obviously a negative, but we also have been increasing our allocations very recently to some high yield bond portfolios, given the significant widening that’s occurred in those markets.

Matthew Heimermann - JPMorgan

Okay. That makes sense. Thank you.

Michael J. McGuire - Chief Financial Officer

Thanks, Matt.

Operator

Our next question is from Susan Spivak with Wachovia.

Susan Spivak - Wachovia Capital Markets, LLC

And I have a couple of quick questions. How much of your overall premium for the year do you think has already been written in the first quarter?

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

In ag, Susan, as you know we have generally avoided providing top line guidance and our top line guidance, and our top line will be what it will be after the thousands of underwriting decisions that our underwriters make on a day-to-day basis.

And certainly with the mix shift that we’ve seen from reinsurance to insurance, we are seeing some steadiness over the year. But even that being said, in our agriculture business, we did write a significant portion of what we expect our full year insurance premiums to be in ag in the first quarter. It’s probably 60 to 80% of our agriculture insurance premiums for the full year.

Susan Spivak - Wachovia Capital Markets, LLC

And what percentage of your overall insurance is that now?

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

That’s a pretty... I mean you can look at the numbers. As we had 413 million of gross written premiums in our ag business, so that’s become a very significant portion of our overall insurance business.

Susan Spivak - Wachovia Capital Markets, LLC

Okay. I also wanted to follow up on a comment of Mike Angelina. You talked about expiring contracts I guess in January, 01, renewals and then you also discussed the fact that reinsurance pricing is down in terms and conditions are deteriorating.

So I’m wondering did you buy why would you let those contracts expire and not buy more reinsurance if the rates for reinsurance are attractive? And then I just have a quick follow-up question for Ken after.

Michael Angelina - Chief Actuary & Chief Risk Officer

Yes, Susan, actually, I’ll take that because that really speaks to our risk management and hedging strategy. In the wake of ‘05, we wanted to make sure that from a capital adequacy point of view, rating agency, our own view that I don’t want to use the word bulletproof, but we took a pretty extreme and conservative view terms of what we wanted to do to hedge our portfolio.

We did so, and as those covers, be it Shackleton or some of the traditional reinsurance that we purchased, ILWs, came up for renewal, as we do in all our capital decisions, we assess the cost of capital versus the benefit. We looked at the changing mix of our business, and we made the decisions.

In some ways, our reinsurance purchasing will continue to change. We look for instance insurance and particularly on the insurance business, and we see reinsurance, the traditional reinsurance markets as an attractive way of hedging that exposure. ILWs, and the like are still relatively expensive ways of hedging risk.

Susan Spivak - Wachovia Capital Markets, LLC

Okay. And then Ken, It looks like you bought back I guess about 1.7% of the shares in the quarter. Historically, you’ve been a bit more aggressive. You know what are your plans for the rest of the year on the front?

Michael J. McGuire - Chief Financial Officer

Well, Susan, it’s Mike McGuire. Historically I think we’ve shown a trend of being pretty nimble throughout the year. Year-over-year, our first quarter purchases were higher this quarter and the quarter last year.

And 2007, we repurchased about $313 million of our stock and that was heavily back weighted toward the end of the year. We’ll continue to be opportunistic in our repurchase strategy. And obviously we’ve been able to grow areas of our business and we’re finding good opportunities to deploy our capital.

But we’ll continue as we always have focusing on appropriate and active capital management.

Susan Spivak - Wachovia Capital Markets, LLC

Okay, thank you. And I’ll throw one more in. Do you expect to write more insurance or reinsurance business in Florida this year?

David S. Cash - Chief Underwriting Officer

Susan, it’s David. The tale hasn’t been told yet. We have actually the Florida clients walking up and down Front Street, Bermuda as we speak. My sense is that we’re looking to be around where we were last year. But what we have to wrestle with is whether that mix of business will be excessive loss, or pro rata.

Last year, portion of our premium was pro rata and to the extent that we shifted down one way or the other it premium will go up and down. Our goal is to essentially achieve the same amount of exposure, I’ll say, in terms of exposure to an event.

But the premium that we get for doing that will shift inline with that choice with the pro rata and the excessive loss.

Susan Spivak - Wachovia Capital Markets, LLC

Okay. Thank you very much for your answers and also for the detailed market commentary that you provide on your call. It’s helpful.

David S. Cash - Chief Underwriting Officer

Thank you, Susan.

Operator

[Operator Instructions]

Our next question is from Ron Bobman with Capital Returns.

Ronald Bobman - Capital Returns

Hi, thanks a lot. I just had a quick question. I forget who said it in the prepared remarks, but there was a reference to the Bermuda casualty business, and I’m sorry, I just missed the point that was being made.

I’m not sure if you’re talking about favorable development from that segment of your business or unfavorable development or some other point? I apologize.

Michael Angelina - Chief Actuary & Chief Risk Officer

Sure, Ron. It’s Mike Angelina. When we talked about the casualty Bermuda lines, we talked about our favorable development for the quarter was lower than prior periods and it was basically because in prior quarters, we had experienced either no claims activity or very light claims activity.

This quarter, we experienced some claim activity, not a lot, but some. And when you look at that book in total on an inception-to-date basis, we’ve got about 1.3 billion of earned premium and we’ve got about 40 million or so of actual reported case reserves.

On top of that, we’ve got $725 million of IBNR. And actually you can go to our yearend triangles and I think all the gory details are there as well.

Ronald Bobman - Capital Returns

If I have trouble sleeping, so let me just ask you, the nature of the claims, might they be elsewhere on the call would you make comment, or would you now, the nature of the claims and sounds like translated claims activity, you may just have been in line with sort of expectations in prior periods. They were below expectations, so matching the volume of claims activity that you would sort of normally accrue for on an IBNR basis.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Ron, I think the best way of talking about the quarter is that we had basically an expected level of claim activity, and that’s been unusual. Generally we’ve had none or modest claims activity in our history, and we do tend to react to bad news quickly and we react to good news slowly as an organization.

It’s just how we hedge things. And the claim that I think Mike is making specific reference to was actually an excess casualty claim basically stemming from products liability exposure, certainly a claim we’ve known about for sometime and facts and circumstances have changed in terms of the claim settlement process and that’s reflected in our reserve.

Ronald Bobman - Capital Returns

You answered my question, thanks a ton. Best of luck.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

You’re very welcome. Thanks.

Operator

Our next question is from Jay Cohen with Merrill Lynch.

Jay Cohen - Merrill Lynch

Yeah, thank you. Two questions unrelated. The first one, I’ll ask them both, you can answer them. First one is deals. Are you seeing more potential sellers out there, is really the question, including both companies and MGA. So kind of what’s the flow look like that you are seeing?

Secondly, in your alternative investments, I understand that you record those results on a one-month lag. As I recall in the first quarter, March was a pretty tough month from a credit standpoint. So I’m wondering, since quarter end, if you have any details of how these funds to perform March and hopefully in April as well.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Jay, I’ll ask Mike to answer your last question first and then I’ll answer the M&A question.

Michael J. McGuire - Chief Financial Officer

Okay. On the alternative investments, within our other investment category, as I said I think in earlier question, we have a split between some hedge funds and some high yield funds. Our high yield funds are mark-to-market basically through to the end of March 31st.

The hedge fund portfolio is booked on a one-month lag. In fact, if we look at our monthly performance, January was a worse month for our hedge fund portfolio than was March. And although March was a negative month, and as we look over April, and this is still early days in terms of getting the return information, we have seen a pretty decent recovery in our hedge fund and high yield portfolios for the activity through April.

I think its early days to declare victory on the state of the credit markets, but certainly we have seen a comeback of sorts in those asset classes in the quarter.

Jay Cohen - Merrill Lynch

So just to make sure that the fixed income exposure there is not reported on a one-month lag?

Michael J. McGuire - Chief Financial Officer

Well, that’s correct. We have, as I said, a high yield bond fund, some high yield bond funds that are included there, and that is booked through to the end of March, so there is no lag factor there. We also have a portfolio of hedge funds, which are credit-focused, as well as some opportunistic strategies. Those are booked on a one-month lag. As I said our initially indications for March and April performance would be slightly up.

Jay Cohen - Merrill Lynch

Great. That’s helpful.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Jay, this is Ken. I would like to respond to your M&A question. One of the big surprises to me over the last six years now is just how active an M&A environment we have seen in the insurance and reinsurance sector. And this year actually does feel meaningfully different than past years.

In the past, many opportunities that we and others saw really came from distress kinds of situations, people found themselves very capital constrained and other cases we’re changing their strategic focus as an organization. So there were organizations that were in essence orphaned through that process and you your normal flow of M&A activity as well.

This year field’s more active already than in prior years. We see quite a number of transactions in the course of a year, as many as 100. It’s pretty amazing in terms of the things we see in the course of even a week, but this time around, what I sense is going to drive M&A activity in terms of field brought to fruition would be some of the things we’ve seen already.

There will be organizations that are reaching for scale and to maybe also complement some of their strategic objectives. I would put the Safeco acquisition in that kind of a category. We’ve seen Munich reacquire an onshore company. Clearly, we want to add to their portfolio of insurance businesses in the US.

I also sense that there are organizations that perhaps are finding themselves suboptimal in terms of scale and perhaps too weakly positioned strategically for what is likely to be a softening market for a few years ahead, absent a dislocating event. And in other cases, too, valuations are relatively high, particularly for specialty insurance organizations in London, and as well as in the US.

So I think some owners are feeling it’s a good time to cash out. So we’re seeing all those flavors of opportunities here at Endurance. We have a pretty strict set of criteria that we evaluate each opportunity against. Very few in our system really make it to a point where we really actively working on them, but every year has brought three or four deals that we were interested in perhaps doing.

Sometimes they don’t happen because of price or other situations. Sometimes like with ARMtech, they do. So we are focused on continuing to grow our business organically and we have quite a bit going on in Endurance, so we’re pretty excited about there. And we’re very active in looking at M&A transactions and not just in a reactive way. You know, we tend to go out looking for things that are below the radar screen.

Some of them would be MGA deals. Some of them would be private companies and those kinds of situations.

Jay Cohen - Merrill Lynch

Just to follow-up, with ARMtech, what drove... you made it sound as if there was organic growth obviously for a year ago for the ARMtech folks, and what drove that? Did you guys put in some changes that accelerated that growth, stuff they were doing already?

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Jay, that’s a great question. When you look at the numbers David had cited, a policy count increase as well as the commodity prices, driving the premium change, but as long as you ask the question, it gave me a softball. ARMtech really fit our criteria very, very well for an acquisition. It really starts with the people, we’ve known them for a long time, they are a great cultural fit with us, they are very passionate about the specialty they pursue and very, very knowledgeable about it.

They actually started as a technology company. That was really their core strategic thrust, and as such, they have really wonderful technology that gets right down to the kitchen table level of the farmer in terms of creating a differentiation, and also very efficient access to agents.

They have great data and combined with our existing property insurance team, incredible experience in understanding the ins and outs of the federal program and how to optimize a result around that. So when I looked at all those factors, I certainly was not surprised to see that with Endurance’s support, our capital, I won’t say that, if you will, an increase risk tolerance, because I cited the reinsurance that we purchased.

But certainly the heft of our balance sheet is meaningful compared to where they were a year ago. All those factors played into the strength of the organization and allowed them to be even better than they were before.

Jay Cohen - Merrill Lynch

And certainly gave you the opportunity to make a pretty dramatic shift out of reinsurance and into insurance, and as you suggest, market conditions are certainly diverging there.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Yeah. But Jay, I’d like to highlight perhaps reinsurance because, we have been somewhat pessimistic about pricing and terms and conditions in the aggregate. That has been a wonderful business for Endurance. I love the reinsurance business and I think we have a very strong catastrophe reinsurance business.

I think our onshore reinsurance people do this in a best-of-breed way, and while I would like to see more opportunities to deploy those capabilities that we have, the market is what the market is. We certainly get our turns at that and have our opportunities to write business.

But what I would point to for the future in terms of building shareholder value is the scalability of that. I think what we’re doing in terms of the audits and the underwriting and the actuarial technology, I want to keep us save and we should be very knowledgeable about, where the returns are and so forth.

When the inevitable dislocation takes place, we can take a step move in terms of our position in the reinsurance business, and I think the reinsurance business and the clients in it are somewhat underserved. I think there’s a niche that we can really occupy that would be unique there.

Jay Cohen - Merrill Lynch

Great. Thanks for the answers.

Operator

Gentlemen, I would like to allow the participants an additional moment to pose any initial or follow-up questions they may have. [Operator Instructions].

Our next question is a follow-up question from Matt Heimermann with JPMorgan.

Matthew Heimermann - JPMorgan

Good morning. Since we had some time left, just a quick question on the growth and property in primary, just curious if you could give a little more color where that’s going and where that’s coming from, given that I had kind of thought that the best of primary property days for the company were over.

David S. Cash - Chief Underwriting Officer

Hi, Matt. It’s David. We have two property insurance businesses. We have one in London that writes smaller, middle market accounts through the retail channel. We have one based in the US, Los Angeles primarily, but across the country, writing through the wholesale channel.

We have seen some shrinkage in our US operation, but we’ve seen growth in our UK operation. That sort of is the balance. Also, I’m not sure if you’re referring to the net as opposed to the gross, but what we’ve been doing is, we have been retaining more of the, I’ll call it the first loss position on those books of business than we’ve had in the past and we’ve done that by cutting back one some of the proportional protection in the ROWs we bought.

So you’re seeing a little bit of income kind of come through net written premium that way. I mean, now going forward, we look at the reinsurance market in California as being pretty tough market. We think being able to retain more of the kind of first loss position on our insurance book in California will be positive for us, so I suspect to see a bit of shifting for the rest of the year in that space as well.

Matthew Heimermann - JPMorgan

So to some extent, sounds like it’s just kind of a swap and given the declines you’re seeing in the cap book, it’s a normal use of ag?

David S. Cash - Chief Underwriting Officer

It’s not dramatic, but it’s a natural kind of shifting. I mean we can sort of ebb and flow in both those markets as we see conditions dictate.

Matthew Heimermann - JPMorgan

Can you remind me in the London property business what the account and size you are focused on there is?

David S. Cash - Chief Underwriting Officer

Sure. I mean it’s pretty small. With the client buying sort of 20 to $50 million worth of limit, these would be small companies that might be $20 million of revenue or something like that, relatively limited number of locations. The broker we’re dealing with is a regional broker. They have a client. The client will be locally based. They typically won’t be nationally based. It’s in the UK province it’s a SME business.

Matthew Heimermann - JPMorgan

Okay, perfect. All right thank you much.

David S. Cash - Chief Underwriting Officer

You’re welcome.

Operator

Our next question is from Vinay Misquith with Credit Suisse.

Vinay Misquith - Credit Suisse

Hi, good morning. This is a question for Ken. We’ve heard some reinsurance executives opine that reinsurance pricing is holding up better than primary insurance pricing and so I’m curious from your perspective, given that you’ve made more focus, our primary reinsurance that are buying more reinsurance on your primary book. As to where you see that right now, and how you see that shaping out in the near future? Thank you.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Well, I would like to respond in the context of what we would view as price adequacy or attractiveness. That’s kind of the context of these comments come from. On the reinsurance side, my belief is that the reinsurance market tends to lag the reality of market changes. They tend to be slow to react to pricing changes, terms and condition changes, deductible changes at the primary level on the portfolios they reinsure.

Why is that? It is often the information you’re looking at is stale. And when you’re renewing an account, you may be looking at data that’s six, eight months old at times. Maybe older than that and it’s often imperfect data, and I think that’s important to stress.

The auditing culture that we’ve implicated in our reinsurance business gives us pretty tangible visibility in a current way as to what’s going on in terms of pricing in terms and conditions. So we don’t wake up surprised in terms of price erosion. We expected 5%. We saw 15 with the fullness of time.

So we’re trying to avoid those kinds of surprises. Equally on the claim side of things you have a very mixed set of industry practices in terms of claims reserving, philosophy, and actually I would say ability. And that is one of the criteria that we use to determine whether we are, if you will, qualify to be reinsured by us.

And despite that, again, we pointed to the level of the ACRs that we carry on the casualty side. Now that’s from I think a very well groomed and well selected group of clients. You could imagine some of the poorer organizations out there might have even higher levels of ACRs if we were reinsuring them.

I think that talking about the insurance or reinsurance market in totality, globally being one better than the other, I’m not sure that’s particularly informative. We like the California workers’ compensation business very well right now, just picking a state out of the air, we don’t necessarily think that workers’ compensation in Oklahoma is a great opportunity for us right now.

So I think that understanding the micro cycles, the discreet character Ricks of these very focused markets and approaching them as specialists is really key. And that’s what we’re seeking to do, both on the insurance side and on the reinsurance side. That’s why it’s so hard for us to predict revenue and even mix prospectively. It literally is a function of thousands of decisions we make over the course of the year.

Vinay Misquith - Credit Suisse

Now that’s fair. And second question, you’ve made some hires recently, especially on the primary insurance side. Question is how you ensure that you’re writing the most profitable business given that we are hearing renewal pricing is down more than... new business is down more than the renewal business.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Well, I would say to echo something that David said already, our wholesale-generated business, which is a lot of the specialty business that’s done in the US, in the offices there, are showing lighter hit ratios and renewal retentions than we posted a year ago. There’s no doubt about that.

But that being said, when we add a new office and teams of people, one of the things we look to do is to have people who have been attached to a book of business for sometime and, there’s stickiness in terms of the broker relationship, often there’s stickiness on the client relationship and certainly there is knowledge that our underwriters possess about that account and its history that’s important to underwriting process.

So actually we see a lot of opportunities to hire teams of people, but where they really don’t have a book of business that they can point to that we can understand, those opportunities tend not to be good for us. Also, when we hire new underwriters, and some those go right to the most senior level of underwriter, they generally don’t have underwriting authority at Endurance for quite sometime.

We have a referral process across the whole company, but particularly for new underwriters to our organization, even if they have 30 years of experience. They don’t have underwriting authority until, if you will, they demonstrate that they can use it effectively and efficiently.

Vinay Misquith - Credit Suisse

Thank you.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

You’re welcome.

Operator

There are no further questions from the phone lines. I would now like to turn the conference back to Ken LeStrange and our panel for any additional remarks.

Kenneth J. LeStrange - Chairman, President and Chief Executive Officer

Well, thanks everyone for joining us today, and we look forward to talking to you when we report our second quarter earnings. Take care.

Operator

Ladies and gentlemen, thank you for your participation in today’s Endurance Speciality Holdings first quarter 2008 earning results conference call. This you concludes today’s call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!