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Endurance Specialty Hits All Time Highs, and Richard Perry Sells Out, but Valuation is Still Reasonable

February 16, 2011 | About:
Analyst upgrades ahead of earnings helped propel Endurance Specialty Holdings (ENH) to new highs. The insurer is trading at all time highs but still has favorable valuations. I came across this name after noticing Richard Perry of Perry Capital sold out of his position completely on January 28. He owned more than 7 million shares, and some call options, and about 15% of the company before unloading his position. After looking into it a bit more, I learned that Perry was a founding member of Endurance Specialty and the company actually had entered into a repurchase agreement with him for a price of $44.99 per share.

Endurance Specialty was created in the difficult insurance environment in the aftermath of September 11. They have reinsurance and insurance operations with a focus on property and casualty. The company does, however, follow the line with the best prices and risk, in the opinion of their underwriters. In recent years they’ve had significant variability in net written premiums in, for example, worker’s compensation and professional lines.

The company announced full year earnings on February 9 and they were impressive. Full year EPS was $6.38. Book value ended the year at $52.74, an increase of nearly 2% over the last quarter and 18% over the last year. Their full year combined ratio was 88.7%, indicating a significant underwriting profit and, finally, a $200 million investment gain.

The two biggest things I look at for comparison purposes to other insurers are P/B and the combined ratio. Once you go from there, you have to look behind the numbers and into management, but P/B and combined ratio are a good place to start your research. Endurance Specialty’s P/B is currently 0.9. This is significantly lower than their pre-2008 figures, but that pretty much tracks the entire industry. I recently wrote an article discussing some of Endurance Specialty’s competitors, Montpelier Re (MRH), PartnerRe (PRE), and Everest Re (RE) and showing the reinsurance industries drop in P/B. I encourage you to take a look at: Four Cheap Reinsurers to Research: Historically Low Price to Book

For the combined ratio, Endurance Specialty was pretty good and comparable to their competitors. There are a few other highlights. The company repurchased 8.7 million shares in 2010. And, as mentioned above, they already repurchased about 7 million shares so far in 2011. That’s a significant portion of their outstanding shares and should be a considerable boost to EPS. Their 2010 EPS was a very impressive $6.38 and their P/E is 7.6. They’ve also increased their net premiums and sport a healthy operating return, mid-teens for the quarter, and 12.6% for the full year.

The insurance and reinsurance industries are out of favor but despite that, many names like Endurance Specialty continue to hit new 52 week and all-time highs. Their valuations are still pretty reasonable and P/B is 25% below their historic level. They also have a nice 2% yield. I didn’t uncover any unusual risks with the company, and their management appears to be top notch. An important thing to consider is whether an insurer will chase pricing in order to gain volume. Endurance Specialty seems to adjust their product mix in order to protect themselves from doing this. There are a number of attractive stocks in this space, and Endurance Specialty is one that it may be worth to follow as well.

Disclosure: No positions

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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