Shares in Bermudian reinsurance group Endurance Specialty Holdings fell by almost 10% following the announcement that it had to boost its loss reserves for hurricanes Katrina, Rita and Wilma in the second quarter. But some believe investors overreacted to the news.
Endurance released its second quarter results after market close on July 26. It made a net profit of US$171.1 million for the first half of the year, down from US$206.3 million in the same period last year. For the second quarter alone, the company made a net profit of US$64.1 million, down from US$110 million in last year’s second quarter.
Higher than expected losses forced Endurance to increase its loss estimates for the hurricanes by $84 million. This was partially offset by US$62.4 million of reserve releases from 2005 and previous years, leading to a US$21.6 million net increase to reserves.
Endurance’s stock closed at US$30.98 on July 27, 9.7% down from July 26’s closing price of US$34.32. By July 31, the share price had fallen further to US$30.36
But Jay Cohen, analyst at investment bank Merrill Lynch, called the drop in Endurance’s share price an overreaction in a report and said that, despite the increase in loss estimates and reserves, the results announcement demonstrated strong underlying earnings power.
Cohen justified his stance by saying he did not expect more large additions to the company’s 2005 catastrophe reserves. “Endurance has now had two to three quarters to reassess losses from the 2005 cats and the claims activity which gave rise to the reserve increase has slowed noticeably,” he said in the report.
The analyst also expressed faith in the capability of the Endurance management team. “Although we were disappointed by the second-quarter earnings miss, we acknowledge that Hurricane Katrina was a complex storm,” he said. He added that he believes underwriting skill and discipline are more important than ability to estimate past losses.
Cohen also pointed to the fact that Endurance is addressing past mistakes in risk management by reducing its one-in-100-year wind exposed probable maximum loss by between 30% and 40%.