Will Endurance Specialty Make It Through Tough Times?

Crop insurance demand has fallen recently, threatening the specialty line's success. Image source: Endurance Specialty.

Many investors struggle to understand insurance companies, but as with so many other industries, simple concepts like supply and demand often have a critical impact on business performance.

For reinsurance and specialty-coverage insurer Endurance Specialty Holdings (ENH +0.00%), changing conditions in the insurance market are putting some strain on its ability to grow, and coming into its third-quarter financial report on Monday, Endurance shareholders expect a downtick in earnings.

Let's look more closely at Endurance Specialty Holdings in order to assess whether a possible hit on the bottom line is just a temporary phenomenon or a sign of a more lasting trend.

Stats on Endurance Specialty

Data source: Yahoo! Finance.

Can Endurance Specialty earnings endure?
In recent months, investors have generally been more optimistic about the long-term prospects for Endurance Specialty earnings, boosting their full-year 2015 and 2016 projections by $0.20 to $0.25 per share even as they've kept their third-quarter estimates mostly in check. The stock hasn't mirrored that optimism, though, falling about 3% since late July.

Endurance Specialty's second-quarter results revealed some of the tensions that the insurance company has gone through lately, although they also gave an example of how Endurance has fought back to try to make the most of the tough environment. Gross premiums written jumped by 25% over year-earlier levels, but net premiums rose at a much slower pace, and earnings were roughly flat compared to the second quarter of 2014. The reinsurance segment continued to benefit from a lack of major catastrophic losses, but rising competition within the insurance industry and some poor loss experience in some of its specialty lines hurt Endurance's ability to make the most of its premium growth.

Ongoing struggles in the commodities markets are indirectly to blame in part for some of Endurance Specialty's difficulties. The insurer has a significant business in writing crop insurance, and with crop prices down, the incentive for farmers to take out crop insurance policies is lower than it has been in past years. Moreover, with much of the agricultural industry seeing pressure on its own profits, it's not as easy to spend money on insurance even for those who would want the protection it offers. Meanwhile, Endurance has had recent exposure to energy-related losses as well, and falling levels of activity in the oil patch could have a negative impact on the amount of business the insurer does in that industry as well.

Yet overall, most of the challenges that Endurance Specialty faces are ones shared by even the biggest companies. On one hand, ACE Limited's (ACE 1.51%) pending acquisition of Chubb (NYSE: CB) is just one example of the merger and acquisition activity that has taken hold in the insurance industry, and one of the stated reasons that ACE provided in announcing the merger was the fact that the combined entity would have a stronger balance sheet. Larger insurers are better able to handle risk without resorting to reinsurance arrangements, and a shrinking reinsurance market would reduce demand and put Endurance Specialty into an even tougher position in trying to attract business at prices that will allow it to earn a profit.

The concern that many investors have is that Endurance Specialty will have to take risks that it hasn't taken before in order to sustain growth. As more time passes between major catastrophic events, pricing in the specialty insurance and reinsurance markets leaves thinner margins, making underwriting decisions that much more important. With a sluggish global economy, many would-be insurance customers aren't taking on the business risks that would ordinarily spur premium growth, and that threatens not only Endurance but also the entire reinsurance market.

In the Endurance Specialty financial report, look to see if the company is able to deliver another positive surprise on the earnings front and cushion the blow that many of its shareholders are expecting. Even if Endurance manages to dodge a bullet again this quarter with its short-term results, the more important thing that long-term investors should look for in the report is whether the insurer's strategic plan has it already preparing for the impact of these tough conditions. With a lot of uncertainty in the market, Endurance will have to stay at the top of its game to make it through these tough times unscathed.