Can Endurance Specialty Insure Future Growth?

Endurance writes crop insurance. Image source: Endurance Specialty Holdings.

The reinsurance industry is full of minefields for the unwary, but it also is highly lucrative for those who are successful at it. Reinsurance and specialty-coverage insurer Endurance Specialty Holdings (ENH +0.00%) has done a good job over time of producing consistent growth throughout numerous cycles in the industry. But as Endurance prepares for its fourth-quarter financial report on Wednesday, investors want to see if the company can avoid some of the pressures that peer Chubb (NYSE: CB) saw in its report. Let's take a closer look at how Endurance Specialty Holdings has done and what's ahead for the reinsurer in 2016.

Stats on Endurance Specialty

Data source: Yahoo! Finance.

Which way will Endurance Specialty earnings go?
In recent months, investors have been generally positive about Endurance Specialty's earnings prospects. They've raised their fourth-quarter estimates by close to 10%, and they've boosted their full-year 2015 projections by nearly $0.75 per share, offsetting a dime-per-share cut to their 2016 consensus. The stock hasn't gone anywhere, though, falling 3% since late October.

Endurance Specialty's third-quarter results explain much of the concern that shareholders have about the insurer's future prospects. Gross premiums written climbed slightly, but an unexpected drop in net premiums written pointed to the impact of what CEO John Charman referred to as "a backdrop of relentless global competition" on Endurance's results. Net income fell by more than a third, yet some of the headwinds in Endurance's business came from the ongoing integration of its purchase of Montpelier Re.

Yet there's already evidence that the poor conditions in the reinsurance market might have continued. Chubb reported in late January that its global reinsurance division saw a 22% decrease in net premiums for its most recent quarter. Chubb's combined ratios for the quarter climbed more than 3 percentage points, and catastrophe losses accounted for most of the gain that Chubb saw. If Endurance's experience resembles Chubb's, then continued weakness in the reinsurance arena could hold back Endurance's growth as well.

Other macroeconomic factors are also likely weighing on sentiment about Endurance. The reinsurer does have some exposure to losses in the commodities sector, both through its business of writing crop insurance and because of its having policyholders in the energy industry. The potential for rising interest rates in the U.S. could put downward pressure on any bond holdings the company has, although Endurance took advantage of the low-rate environment to refinance an outstanding preferred stock issue with a new offering that pays a smaller dividend.

Still, the acquisition of Montpelier Re has had some positive impacts. In November, bond rating agency Moody's affirmed Endurance's bond ratings but changed its outlook on the company to positive. Endurance has set goals to increase the firm's scale and market presence and write more specialty insurance and reinsurance line business, and Moody's thinks that the Montpelier Re purchase improves the odds of Endurance meeting those goals sooner.

In the Endurance Specialty financial report, investors should look closely to see if it delivers another negative surprise. If the signs of weakness that Chubb saw in its reinsurance operations show up in Endurance's results as well, then investors will need to think twice about their exposure to the entire industry going forward. On the other hand, if Endurance can produce success even in a tough environment, then it will speak even more loudly to the company's reputation for excellence.