In the insurance world, growth isn't always good. Bad growth is like taking steroids -- in the short run, it'll make you look stronger, boost performance, and maybe even make you more popular. But in the long run, it could have dire repercussions. Endurance Specialty Holdings
In the first quarter of 2007, this Inside Value selection reported tepid numbers. Earned premiums fell 10% to $377 million, which helped cut net income 5% versus last year's results. The company's combined ratio rose 150 basis points to 86.7%, primarily because of increased G&A expenses, which in turn were partly due to negative leverage from shrinking premiums.
Favorable reserve development contributed $56 million, or 14.8% of earned premiums, to the bottom line. In short, the company decided that it had set aside too much money for losses that occurred in prior years, and that it would reverse those losses.
Management also took the time to point out that it believes its reserving process is very conservative -- currently, 65% of carried reserves are incurred but not reported (IBNR). In other words, Endurance has set aside a healthy 65% of loss reserves for unreported past losses. Furthermore, when losses develop, the company doesn't immediately reduce its IBNR reserve dollar for dollar; instead, it conservatively waits for a more accurate assessment of the real costs to release its reserves. Management also noted that although it holds a lot of mortgage-backed securities, its exposure to subprime mortgages is low, and the average credit rating of its securities is AAA.
I wouldn't penalize Endurance for its slow growth. The market is getting softer, and smart insurers like Markel
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.