The specialist: Kenneth J. LeStrange, CEO of Endurance Specialty Insurance Ltd., one of the Bermuda startups formed in the wake of Sept. 11, to inject new capital into the marketplace, anchors his business model in specialty lines of business

Risk & Insurance, April, 2005 by Roger Crombie

"In every market in which we choose to compete, we aim to be a leader in our ability to analyze, understand and assume risk," Bell says. "We approach each market as experts, bringing deep insight and knowledge to all of our businesses. And we focus our underwriting expertise on select, profitable specialty product lines, supported by a legacy-free balance sheet and centralized, state-of-the-art-analytic expertise and technology."

Endurance Specialty Insurance Ltd. is not concerned at all, Bell also says, about market share imperatives.

"We are beginning to doubt whether economies of scale exist in the insurance and reinsurance markets to the degree that people act upon," says Bell. "We're committed only to writing business that meets or exceeds our return thresholds. We believe we are different in that respect, although such behavior is becoming a little bit more common."

RELATED ARTICLE: Returning capital to shareholders through repurchasing and dividend increases.

The years since Sept. 11, 2001 have been relatively easy for the new Bermuda-based company, even allowing for the four hurricanes last year. But that is likely to change in 2005, with excess capital and signs of backsliding on pricing.

How is Endurance planning to cope?

"We have had a focus on capital management from the earliest days of the company, and one of the issues that begins to challenge management after a certain period is having too much capital, so this is a problem we anticipated," LeStrange says. "We have responded by returning capital to shareholders through share repurchases or increasing dividends."

LeStrange has set a goal of generating a return on equity of at least 15 percent annually throughout the underwriting cycle. But in the cyclical property casualty business, the company's growth will likely consume capital at a rate of less than 15 percent a year, and will, therefore, generate excess capital.

Buying its shares at a significant premium to book value depresses the growth of book value per share, and makes the return-on-equity target a little easier to achieve. The company has determined that the appropriate break-even point between whether to repurchase shares or distribute the excess capital by increasing dividends is 1.3 to 1.4 times book value.

When share prices move above that level, Endurance tends to favor dividends over share repurchases. At lower price-to-book multiples, the company favors share repurchases.

--Roger Crombie

ROGER CROMBIE, a Bermuda-based writer, editor and former accountant, is a regular columnist for Risk & Insurance[R], He also covers issues on alternative risk. He can be reached at riskletters@lrp.com.