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Endurance logs quarterly profit despite investment results lag

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Endurance Specialty Holdings Ltd. reported higher profits and premiums in the first quarter of 2016 following last year’s acquisition of Montpelier Re Holdings Ltd., but said it is taking steps to correct for losses in its investment portfolio.

The Pembroke, Bermuda-based reinsurer reported net income rose 14.9% in the first quarter of 2016 to $124.6 million from the same period of 2015, according to the company’s first-quarter earnings report released Monday afternoon.

The reinsurer reported gross premiums written of $1.6 billion, a 23.8% increase, and net premiums written of $938.8 million, a 22.7% rise, compared to the first quarter of 2015, according to the report.

Endurance also highlighted an improved combined ratio of 77.9% compared to 82.4% for the same period in 2015, attributable to favorable prior year loss reserve development.

“Our results were led by excellent underwriting profitability as reflected in our overall combined ratio of 77.9%, driven by the high quality risk selection within our global underwriting portfolio as well as the very successful integration of Montpelier Re,” Chairman and CEO John Charman said during the company’s earnings call on Tuesday morning. “We retained all of Montpelier’s business that we desired and anticipated.”

The Montpelier acquisition was announced in March 2015 and closed last July.

“I think the fact that they were able to integrate this company as quickly and as efficiently as they had is probably a good selling point if and when they look at another deal,” said Meyer Shields, managing director at Keefe Bruyette & Woods Inc. in Baltimore.

The company’s reinsurance division experienced a 23.2% increase from the first quarter of 2015 to $567.9 million in net premiums written this quarter while the insurance segment saw a 22% increase in net premiums written to $370.9 million in the first quarter of this year, driven by increased gross written premiums in non-agriculture lines of business.

“One area of strong outperformance in the quarter came from the reinsurance segment, which makes sense because the quarter fully included the property/casualty business that Montpelier used to write, and it was a pretty good quarter,” Mr. Shields said. “There were hailstorm losses, but no mega catastrophes that would really challenge the earnings.”

Net investment income was $11.2 million in the first quarter of 2016, a decrease of $30.7 million from the same period in 2015, led by $28.3 million in losses in the company’s alternative investment and high-yield loan funds, according to the earnings report.

“Alternative asset returns were stressed by global equity and credit market volatility, which was exacerbated by poor liquidity conditions,” Chief Financial Officer Michael McGuire said during the conference call. “Our alternative assets have historically generated attractive returns … however, recent performance by several of our managers has not met our expectations, and as you would expect we do not tolerate consistent underperformance.”

The company recently terminated a number of underperforming alternative asset managers representing less than $200 million in investments, although alternative investments will continue to have a place in its portfolio, and the company remains comfortable with its overall asset allocation of 75% to 80% in investment-grade fixed income and 20% to 25% in high-yield equity, Mr. McGuire said.

“The alternative investment portfolio was not great — that was true across the industry,” Mr. Shields said, adding that the uptick in the company’s shares on Tuesday demonstrates that observers understand the volatility of these investments and that they should not be evaluated based on one quarter. “I think they’re being prudent in how they’re managing it.”