Platinum Underwriters Holdings Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.18.13 | About: Platinum Underwriters (PTP)

Platinum Underwriters Holdings (NYSE:PTP)

Q1 2013 Earnings Call

April 18, 2013 8:00 am ET

Executives

Michael D. Price - Chief Executive Officer, President, Director and Member of Executive Committee

Allan C. Decleir - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Neal J. Schmidt - Chief Actuary of Platinum Administrative Services Inc and Executive Vice President of Platinum Administrative Services Inc

Analysts

Michael Zaremski - Crédit Suisse AG, Research Division

Amit Kumar - Macquarie Research

Kevin Shields

Ian Gutterman - Adage Capital Management, L.P.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Operator

Good morning and welcome to the Platinum Underwriters First Quarter 2013 Earnings Conference Call and Webcast. The company's earnings press release and financial supplement can be found in the Investor Relations section of the company's website, at www.platinumre.com. This call is being recorded. A replay of this call and webcast will be available from 11:00 a.m. Eastern Time today until 11:00 a.m. Eastern Time on Thursday, April 25, 2013. The replay can be accessed by dialing (888) 203-1112 for U.S. callers; and for international callers, by dialing (719) 457-0820. Please specify passcode 988-3734.

Before we begin, please note that management believes certain statements in this teleconference may constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about expectations, estimates and assumptions concerning future events and financial performance of the company and are subject to significant uncertainties and risks that could cause current plans, anticipated actions and the company's future financial condition and results to differ materially from expectations. Those uncertainties and risks include those disclosed in the company's filings with the U.S. Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made and the company assumes no obligation to update or revise them in light of new information, future events or otherwise.

In addition, management will refer to certain non-GAAP measures, which management believes allow for more complete understanding of the company's financial results. A reconciliation of these measures to the most comparable GAAP measures is presented in the company's earnings press release and financial supplement.

At this time, we will turn the call over to Mr. Michael Price, President and Chief Executive Officer of Platinum. Mr. Price?

Michael D. Price

Thank you, operator. Welcome to this morning's call. With me today are Allan Decleir, our Chief Financial Officer; and Neal Schmidt, our Chief Actuary.

I will provide an overview of our financial results for the quarter and then Allan will provide more details. Following that, I will review our recent underwriting activity, discuss our outlook on market conditions and update you on capital management. Then we will be happy to take your questions.

We produced net income of $87 million in the quarter, which is $2.63 per diluted common share. Book value per share grew by 4% in the quarter. These results reflect favorable prior-period development, an absence of major catastrophe activity and active capital management.

Net premiums earned are approximately 8% lower than the same quarter last year, reflecting our disciplined approach to underwriting in the face of challenging market conditions.

Allan will now take us through the numbers in more detail. Allan?

Allan C. Decleir

Thank you, Michael, and good morning to everyone. Our net income was $86.5 million for the quarter. As noted in our press release last evening, we had no losses from 2013 major catastrophes. As you may recall, we would generally establish reserves for events if there were more than $1 billion of property losses to the industry or $10 million of property losses to the company. We have identified no such events occurring in this quarter.

Net income reflected the following items on a pretax basis: Net favorable development of $54.5 million; investment income of $18.5 million; and realized gains on investments of $13.3 million. Expanding on each of these items, our Property and Marine segment had net favorable development of $30.1 million for the quarter. Net favorable development included a net reduction ultimate loss estimates for 2012 and prior year major catastrophes of $15.4 million, primarily from Hurricane Sandy, which now stands at $21.8 million net of the impact of taxes. The other $14.7 million of net favorable development arose from a variety of classes, mainly in the 2011 and 2012 underwriting years.

Our Casualty segment had net favorable development of $24.4 million for the quarter. This favorable development related primarily to the North American umbrella and claims-made classes from the 2010 and prior underwriting years, as well as the international casualty class from the 2011 and prior underwriting years.

Turning to our investment results. Net investment income was $18.5 million for the quarter compared with $28.6 million for the same quarter last year. The decrease in net investment income during the quarter versus the first quarter of 2012 was primarily a result of a decrease in average book yield for the portfolio. The average book yield decreased from 2.9% in the first quarter of 2012 to 2% in the first quarter of 2013.

Also contributing to the decrease in net investment income was a reduction in the average book value of investments in cash and cash equivalents from $4 billion at March 31, 2012, to $3.8 billion at March 31, 2013. This decrease of $222 million was primarily due to share repurchases and dividends as well as negative operating cash flows over the last 12 months.

Net realized gains and investments for the quarter were $13.3 million as compared with $22.3 million in the same quarter last year. The net realized gains consisted primarily of $13.5 million from the sale of $90.9 million of taxable municipal bonds. Net impairment losses on investments for the quarter were $421,000 and relate exclusively to investments in securitized mortgages not guaranteed by U.S. government agencies.

While we realized gains on investments in the quarter of $13.3 million, our net unrealized gains on available-for-sale investments, net of deferred taxes, decreased by only $6.6 million to $131.1 million at March 31, 2013. Generally speaking, our portfolio benefited from a decrease in credit spreads on taxable municipal bonds, partially offset by an increase in treasury yields during the quarter. The duration of our portfolio of investable assets, including cash and cash equivalents, decreased to 2.4 years at March 31, 2013, from 2.6 years at December 31, 2012, and 3.4 years at March 31, 2012.

Regarding our operating expenses. Our operating expenses were $19.3 million in the first quarter of 2013 versus $17 million in the first quarter of 2012. The increase in our operating expenses is primarily the result of an increase in compensation accruals due to the company's stronger financial performance in the first quarter of 2013 versus 2012.

Finally, on income taxes. We recorded tax expense of $5.1 million for the quarter. Our income tax expense or benefit will vary depending on the contribution of taxable earnings by our U.S.-based subsidiaries.

Michael will now discuss our recent underwriting activity, market conditions and capital management. Michael?

Michael D. Price

Thank you, Allan. This is a relatively slow time of year from an underwriting standpoint. In approximate terms, we undertook the following: We had $42 million of premium expiring since January 1, and we wrote $45 million, a 7% increase. Also, we concluded on approximately $10 million of January 1 crop business compared with an expiring base of $26 million. Reduction in our crop portfolio reflects unusually competitive crop reinsurance market conditions for pro rata accounts and our expectations regarding drought persistence. On a year-to-date basis for all lines of business, we had $325 million of premium expiring, and we've written $310 million, a 5% decrease.

Property and Marine. We had $28 million of business expiring since January 1, and we wrote $26 million. Year-to-date, we have $194 million of premium expiring, and we've written $180 million, 7% decrease resulting entirely from the reduction in U.S. crop premium. In the recent renewal period, we underwrote approximately the same amount of premium in the Japanese earthquake market as we did last year, continued to restrict our involvement in the Japanese typhoon market due to our views on the price adequacy of this sector.

Our 1-in-250 year net probable maximum catastrophe loss estimate now stands at $217 million, which is approximately 10% of our total capital and is well within our tolerance for this type of risk. While we generally expect property catastrophe reinsurance rates for peak zones and perils to remain acceptable for the balance of the year, we anticipate risk-adjusted rate reductions resulting from an influx of capacity into the marketplace.

In the Casualty segment, competition remains strong and capacity is abundant. While insurance rates are continuing to improve in some casualty classes, positive lost costs trends and the effect of lower interest rates means that many treaties do not meet our pricing standard. We had $14 million of business expiring since January 1, and we wrote $18 million. So far this year, we've written $113 million in Casualty business versus an expiring base of $115 million. We expect Casualty insurance and reinsurance capacity to remain abundant for the rest of 2013, curtailing the potential for improvement in risk-adjusted rates. We've written no finite business since January 1 and continue to expect only minor activity in this segment.

Absent major events in the insurance or capital markets, we expect stability and overall reinsurance rate adequacy. We will continue emphasizing profitability, not market share. Based on our current reserve position, our net in-force portfolio, our asset portfolio and our underwriting prospects for the balance of the year, we believe that we are well capitalized, with a comfortable margin above the rating agency targets for a company with our ratings.

If the business performs as expected, we believe our capital cushion would grow over time. Under those conditions, we anticipate having the financial flexibility to expand our underwriting, hold riskier assets or buy back shares. Our decision making will be guided by the pricing we observe in the various markets. So far in 2013, we've repurchased 1,291,864 common shares for $68.3 million, an average of $52.88 per share. We currently have approximately $156 million of buyback capacity remaining under our board-authorized plan. Given our attractive balance sheet composition and broad market access, we are well positioned to take advantage of quality reinsurance underwriting, investment and capital management opportunities as they arise.

We will now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Mike Zaremski with Crédit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

Michael, in the past, you've talked about stock repurchases targeted to run above net income. So the stock's risen, I think, more than 20% year-to-date. So I'm curious if that would impact the repurchase outlook. And related, I was curious if PTP's average daily stock trading volume levels create a challenge to buying back large chunks in any given quarter. And then I had a follow up.

Michael D. Price

Okay. Well, we fell short once again this quarter in our objective to buy back more than earnings and I would attribute that to not anticipating the reserve releases that we did observe this quarter. I think we were on track early in the quarter to buy back shares in approximately the amount that we ended up buying back, $68 million. The fact that the earnings came out this quarter higher than that is something that we didn't know until quite recently. So I feel good about the amount we were able to buy back in the quarter. You're right that the increase in share price does influence the volume of repurchase that we're comfortable making. However, we still have an opportunity to buy back at a discount to book and we view that as an attractive proposition. The volume constraints exist but they really haven't, so far, proven to be operative. We are able to buy back, in aggregate, the amount that we would like to. It's more valuation sensitivity that drives the outcome for the quarter.

Michael Zaremski - Crédit Suisse AG, Research Division

Got it. And what about upcoming wind season? Does that impact your decision in the near term?

Michael D. Price

Not really. Our CAT PMLs are at historically low levels. We think they're well identified, well modeled. And our capital cushion is strong, so we should have the flexibility to manage capital actively throughout the year.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay, great. And then lastly and I'll get back in the queue. Can you elaborate on your remarks about drought persistence as it relates to downsizing the crop reinsurance portfolio? And maybe on pricing, as well, for crop insurance?

Michael D. Price

Sure. We have had a drought last year. There's, from a statistical standpoint, some evidence that there's serial correlation in droughts, meaning that, given that you have one, 1 year, the likelihood that you have one the next year is higher than the long-term average. We also know, given that we're in April, that we have sustained drought conditions and we have an outlook published by the U.S. federal government that we can observe, which tells us that although there's improvement anticipated, it's still worse than the expectation was 1 year ago. So I think there's quite a bit of uncertainty as to whether severe droughts persist 1 year to the next; maybe they do, maybe they don't. But we would view this as an elevated risk environment and, ironically, that's occurring at a time when terms and conditions available on the pro rata business are less attractive to reinsurers than they have been in prior years. So risk is higher in the past. Reward is lower than in the past and that, I think, justifies our decision to pull back from the pro rata portion of the business. We did maintain our excess of loss positions. We did maneuver, to some extent, to move ourselves a little bit farther away from the risk in light of our views on drought persistency. And to some extent, we enhanced our excess of loss positioning in Canada relative to the United States. So we continue to be a participant in this market. What I find interesting is that, in 2003, when we were active in this market and it was attractive, no one else seemed to want to do this business. Today, it's much less attractive and everybody that we know is somehow in this business. So it's changed quite a bit, and we're happy to let others take the lion's share of the premium and risk right now.

Michael Zaremski - Crédit Suisse AG, Research Division

That's helpful. And just as a follow-up to that. On the crop, did you see more demand for reinsurance in crop due to primary ceding more? I know you guys didn't take it.

Michael D. Price

Actually, what we saw is that in certain instances, pro rata business was being ceded to the reinsurance market on terms that were more favorable than last year, notwithstanding the fact that there were drought losses. So I don't know if, in the aggregate, more dollars are being ceded into the reinsurance market. I suspect the answer to that is yes, in part because of greater acreage under production as well as relatively high commodity prices. But lots of people are trying to write crop reinsurance right now and, when there's an appetite, generally primary companies are willing to fulfill the aspirations of reinsurers.

Operator

[Operator Instructions] Next, we'll go to Amit Kumar with Macquarie Capital.

Amit Kumar - Macquarie Research

Just, I guess, 2 or 3 quick questions. First of all, just going back to your opening remarks regarding prop CAT renewals. Clearly, there's a shift in your tone from what you had said in the last quarter. You're talking about risk-adjusted rate reductions. And I know this is a smaller portion of your book compared to others. Can you just sort of flesh out that comment a bit more in terms of if you had to put a range, what sort of numbers are you thinking of?

Michael D. Price

Well, so far, we've written about 70% of our annual CAT reinsurance. So we're much less focused on the mid-year renewal period. There has been, as I suggested, an influx of capacity, in particular into the Florida marketplace. And it is that capacity influx that's driving pricing expectations. Brokers are expecting significant reductions. They're usually working with good information when they form these expectations and so if they are anticipating significant reductions, I think it's unlikely that you're going to get increases coming out. So the increased supply is evident. You can see it coming in and, as a general proposition, I don't see how you get rate increases if supply is increasing. So we believe that it's going to be a tough renewal period coming up.

Amit Kumar - Macquarie Research

And in terms of the range, would you say that rates would be down, I don't know, 5% to 15%? Is that a good enough range to dues [indiscernible]?

Michael D. Price

I don't think that's out of the question in the Florida marketplace. Whether everything else that might get renewed between now and year end suffers that kind of erosion of rate adequacy, I don't know. And we'll be, at least, in part, a function of the kind of loss experience that those seasons have had in 2012. But for the peak zone, peril Florida wind, yes, I think we're looking at reductions and the order of magnitude that you cited is not out of the question.

Amit Kumar - Macquarie Research

Got it. That's very helpful look. I guess the only other question I have and I'll re-queue is, if the cash position on the balance sheet -- I guess, maybe it's a two-part question. First of all, can you remind us what percent of New Zealand losses have been paid? And I guess, in conjunction, you mentioned you might look to hold riskier assets. Maybe just -- I guess, touch upon those 2 things.

Michael D. Price

Allan will update us on the percentage of New Zealand CAT loss payments.

Allan C. Decleir

As you know, the New Zealand -- there were 3 separate major catastrophe events that we identified. The most recent earthquake in New Zealand, in June 2011, we've actually only paid 3% of that loss. The February 2011 and the September 2010 ones are now finally starting to pay and they're sort of in the 50% to 60% paid area.

Amit Kumar - Macquarie Research

And can you touch upon the comment you might look to hold riskier assets?

Michael D. Price

Sure. We'd like to hold riskier assets but, in the near term, I think it's unlikely because we don't see that we're being appropriately rewarded for taking on the risks associated with those riskier assets. Presently, the portfolio has a high concentration in cash and short-term investments, as well as governments, agencies and munis. I think when you add those categories together, we're approaching 90% of the portfolio. We would happily accept risk either on the equity side or in the fixed-income markets. Equities appear to be, as a general statement, overvalued from our point of view, using long-term measures of equity market value. And on the fixed income side, we're perfectly comfortable accepting duration risk, liquidity risk and credit risk. Unfortunately, none of those categories of fixed-income risk are being well rewarded now. So what you've seen us do is shorten the duration of the portfolio, hold cash so that we can finance our negative cash flow from operations and our buyback activity. So right now, we see the best use of funds as buying back shares at a discount. That's more attractive than the reinsurance underwriting opportunities, more attractive than the investment opportunities.

Operator

Next, we'll hear from Kevin Shields with Pine River Capital.

Kevin Shields

I was wondering if you could share with us paid catastrophe losses for this quarter and last. And I'd be interested in what percentage of Hurricane Sandy has been paid so far.

Michael D. Price

Allan's got that.

Allan C. Decleir

I have this quarter's. I apologize, I actually don't have the last quarter's but I think they're generally in the same vicinity from my memory. So if you look at our supplement, on Page 25, you'll see we paid $103.5 million of losses during the quarter; $38 million of that was related to CAT losses. In particular, you mentioned Sandy. We've started paying that but a very small amount. Through March 31, we've only paid 3% of our Sandy losses.

Operator

Next, we'll hear from Ian Gutterman with Adage Capital.

Ian Gutterman - Adage Capital Management, L.P.

A few things. First, do you have any thoughts on the fertilizer plant explosion last night?

Michael D. Price

I do have thoughts, Ian. Not so much on that particular event but on risk losses in general. We do write a risk access portfolio. As you might imagine, those limits can accumulate with each other. And so much like property catastrophe losses, we do measure and monitor the accumulation of our risk limits. And we do apply a PML-ing process to those accumulated risk limits to reflect the fact that, in any one event, it's unlikely that every single theoretically exposed limit will be exhausted by that event because each and every ceding company participated on that risk. In order to gauge the magnitude of this, we've looked at prior events and what percentage of our accumulating limits are eroded in single large events. And to sum it all up, what we have is a position presently where our U.S. risk PML is typically lower than our CAT PMLs. And presently, it's under $50 million. So even in a very large U.S. risk loss, which hit a very high percentage of our cedents, we're looking at an individual loss -- an accumulated loss to us that's quite manageable in size relative to our balance sheet and expected income for the year.

Ian Gutterman - Adage Capital Management, L.P.

Okay, and do you have a sense of -- any early sense of industry loss potential on this?

Michael D. Price

I don't, to be honest with you. I've spent my time on other things in the last 24 hours than that one particular event. And it typically takes a few days to figure out the nature of the coverage and who the participants are and what kinds of programs they buy and so forth. So the information doesn't quite emerge in a 24-hour time frame.

Ian Gutterman - Adage Capital Management, L.P.

Got it. And then you mentioned on the earlier question about buybacks being less than earnings because reserve releases were greater than expected. I guess, can you provide some additional color of why they were greater than expected?

Michael D. Price

I would happily allow Neal to first explain that we don't expect reserve releases anymore in the quarter and then share his reflections on what he saw going on this quarter. Neal?

Neal J. Schmidt

Right. Well, this quarter, we certainly had an extremely low level of losses in our umbrella portfolio. So they're a lot lower than we've seen in prior quarters, which led to a significant reserve release, as well as we did not anticipate, let's say, very little change in our cedents view of Sandy loss. We generally anticipate those losses going up as they mature from the first quarter after their -- -- first quarter and after the event happened, so the second quarter and the third quarter in, generally cedents are increasing their loss estimates on catastrophe events and that did not happen in this case, which forced us to release a significant part of our Sandy reserves as well.

Ian Gutterman - Adage Capital Management, L.P.

Got it, great...

Neal J. Schmidt

[indiscernible] Something main [indiscernible].

Ian Gutterman - Adage Capital Management, L.P.

Okay. And then, a couple of financial questions. The negative cash flow from operations, would you expect this to continue given unpaid cash to come or should that start to turn positive later in the year?

Allan C. Decleir

No, I was -- Michael has mentioned, we're holding -- Frederick's [indiscernible] holding large sums of cash as we do anticipate negative operating cash flow going forward, certainly for the next 12 months as we pay the New Zealand losses that I mentioned earlier and pay Sandy and some of the other CATs. We will be, I think, negative operating cash flow. That's our current expectation for the next 12 months.

Ian Gutterman - Adage Capital Management, L.P.

Got it. Okay, and then just my last one, the expense ratio. I know you said there was the incentive accrual but, even still, the expense ratio looked very high and even the acquisition ratio was very high versus prior 8 quarters, let's say. So is there anything else unusual? Or mix change maybe?

Allan C. Decleir

Nothing that we can specifically point to. Again, on the operating expenses, they're flat for the most part, as we'd expect our employee base to stay the same at 125 employees. So it's really a little bit of a change in the denominator of that calculation, it's premiums earned, lag, premiums written, decreases from last year. And the acquisition expense side, I think you hit on the answer. It's a little bit of mix but nothing significant jumped out from the analysis that we've done.

Ian Gutterman - Adage Capital Management, L.P.

Okay. So should that mix on the acquisition persist a bit? I mean, historically, you've been around nearly 20 and it's close to 24 this quarter. I'm not saying will the 24 persist but should we be thinking greater than 20 going forward?

Allan C. Decleir

I guess, we're -- if you're looking at the Finite segment, there is a big change there as we released reserves and had to put up a profit commission so that might be [indiscernible] that segment there. If you refer to our supplement, I think you'll see that. And so that might have had an impact as well on the acquisition ratio.

Operator

[Operator Instructions] Next, we'll go to Jay Cohen with Bank of America Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Yes, Michael, you had mentioned that there's certainly ample capacity and additional capacity in the CAT market, certainly for peak zones. And I guess it raises the question of potentially ceding more to these newer participants if, in fact, the price is pretty attractive. It didn't look like you did it this quarter just based on the net-to-gross but could that be part of the game plan going forward?

Michael D. Price

It could be, Jay. And we didn't do it but we did look at it. So you're right, we are interested in ceding off CAT risk if we can find attractive security at attractive prices; and sometimes we do, and sometimes we don't. It's kind of hit or miss.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

And I'm assuming, Michael, that your view, which you've expressed before on managing third-party capital hasn't changed?

Michael D. Price

Has not changed at all, Jay.

Operator

At this time, there are no further questions. Mr. Price, I will turn things back to you for any additional or closing remarks.

Michael D. Price

Thank you, operator. Thanks for your participation and we look forward to speaking with you next quarter.

Operator

And that does conclude today's teleconference. Thank you, all, for joining.

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