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Platinum Underwriters Holdings Ltd. (NYSE:PTP)

Q2 2014 Results Earnings Conference Call

July 17, 2014 8:00 AM ET

Executives

Michael Price - President and CEO

Allan Decleir - Chief Financial Officer

Neal Schmidt - Chief Actuary

Analysts

Brett Shirreffs - KBW

Amit Kumar - Macquarie

Larry Greenberg - Janney

Ian Gutterman - Balyasny Asset Management

Operator

Good morning. And welcome to the Platinum Underwriters Second Quarter 2014 Earnings Conference Call and Webcast. The company’s earnings press release and financial supplement can be found in the Investor Relations section on 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, 11:00 a.m. Eastern Time on Thursday, excuse me, until 11:00 a.m. Eastern Time on Thursday, July 24, 2014. 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 pass code 5668803.

Before we begin, please note that management believes certain statements on this conference 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/or subject to significant uncertainties and risks that could cause current plans, anticipated actions and the company’s future financial conditions and results to differ materially from expectations.

These 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 current, excuse me, 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 Michael Price, President and Chief Executive Officer of Platinum. Mr. Price?

Michael 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 discuss the results in more detail. After that, I'll comment on our recent underwriting, investment and capital management activity, as well as our outlook for market condition. Then we will be happy to take your questions.

We produced net income of $36 million, which is $1.34 per diluted common share. Tangible book value per share grew 3% to $67.38. Our performance reflects favorable prior period development in the casualty segment, strong investment results on a total return basis, no losses from major catastrophe and active capital management.

Net premiums earned are approximately 13% lower than last year's second quarter. You may recall that quarterly earned premium comparisons are sometimes complicated by re-estimates of ultimate premium from prior underwriting years and that is the case this quarter. After Allen's remarks, I'll offer what I believe is a clearer comparison of underwriting activity this year versus last year.

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

Allan Decleir

Thank you, Michael, and good morning to everyone. Our net income was $36.2 million for the quarter. Our results reflected the following items on a pre-tax basis, net favorable development in prior years of $28.6 million, investment income of $17.6 million and no losses from new major catastrophe events in the quarter.

Expanding on each of these items, regarding prior year’s development, our Property and Marine segment had net unfavorable development of $2.6 million for the quarter. This resulted from an $8.9 million increase in our estimate of ultimate losses from 2012 grounding and ongoing wreck removal of the cruise ship Costa Concordia, offset by $6.3 million of favorable development elsewhere in this segment.

Our casualty segment had net favorable development of $30.4 million for the quarter. The favorable development related primarily to the North American umbrella and claims made classes from the 2011 and prior underwriting years.

Turning to our investment results, net investment income was $17.6 million for the quarter, compared with $17.8 million for the same quarter last year. Net investment income was relatively flat as the reduction in the average book value of investment and cash and cash equivalents was offset by an increase in average book yield. The average book yield was 2.1% for the second quarter of 2014. This compares with 2% in the second quarter of 2013 and it’s unchanged from the first quarter of 2014.

Net realized losses on investments for the quarter were $600,000 as compared with net realized gains on investments of $11.7 million in the same quarter last year. The net realized losses related to fair value adjustments on our foreign-currency denominated trading securities.

Net impairment losses on investments were minimal in the quarter. For the quarter, our net unrealized gains on available-for-sale investments, net of deferred taxes increased by $16.8 million to $91.4 million at June 30, 2014. Generally speaking, our portfolio benefited from a decrease in U.S. treasury rates, as well as a tightening of credit spreads.

The duration of our portfolio of investable assets, including cash and cash equivalents was 2.6 years at June 30, 2014. This compares with 2.4 years at June 30, 2013 and is unchanged from March 31, 2014.

As per catastrophe activity, we experienced no major catastrophe events in the second quarter of this year, which compares with $18.6 million of losses from major catastrophes in the second quarter of last year.

We experienced a $5.5 million increase in losses from non-major catastrophe event in the second quarter of this year compared with the second quarter of last year. This resulted in an increase in the loss ratio in the Property and Marine segment when comparing periods.

We renewed our syndicated credit facility in April and have expense the upfront costs related to this facility in the quarter. Our operating expenses were $21.4 million for the second quarter of 2014, compared with $19.7 million for the same quarter in 2013. The increase in operating expenses was attributable to professional fees.

Finally, on income taxes, we recorded a tax expense of $1.8 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 investment activities, market conditions and capital management. Michael?

Michael Price

Thank you, Allan. The mid-year underwriting period reflect the deteriorating conditions for all lines of business. Once again it proves challenging to find attractively priced reinsurance opportunities.

Overall, we had $124 million of premium expiring since late April and we wrote $133 million, a 7% increase. Year-to-date, we had $454 million of premium expiring and we've written $431 million. Thus we’ve written 5% less business this year as compared with last year. Reference there is $82 million of business expiring between now and year-end.

In Property and Marine, we had $57 million of business expiring since late April and we wrote $50 million. Year-to-date, we had $234 million of premium expiring and we've written $220 million.

Our net PML reflect the purchase of a $50 million property catastrophe aggregate cover, which protects our portfolio from losses at less frequent return periods for all [natural perils] (ph) in the United States, as well as Caribbean windstorm, Japanese windstorm and Canadian earthquake.

Currently, our 1-in-250 year net probable maximum catastrophe loss estimate is within our stated risk tolerance at 9% of total capital and 10% of shareholders equity, reflecting the expected profitability of this business class. Seasonal hurricane forecasters are anticipating lower than average Atlantic windstorm activity.

Due to the significant capital available to support catastrophe exposed risks, we anticipate continued downward pressure on pricing for this segment. In the Casualty segment, we had $67 million of business expiring and we wrote $83 million. For the year-to-date, we've written $183 million of premium versus an expiring base of $188 million.

Capacity in the casualty market remains abundant. We anticipate continued downward pressure on risk-adjusted profitability for this segment. We've written no finite business since January 1 and continue to expect little or no new activity in this segment.

Absent major events in the insurance or capital markets, we expect continued downward pressure on overall rate adequacy. We will continue emphasizing profitability over market share, while seeking to maintain a position in larger markets by participating on the most attractive business available.

Our investment activity in the quarter included purchasing $54 million of par value of securities backed by the U.S. government or agencies. We’ve continued exploring higher risk, higher return investment strategies and anticipate allocating funds to this purpose by year-end.

During the quarter, we repurchased 556,092 shares for total consideration of $35 million and average cost per share of $62.95. That brings our repurchase for the year-to-date to $111 million versus net income of $100 million.

We currently have $215 million of buyback capacity remaining under our Board authorized plan. Based on our current reserve position, our net-in-force portfolio, our asset portfolio and our underwriting prospects for the near-term, we believe that we're well-capitalized with the comfortable margin above the rating agency targets for our company with our ratings. If the business performs as expected, we anticipate our capital cushion would grow over time.

Under those conditions, we would have 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 various markets. For the strong balance sheet and experienced underwriting, investment and risk professionals, we're well positioned to operate effectively in the current challenging market conditions.

We will now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We will take our first question from Brett Shirreffs from KBW.

Brett Shirreffs - KBW

Hi. Good morning. Michael, I was wondering if the additional retrocessional purchase might impact your capital management decisions during the upcoming winter season and also if you could just touch on your views on share repurchases during the Atlantic Storm season?

Michael Price

Sure. Having the retro in place would give us more confidence to be active in share repurchase during the upcoming quarter. What we've seen is that share repurchases do vary from quarter to quarter. So we don't get overly focused on how much we do in anyone period but rather try to look at it over a longer time frame, such as the entire year. How much we can repurchase in any quarter is a function of various factors including our absolute level of capital relative to that target of $1.5 billion that we've spoken of before, our assessment of our capital cushion what we see as the underwriting opportunities, what we see as the valuation on our shares, our perception of our confidence in our reserve position and other factors.

So as we look ahead to Q3, I'm anticipating that we will be active in the share repurchase arena. We have the capacity under our plan. We have the strong balance sheet to support this. We have the capital that we need relative to our target. So it's going to impart be a function of the valuation that we see.

Brett Shirreffs - KBW

Okay. Thanks. And I was wondering if you could maybe elaborate a little bit on the premium decline in the casualty segment. Was there anything one-time in nature that happened there or what was driving the significant decline?

Michael Price

I alluded to this in my opening remarks, where Q2 of 2013 which is the period we’re preparing to, had benefited from re-estimate of ultimate premiums and prior underwriting years. And so it's a challenge in comparison to look at Q2 2014 to Q2 2013 because ‘13 had those re-estimates included in it. So that's why I'm suggesting that you focus more attention on the actual underwriting activity which, as I pointed out in my later remarks is very similar for 2014 to what we had seen in 2013. So there really isn't a material decline in the volume of premium that we’re writing.

Brett Shirreffs - KBW

Okay. That’s very helpful. Thanks. And then just one last one, based on some of the negative pricing commentary we've heard, I was wondering if you could just kind of talk about how the expected ROE on your book of business has changed over the last couple of renewal periods?

Michael Price

Yes, it’s trending down. And we used to have a pretty strict approach of kicking out business when it fell below its selected target return. And historically we've been using 10% as the point at which we tend to decline business. More recently we have not been able to hold to the 10% return standard. We've had to accept more business on the books that’s in the high single digit as opposed to historically. We would not have done that. So the price to ROE is trending down and they're coming in overall in the high single-digit.

Brett Shirreffs - KBW

That’s very helpful. Thank you for your time.

Operator

We will go next to Amit Kumar with Macquarie.

Amit Kumar - Macquarie

Thanks and good morning. Two or three quick questions. Number one is on Costa Concordia. What industry loss are you assuming and what potential remaining exposure you might have, if the limits continue to develop?

Allan Decleir

The indicated outlets claim size that’s been reported to us is around $1.4 billion and the specific reserves that we’re holding are anticipating something higher than that, closer to $1.5 billion. But we also have IBNR for that class of business such that we are protected for even higher amounts if they work to materialize. My recollection is we have exposure all the way up to $2 billion. And I think we picked up about 2.5% of the losses from here on up to $2 billion.

Amit Kumar - Macquarie

Got it. That’s actually very helpful. The other question is just going back to the previous question on buyback and I guess, it goes back to the discussion on $1.5 billion equity as well as the high returning assets. Is our latest book value number still the threshold or is the focus now more on where the stock is trading at?

Michael Price

Well, we’re mindful of the relationship between where the stock trading and what our fully converted book value looks like. So in the prior quarter ending fully converted book value is to some extent a benchmark in our minds for where share repurchase -- the upper bound of where share repurchase may make sense.

Amit Kumar - Macquarie

Okay. The final question I will re-queue after this. Can you break out what the reserve releases were from either from Tohoku or New Zealand on the property in marine side and from the North American claims made and umbrella lines?

Michael Price

I have to defer to Neal to give us some insight into the source of reserve releases for the quarter.

Amit Kumar - Macquarie

Thanks. Hey, Neal.

Neal Schmidt

Hi. On the umbrella and claims made side, generally I think we said 2011 and prior underwriting years, the number of underwriting years, it reflects the lack of claim activity rather than anything specifically. So with respect to major catastrophes at overall very small decrease, Tohoku, we have -- it's difficult to say because we have claims that are moving between different events or ceding companies that has exposure to multiple defense and only have a couple of limits that are spread between three or four different events, so we have that going on.

So it’s difficult to say specifically what the overall -- whether it is by specific event because there are movement between events. But overall on those older claims, it was little movements in the quarter, when you put only New Zealand together with the Tohoku and so on, there was very little movement.

Amit Kumar - Macquarie

Got it. That’s very helpful. I’ll stop here. Thanks for all the answers and good luck for the future.

Operator

At this time, we have one question remaining in queue. (Operator Instructions) We’ll take our next question from Larry Greenberg with Janney.

Larry Greenberg - Janney

Hi. Good morning. Just wondering if you could describe the $5.5 million of, I guess, larger loss, but non-cat type losses?

Michael Price

Sure. We had tornado and hail type events impacting several states in the United States, as well as several countries in Europe, France, Germany, Belgium, for example. So we’re talking about things that are sizable enough to give rise to losses in our portfolio, but not so large as to be multibillion-dollar industry events ending up themselves or be creating more than $10 million of loss to us. So as what we would consider to be the attritional type of catastrophe losses that you sometimes have coming into an XOL portfolio.

Larry Greenberg - Janney

And then I mean, if you look at the, I mean if you -- so that were said to about 4.5 points on your combined. I think if you adjust for that your ex-cat, ex-prior year was actually a little bit better than the year ago second quarter. Did you have -- do you remember if you had any of that type of noise in the year ago second quarter?

Michael Price

No, I don't think we did Larry.

Larry Greenberg - Janney

Okay. And then just, I mean generally on the accident, your ex-cat loss ratio. I mean, it's been creeping up a bit. We've kind of seen mix results from the industry in general, but I would argue that that number has stayed more contained than I would've thought. I mean -- and certainly given the pricing pressures, it would be rational to expect it to be moving up. Do you have any general thoughts about how the industry is able to maintain underlying loss ratios where they are?

Michael Price

Well, I think we've been able to maintain good combined ratios on the basis of having trunk to portfolio over time and change the mix of the portfolio over time. For the industry as a whole, I think it's more problematic because the industry as a whole doesn’t shift mix or change the volume of its writing. So I would expect that the broader market combined ratios are trending up over time as a general matter, whereas in our portfolio they are more static.

I think looking ahead, it's unlikely that they can remain static even in our portfolio since we are no longer actively shrinking the book and we’re now limited to just the mix change tool for managing combined ratio.

Larry Greenberg - Janney

Thanks. Appreciate the thoughts.

Operator

We’ll go next to Ian Gutterman with Balyasny Asset Management.

Ian Gutterman - Balyasny Asset Management

Hi. Thank you. Michael, first, I guess, I was looking at -- well, I guess, maybe first follow-up on Larry’s question. If I back out that $5.5 million, it’s about 10 points on the property. You’re still having about a 75 actually your combined for property, which is still significantly higher than normal. Should I assume the cat loss lower I guess as part of it because of the mix? And I guess, I’m struggling to think about, 75, I guess, seems inappropriate for a property book, once the property book that doesn’t have lot of cat. I’d say, I think the cat load on top of that 75 obviously.

Michael Price

Yeah. Recall, Ian, that some of the premium in the property and marine portfolio has shifted to proportional away from excessive loss. And proportional is going to carry a significantly higher combined ratio than XOL well on an expected basis. So as we write more proportional business, we would expect the combined ratio in the property and marine segment to rise.

I wouldn't expect it to get to be a 100 because it is still somewhat cat exposed business that does need to be a margin for the cat, as well as the margin for the other risks inherent in that subject business. But certainly if it’s less XOL, which it is, it’s going to have a lower catastrophe component to it, but a higher combined ratio associated with it.

Ian Gutterman - Balyasny Asset Management

Got it. And then somewhat similar on the casualty side, the acquisition expense ratio look like it bumped up a point or two, is that mix, or is that pressure on ceding commissions given competition?

Michael Price

It's probably both, Ian.

Ian Gutterman - Balyasny Asset Management

Okay. And is it fair to expect that to continue? It sounds like there is -- I mean, obviously, we on the outside only read the sensational headlines. We see a lot of talk of ceding commissions where it was 3% or 5% or 6% even overrides to the insured. How much of a trend is that?

Michael Price

That’s real. It’s pervasive. We’re seeing significant pressure on ceding commissions. The market held this discipline for many years and then it seems to be capitulating now. And so all at once, you're getting increases in ceding commission of four, five and sometimes more points. I expect that pressure will continue. I don't know that those same treaties next go around can benefit from yet another improvement in ceding commissions. I mean, time will tell, but there is an upper balance to the sort of thing I suspect. But those treaties that haven't yet benefited from increases are probably going to be seeking them.

Ian Gutterman - Balyasny Asset Management

And is that linked to any increased demand, meaning it’s more being ceded as a result of the attractive overrides, or is it just to keep cedents from not retaining more business?

Michael Price

So it’s an interesting comparison, where we are now versus what was going on in the late 90s. And there is a difference. And there are similarities. So, one similarity is that today just as then we are seeing this big push for higher ceding commission. A difference is that back then companies were ceding substantially greater percentages of their books of business out into the reinsurance market, whereas today companies are not ceding as great of a percentage and some companies are actually reducing the amount of business that they’re ceding into the reinsurance community. So there seems to be some general perception amongst ceding companies that the quality and profitability of their business today is better than it was in the late 90s, if you view their buying behavior as somehow indicative of their frame of mind, which I do.

Ian Gutterman - Balyasny Asset Management

Got it.

Michael Price

So I think they view it correctly as an alternative form of capital and they use it as a capital management reinsurance, that is, as a capital management tool, but it’s attractively priced relative to other sources of capital, they will rely upon it. Or if for some reason they value the expertise or insights of the reinsurer, they will go the reinsurance route. But they're not pushing all their business out the door now as they were in the last soft market.

Ian Gutterman - Balyasny Asset Management

Got it. That makes sense. And then just lastly, again from the rumor, I guess, it sound like there's -- maybe a cat deal or two that seems to be experiencing some pushback to enhance terms or further decrease in pricing. I guess I'm curious if you’re an optimist or pessimist on that, to the feel like that's a sign of the market finally reaching its breaking point or are these sort of one-off deals and if you could find six other deals for one of those that the market does cave on?

Michael Price

Yeah. Some are claiming that the market is testing its bottom. I'm not so sure about that. We have seen rate reductions in cat exposed business in the 10% to 20% range, but you got to remember that translates into a change in expected profitability, that’s much greater. So probably a third of the expected profit has been given up in the form of rate reductions.

Nevertheless, the business that’s being bound today still has expected profits embedded within it. And obviously, there are market participants that view that business as being attractive, whether it's in absolute terms or relative to their other opportunities. It varies depending on who you ask. But I don't know that there are very many people who have wholesale withdrawn from the cat exposed market. They are still all in there, all participating. And yet more people come into that marketplace.

So I expect continued downward pressure. There is a point below which shouldn’t go and no one claims it on purpose. So cat capacity at or below loss cost. The issue that's being debated and resolved in the broader marketplace is what is the appropriate expected margin on top of expected loss cost? And the complicated, different parties have different views of loss cost depending on the model that you use and whether you make adjustments to it and whether you're applying it correctly and how accurate it is and so on.

Different companies have different senses of what is the expected cost of losses. And according, they have different perspectives on how much profit mode is embedded in each treaty. So differing our non-homogeneous views about profitability are driving competition. That dynamic is not going away. It cannot go away, because there's no perfect model. So I think all that summed up means continued downward pressure on pricing for cat exposed businesses.

Ian Gutterman - Balyasny Asset Management

Thank you, very helpful as always Michael.

Operator

We will take a follow-up question from Amit Kumar with Macquarie.

Amit Kumar - Macquarie

Thanks. Just two quick follow-ups. The first which is going back to I guess Ian’s question. All is being equal, let's say, if we don't have an active hurricane season and pricing remains under pressure, I mean are we talking about another round of double-digit rate increases at 1/1/2015, or do you think at that point, so you’ll see more and more reinsurers revolting and seeking better rates?

Michael Price

Yeah. I don't think you can continue to have sequence of double-digit rate decreases in property cat exposed business. So the rate of decrease has to slow down at some point.

Amit Kumar - Macquarie

Got it. The only other question is -- is I guess on the discussion on consolidation in the industry which all of us have been watching. I am curious how you feel against the backdrop of profitability, against the backdrop of third-party capital coming in for a small, but a strong balance sheet, stronger reserves. How do you think about Platinum as a standalone franchise going forward?

Michael Price

I think we feel good about our prospects as a standalone company in light of the fact that we have a strong track record of underwriting excellence. We have as you pointed out a very strong balance sheet. We have ample capacity for risk-bearing, whether that's on the reinsurance side or the asset side. And we have a good established pattern of capital management. So as you know, we have signaled our intention to take on more risk on the asset side and use that as a method to address the fact that we see fewer underwriting opportunities now than we have over the past 12 years. But we can balance insurance, reinsurance risk with capital markets risk and continue to manage our capital base effectively overtime. And I think together, those activities can result in attractive returns for shareholders.

Amit Kumar - Macquarie

Got it. Thanks for all the answers. Appreciate it.

Operator

(Operator Instructions) We have no other questions at this time. I would like to turn the call back to Mr. Price for any additional or closing comments.

Michael Price

Thank you, Operator. And thank you all for your participation. We look forward to speaking with you next quarter.

Operator

And that does conclude today’s call. Again, thank you for your participation.

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