I caught an episode of Fast Money on CNBC Wednesday and Doug Kass mentioned that he liked a company called Platinum Underwriters Holdings (PTP). I admit I hadn’t heard of the company before. He called it a special situation and likened it to Yahoo (YHOO). After researching the company I disagree with the Yahoo comparison, but I do think the stock is significantly undervalued and I'm very impressed by its management.
The company has significant exposure to Japan and, consequently, shares have taken a beating today. We'll have to wait to see loss estimates, but this one time event doesn't change my thesis on the stock.
Platinum Underwriters is a property and casualty insurer and also offers reinsurance coverage. Like most insurers, Platinum is trading at depressed valuations relative to its history. Investors in the industry remember getting crushed just a few short years ago and are hesitant to commit to these types of companies with the heightened level of uncertainty in the economy. Additionally, the prospects of future inflation coupled with extremely low yields on fixed income investments add a considerable amount of risk. Prices are soft and smart insurers are reducing the number of policies written. The fourth quarter was particularly tough for Platinum Underwriters as soft pricing and heavy losses with the New Zealand earthquake and Australian floods pushed its combined ratio for the quarter to 107.8%. Additionally, the fallout from the earthquake in Japan has pushed shares near their 52-week lows.
Despite a rough fourth quarter, the company still had an impressive 2010. The company earned $4.78 per share and book value increased to $50.20. The full year combined ratio was 86%. Investment income was $134.4 million. At today’s stock price, price to book stands at 0.75.
The upshot of these depressed valuations is that any buybacks are immediately accretive. Perhaps because of this, the company has been on a share buying binge. Last year it bought back 9.7 million shares. At the end of 2010, it only had 37.8 million shares outstanding. As an encore, the company recently announced that the board has authorized the company to repurchase an additional $250 million worth of shares. At today’s prices, that’s 6.3 million shares, or nearly 17% of outstanding shares. Some boards authorize purchases but the company never gets around to making them. Not the case with Platinum Underwriters. Just in the last quarter it bought back 1.7 million shares at an average purchase price that’s $5 higher than what the stock is at now. The company seems to be happy to buy back shares at today’s prices.
Let me share with you the best thing that an insurance CEO can say. This is what Platinum Underwriters CEO Michael Price said in the February 8 press release:
“Despite the prevailing soft market conditions, we expect to participate selectively in a variety of reinsurance classes while maintaining our strategy of underwriting for profitability, not market share, and continuing to align our capital base with business opportunities.”
The pricing cycle costs a lot of insurers that focus on revenue, but Price understands that it’s better to write fewer policies in a poor pricing environment and be ready to strike when pricing improves. He’s not just saying this either: Net premiums written decreased by 15% in 2010 compared to 2009. That’s a sign of strength despite reduced revenue.
I wish more companies looked at the options in front of them the way this company does. If you read through the last conference call you’ll see they compare the potential returns they get from writing policies to the returns they get from buying back stock. They feel confident in their book value estimations and can realize a 25% gain by buying shares at 0.75 times book. They then compare that 25% gain to what they can make selling insurance. If they’re confident in their loss estimates, they’ll need 11% investment gains if they maintain their combined ratio of 86%. Why not take the easy 25% and wait for pricing to improve rather than take on the loss and investment risk by writing the policy? Chances are the company will be buying more shares after today's plunge.