Executives
Michael D. Price - President, CEO
James A. Krantz - CFO
Neal J. Schmidt - Chief Actuary
Analysts
Matthew Heimermann - J.P. Morgan Securities Inc.
Larry Greenberg - Langen McAlenney
[Joel Solomon] - Citigroup
Platinum Underwriters Holdings, Ltd. (PTP) Q4 2007 Earnings Call February 20, 2008 8:00 AM ET
Operator
Good morning, ladies and gentlemen, and welcome to the Platinum Underwriters Holdings investment community teleconference to discuss the financial results for the fourth quarter and year ended December 31, 2007. This call is being recorded.
A press release with these results and financial supplement along with access to the webcast of this call is posted in the company's Investor Relations section of their web site at www.platinumre.com. A replay of this call and webcast will be available from 11:00 a.m. Eastern Time today until midnight Eastern Time on Wednesday, February 27, 2008. The call can be accessed by dialling 8882031112 for U.S. callers and for international callers by dialling 7194570820. Specify passcode 5962154.
Management believes certain statements on this teleconference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements including all statements that do not relate solely to historical or current facts and can be identified by the use of words such as may, should, estimate, anticipate, intend, believe, predict, potential or words of similar import generally involving forward-looking statements.
These forward-looking statements are based upon the company's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipating actions and the company's future financial condition and results. The uncertainties and risks include but are not limited to those disclosed in the company's filings with the Securities and Exchange Commission. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the company.
Additionally, forward-looking statements speak only as of the date they are made, and the company assumes no obligation to update or revise any of them in light of new information, future events or otherwise.
At this time we will turn the call over to Michael Price, Chief Executive Officer of Platinum. Please go ahead, sir.
Michael D. Price - President, CEO
Thank you, Operator. Welcome to this morning's call. With me today are Jim Krantz, our Chief Financial Officer, and Neal Schmidt, our Chief Actuary.
After five complete years of operations, Platinum has produced record net earnings and record net earnings per diluted common share for the fourth quarter and the full year.
I will provide an overview of those results, and then Jim will review them with you in more detail. Following that, I'll discuss our recent underwriting activity, our outlook on market conditions, update you on our recent share buyback activity and comment on the subprime phenomenon. Then we'll be happy to take your questions.
We produced net income of $102.2 million in the quarter, which is $1.60 per diluted common share. For the full year 2007 we produced net income of $357 million, which is $5.38 per diluted common share. Our return on opening common equity was approximately 21%.
For both the quarter and the year, our results were strong, reflecting our disciplined underwriting approach, the absence of major catastrophes, favorable prior period developments, and growing investment income due to positive operating cash flow.
Jim will now take us through the numbers in more detail. Jim?
James A. Krantz - CFO
Thank you, Michael, and good morning to all of you on the call. And now I'll give you a little more detail on our financial results for the quarter and full year ended December 31, 2007.
Our results for the quarter and the full year were the best ever for Platinum. As Michael just stated, net income was $102.2 million and diluted earnings per common share was $1.60 for the quarter ended December 31, 2007.
Net income was $357 million and diluted earnings per common share was $5.38 for the year ended December 31, 2007.
These record results reflect continued strong underwriting income of $74.7 million, [$223 million] for the quarter and year end December 31, 2007. Also reflected in these results was net investment income of $53.6 million and $214.2 million for the quarter and year ended December 31, 2007 respectively.
Overall, net premiums earned were $1.17 billion and $1.337 billion for the year ended December 31, 2007 and 2006 respectively, a decrease of [break in audio] or 12.2% in '07 compared to '06. This overall decrease was driven by the Casualty segment.
Net premiums earned were $302 million and $315.7 million for the quarter ended December 31, '07 [break in audio] respectively, a decrease of $13.7 million also driven by the Casualty segment.
Net premiums earned in the Property and Marine segment were $502.3 million and $449 million for the years ended December 31, '07 and '06 respectively, an increase of $53.3 million or 11.9% in '07 as compared with '06. This increase was primarily in the Property [inaudible]. We also chose to keep most of that business [inaudible] and not [inaudible] 30% [inaudible] contract.
Net premiums earned were $129 million and $106.6 million for the quarters ended December 31, '07 and '06 respectively, an increase of $22.4 million, also [inaudible] excess class.
Net premiums earned in the [inaudible] segment were $637.9 million and $764.3 million for the years ended December 31, '07 and '06 respectively, a decrease of $126.4 million or 16.5% in '07 as compared with '06. This decrease was primarily in the [casualty excess] line where fewer opportunities met underwriting standards.
Net premiums earned were $166.1 million and $191.2 million for the quarters ended December 31, '07 and '06 respectively, a decrease of $25.1 million also primarily in the excess lines.
In our Finite Risk segment, net premiums earned were $32.9 million and $123.4 million for the years ended December 31, '07 and '06 respectively, an increase of $90.5 million reflecting fewer opportunities [inaudible] business.
Our overall combined ratios were 81% and [break in audio] for the years ended December 31, '07 and '06 respectively. The improvement was due primarily to [inaudible] business, which has a higher [inaudible] ratio than our other business, our shifts to excess [inaudible] versus proportional business in the Property segment, and a fairly benign loss environment. These favorable [inaudible] were partially offset by [inaudible] losses in '07 of [inaudible] million as compared with $5.5 million in 2006. [break in audio]
The combined ratios for the quarter's end [inaudible] in '07 and '06 were 75.3 and 81.3 respectively, and the improvement was attributable to factors just mentioned except that they were no catastrophe losses in either of those quarters.
Debt favorable to prior year premium loss in acquisition [inaudible] development was $28.3 million and $77.8 million for the quarter and year ended December 31, '07 respectively. Page 23 of our financial supplement provides more details on unfavorable development for the quarter, full year and by segment.
Operating expenses increased by $2.4 million and $8.1 million in the quarter and year ended December 31, '07 respectively. Operating expenses increased 8.5% in '07 as compared to '06, primarily due to increased compensation [inaudible] and some of which are due to our strong financial results.
Our effective tax rate was 6.3% and 8.4% for the years ending December 31, '07 and '06, respectively. The decrease was primarily the result of a [inaudible] percentage of our pre-tax income being generated from [Bermuda].
Net investment income increase $2.7 million and $26.2 million for the quarter and year ended December 31, '07 respectively. The increase in net investment income in '07 compared to '06 was due to slightly higher yields and [inaudible] in net cash flows in [inaudible] months.
Our shareholders' equity increased by $140.3 million to [$2 billion] during the year ended December 31 of '07. Contributing to this growth was strong [net income] as well as changes in fair value of investments [inaudible] partially offset by common share repurchases of $240.5 million at an average price of $34.68 per share during the year.
Michael will now discuss our recent underwriting activity, market conditions and capital management.
Michael?
Michael D. Price - President, CEO
In response to deteriorating reinsurance market conditions, we cut back our underwriting opportunity at January 1. Our underwriting discipline, coupled with greater retention by ceding companies, has resulted in approximately 18% less premium [bond] at January 1 as compared to last year.
Overall, we had approximately $619 million of premium expiring on January 1, and we wrote approximately $508 million.
In Property and Marine, catastrophe rate adequacy declined sharply in some areas, particular in the United States. We had approximately $100 million of U.S. catastrophe excessive loss business up for renewal at January 1, and we wrote just over $82 million, an 18% decrease. Most of the reduction results from deteriorating expected profitability, so our probable maximum loss exposures have not increased by a commensurate amount.
We wrote $47 million in Property Risk business compared with an expiring book of $51 million, an 8% decrease. We wrote very little pro rate premium in either period.
Internationally, cap rate adequacy continued a modest slide, although this is somewhat masked by the appreciation of the euro against the dollar. We maintained the portfolio in some markets where we thought pricing remained acceptable, reduced in other markets where rates on some treaties feel below our minimum standards.
We had $83 million of international Property Catastrophe premium expiring, and we wrote $92 million.
[inaudible] other Property and Marine business, including marine, crop, international risk and proportional business, we wrote $100 million versus an expiring base of $112 million.
Our 1 in 250 year probable maximum catastrophe loss estimate now stands at $467 million, which is approximately 21% of total capital. This is essentially unchanged from last year, both in dollar terms and relative to capital.
We deployed roughly 70% of our global catastrophe capacity at January 1 and believe that we have done so on acceptable terms. In the absence of major losses, we expect that Property and Marine reinsurance rates for the balance of the year will be approximately in line with what was observed at January 1.
For Casualty, the January 1 renewal date represents about onethird of the overall book of business. Significant underlying rate deterioration, combined with mildly softening reinsurance pricing terms and conditions and clients' continued willingness to retain business net means that to preserve an acceptable level of expected profitability in our portfolio, we wrote less premium this year as compared to last year.
We had approximately $243 million of renewal business expiring, and we wrote approximately $183 million of Casualty business, representing a decrease of about 25%.
The greatest reductions came from U.S. Casualty Excess and Financial lines, whereas we wrote a similar amount of international Casualty versus last year.
We anticipate market conditions will remain more or less as they are now, and therefore expect our experience at January 1 to be indicative of our Casualty underwriting activity for the balance of the year.
We wrote approximately $10 million of Finite business compared with $31 million of expiring premium. We expect only minor activity in this segment for 2008, and we'll be focusing our efforts on our other lines of business.
Overall, the reinsurance marketplace presents a diminishing set of opportunities with some lines evidencing acceptable expected margins and others we believe to not cover the cost of capital. We will continue with our strategy of responding to changes in market conditions, underwriting for profitability not market share. We will withdraw from those treaties or classes that don't appear to provide sufficient underwriting profitability.
To the extent that the retro market softens over the course of the year, we may consider the purchase of catastrophe [inaudible] to reduce our peak zone exposure and improve our capital [inaudible].
Based on our current reserve position, our net in force portfolio and our underwriting prospects for the balance of the year, we believe that we're strongly capitalized, with an adequate margin above the rating agency targets for a company with our ratings.
If the business performs as expected, we anticipate generating excess capital. Under those conditions, we would expect to continue buying back our shares subject to appropriate valuation constraints.
During 2007 we bought back approximately 6.9 million shares for approximately $240 million at an average cost of $34.68 per share. So far in 2008 we've repurchased approximately 1.2 million shares for approximately $41 million at an average cost of $35.43 per share.
We currently have approximately $85 million of buyback capacity remaining from the $250 million authorized by our Board at its last meeting, and we'll be discussing renewal of that authorization at our upcoming meeting.
Regarding subprime, this is the sort of situation that has the potential to impact both sides of an insurer or a reinsurer's balance sheet simultaneously. Multiple classes of securities are affected, and on the liability side multiple reinsurers may suffer losses from the same insured. Thus, there is an accumulation of risk for a reinsurer, so we think of it as a catastrophe event.
Unlike many property catastrophe events, reliable information is apt to develop slowly over time, in part because the process itself is dynamic. How widespread and deep the problem becomes depends partly on actions that have yet to be taken. For example, will there be criminal investigations? What will the rating agencies do? Will there be a bailout scheme? If so, what will it look like? What fiscal and monetary policy moves will be made, and what will their impact be? How do the [plaintiffs] view the opportunity? What defense strategies will be employed and how successful will they be, et cetera.
So far, many lawsuits have been filed, including various securities class actions. It's a good idea for reinsurers to consider the lines of business and particular insureds that have [inaudible] and may be implicated. This requires [inaudible] with the major ceding companies.
From an industry standpoint, D&O and P&L appear to be most [impressed], particularly for financial institutions. The range of loss estimates is wide, from roughly $3 billion to as much as $20 billion, with most falling in the lower half of that range.
For us, we have some exposure in both the asset and liability portfolios, but currently expect the losses, if any emerge, will be manageable and low compared to other casualty writers.
Our asset portfolio contains approximately $35 million of subprime securities representing less than 1% of our cash and investment assets. The underlying mortgages are fixed rate. The securities are of an older vintage and carrying A or better ratings.
While these securities are currently in an unrealized loss position, we don't believe the impairment is anything but temporary.
We have approximately $140 million of municipal bonds wrapped by financial guarantee companies. We've always focused on the underlying credit fundamentals and so the equivalent [fund] wrap ratings on these securities are very strong, predominantly double A with none below single A.
Our liability business in recent years included a modest amount of D&O and P&L premium that we would classify as financial institutions business. Specifically, we estimate approximately $6 million of premium per [treaty] year 2006, $12 million for [treaty] year 2007, and approximately $3 million so far for [treaty] year 2008.
We've identified six treaties that we believe are most exposed to financial institutions. All of these treaties operate on an excessive loss basis, and the attachment [inaudible] are generally quite high. Our average limit exposed under these treaties is approximately $1 million per risk.
Looking through these treaties to the underlying insured names, we currently believe that the maximum exposure that we face to any one single insured is $6.5 million.
We've considered loss scenarios in excess of $20 billion for the industry, and even at these high levels of industry loss, we believe the loss to Platinum will be manageable and likely much lower than losses at other casualty writers.
Beyond the financial institutions, there may be exposure for the Big 4 accounting firms. We've written three of the Big 4 on a highly funded and structured basis. It's easy for us to quantify our maximum downside on these contracts and, in fact, the maximum downside scenario, although remote, was explicitly contemplated at the time of underwriting. If each of these firms that we cover suffered the maximum number of full limits losses under the contracts, the financial impact to us would be less than $30 million.
Overall, we're comfortable with our current reserve position and believe that under a wide range of reasonable scenarios, our reserves will prove to be adequate in the aggregate. Further, given that we have significantly downsized our D&O book since its peak in 2004 and typically deemphasized financial institutions as a class, we believe that any losses we may incur will likely be less than those of other casualty writers. We'll continue to monitor the subprime catastrophe and its implications for us.
Overall, 2007 was another successful year for Platinum. We produced excellent returns on equity while running manageable net [inaudible] risk. Although 2008 has so far presented fewer attractive underwriting opportunities compared to last year, we're still active in a broad range of reinsurance classes. As reinsurance underwriting opportunities diminish, we expect to respond by actively managing our capital base.
We'll now be happy to take your questions.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) We'll go first to Matthew Heimermann, J.P. Morgan.
Matthew Heimermann - J.P. Morgan Securities Inc.
Hi. Good morning, everyone.
Michael D. Price - President, CEO
Good morning, Matt.
Matthew Heimermann - J.P. Morgan Securities Inc.
A couple quick questions. Maybe, Neal, could you just talk about, particularly in the Casualty segment, what drove some of the development? Is that just a function of the year end process or were there - anything unusual come out of that?
Neal J. Schmidt - Chief Actuary
Well, there's a couple of items, Matt. One is that during the quarter we had two contracts that were commuted and we had been carrying those at loss ratios higher than what the ultimate commutation amount was, so that was a significant item.
Secondly, in our U.K. motor business our year end review we lowered the tail factors we had been using, and at the same time the ceding companies lowered the [inaudible] so we had a double effect of a [inaudible] coupled with a lower inception-to-date loss in that, and that was a significant item.
And the third item, which was smaller, is in the surety area. Just as our general process, the inception-to-date losses on the 2005 year got to a point of credibility where we felt the favorable experience warranted a lower loss [inaudible]. [break in audio] three major items in the quarter.
Matthew Heimermann - J.P. Morgan Securities Inc.
Okay, that's helpful. Thank you.
Michael, could you just maybe touch on - your 1/1 renewal experience, I mean, seems to - well, I guess if we look at 1/1 renewals across a whole cross-section of the industry, there's obviously, you know, there's some companies who are renewal portfolios haven't changed at all. There's others where they've changed more dramatically.
I guess could you compare and contrast what's happening in the market that might help explain why there's a deviation, or is are we just at an inflection point where perception of risk is starting to dramatically change.
Michael D. Price - President, CEO
I think, Matt, that we are a point in the market cycle where there's a divergence of opinion among market participants as to just how profitable the Casualty business may be right now. Clearly, we can think of examples of companies who were very aggressive in fighting for share on [inaudible] at January 1 and thereby managed to hold their premium writings level. Whereas there are others who, like us, sought to restructure their involvement, reduce their participation or just retire from programs. And as you pointed out, we're somewhere in the middle of that pack.
I haven't tried to benchmark us against the reinsurance operations of other companies, but what I have picked up just on a casual basis suggests to me that there are some who have cut back farther and faster than we have and others that were more aggressive at January 1 than we were.
Matthew Heimermann - J.P. Morgan Securities Inc.
Thank you. That's helpful.
And just generally speaking, those companies that are fighting for share, I mean, to what extent do you see them using, I guess, to what extent, as they're fighting for share, how much of it is price, how much of it is terms and conditions? How much of it is just a different view of loss trend if you can speak to that?
Michael D. Price - President, CEO
Sure. I suspect that a lot of it is the third factor that you identified, perception of loss costs. I don't think I can identify too many examples of situations where people were strongly undercounting the market on price or offering up significantly looser terms and conditions than the consensus.
I think it's more a situation where, given what was available, you have some companies who just perceive that business to be more attractive than their competitors do, and so they were assertive in offering big lines and retaining or improving their positions on existing [trees] and trying to get onto some new [trees].
Matthew Heimermann - J.P. Morgan Securities Inc.
Okay. I guess the last question is just, you know, in the past in this business there's been a big, you know, market share focus or size focus in terms of companies, and so I'm cautious in asking this question not to sound like I'm talking too much out of both sides of my mouth, but do you at all have any constraint in your mind outside of just, you know, outside of your PML and other considerations about how small ultimately you would be comfortable shrinking the company?
Michael D. Price - President, CEO
No, we don't from a business presence standpoint have major concerns along those lines, Matt, in part because we have written quite a bit of business in the last five years, and we have an ongoing claims paying relationship with every major client that we've ever done business with. And so they're not going to forget who we are, and when conditions improve we will be right back there offering an analytical approach with big capacity for people who need it and a willingness to significantly upsize the portfolio that we write. It's all in response to market conditions.
So, no. And our presence in the property [cap] markets is virtually unchanged. As you can see from our PMLs, we're writing about the same volume of accounts as in the past. We just are getting a little bit less premium for doing so.
Matthew Heimermann - J.P. Morgan Securities Inc.
Yeah. Okay, thank you very much.
Operator
We'll go next to Larry Greenberg, Langen McAlenney.
Larry Greenberg - Langen McAlenney
Thanks. Just one quick numbers question. The corporate expense line, which I thought would be going down this quarter with the absence of the Ren repayment, it actually picked up a little bit.
Could you just explain what might be in there?
James A. Krantz - CFO
The - the [inaudible] quarter we have expenses that aren't results driven. I think the way to look at '07 expenses overall is to look at what we have in '07, which are - and [break in audio] before in my prepared comments, there are some items that are nonrecurring and some items that are results driven.
In '07 in total we have approximately $9 million of expenses that are higher due to our results; approximately $3.9 million in expenses that are nonrecurring, and we will have the - and then there's the Ren re-expense of about $10.7, which are not going [per] prospectively. So overall about $20 million in the year that can be looked at as either nonrecurring or due to results.
Larry Greenberg - Langen McAlenney
Okay, great. And there was not any Ren re in the fourth quarter, correct?
James A. Krantz - CFO
Right. Correct.
Larry Greenberg - Langen McAlenney
Great. Thank you.
James A. Krantz - CFO
Sure.
Operator
(Operator Instructions) We'll go next to [Joel Solomon], Citigroup.
Joel Solomon - Citigroup
Great. Thanks for taking my question.
Michael, I just wanted to get an updated view on your sense of consolidation in the market. A large number of companies have excess capital now, and just given the market today, just curious about your updated view on any mergers of equals in Bermuda or U.S.-Bermuda.
Michael D. Price - President, CEO
Joel, we haven't heard a lot of talk lately along those lines. The investment bankers are always happy to talk to two parties about potential consolidating moves, but our sense of, you know, the word on the street is that that's not imminent. We don't have any reason to suspect otherwise.
I think you have a situation where companies have done well. While market conditions today are not as good as they have been in the past couple of years, they're still good enough. And managements, I think, believe that their prospects going forward are strong and that they've taken the opportunity of the hard market to build strong balance sheets and show good results and build out infrastructure and probably believe that they don't really need help in order to keep going strong.
That's certainly our view, and I wouldn't be surprised if that was the view of other parties as well.
Joel Solomon - Citigroup
Great. Thank you.
Operator
(Operator Instructions) And we have another question from Larry Greenberg, Langen McAlenney.
Larry Greenberg - Langen McAlenney
Michael, you talked about, you know, some lines obviously not being priced at acceptable returns relative to cost of capital.
Can you just talk in general about, you know, what the deviation is in the various lines? I mean, are we talking, you know, modest basis points relative to cost of capital, or is there a much broader range out there with pricing and terms these days that really makes some lines, you know, obviously very inadequate?
Michael D. Price - President, CEO
I think there is a broad range of economics available between classes of business and even within a class of business. By and large, I don't think we're talking about a situation where people are expecting to lose money. Certainly, there are individual [inaudible] that we believe, on an expected value basis, will lose money for their reinsurers.
But what we're looking at in the current market environment instead of a situation where your returns are, let's say, in the single digits and sometimes in the low single digits on an expected value basis, and our objective is to try to produce double-digit returns over a long period of time, and so we think it's inconsistent with that goal to be taking on a lot of business that produces single digit and in participation low single-digit returns.
There might be other companies with a different point of view either as to their willingness to accept single-digit return business or with a different view as to whether that is in fact business that will produce single-digit returns instead of double-digit returns.
But I don't believe that we're at a stage yet in the cycle where everybody who's on [an account] is planning to lose money by writing them. I think people are still in a moneymaking mode. It's just a question of is it enough money for the risks they're seeing assumed and the capital that's being tied up.
Larry Greenberg - Langen McAlenney
Thanks. Do you envision any scenario where the [cap] environment could reverse itself from a pricing standpoint without there being a fairly significant catastrophe loss?
Michael D. Price - President, CEO
If by reverse itself you mean prices starting to go up, the answer is no.
If what you mean is could prices stabilize around some, call it technical, level that's driven by people's perception of risk aided by [inaudible] and the like, I think the answer is perhaps and we will see.
We have confidence that the [cap] market will be a perpetually interesting market to participate in and that there will be some rationality to pricing over the long term based on exposure-driven evaluations of risk.
But there have been times in the past where even the [cap] market has, on an expected value basis, looked unprofitable. I think we're less likely to return to those conditions, but we will have to wait and see.
Larry Greenberg - Langen McAlenney
Thank you very much.
Operator
And there are no further questions. Mr. Price, at this time I would like to turn the call back over to you for any additional or closing remarks.
Michael D. Price - President, CEO
Thank you, Operator, and thank you all for your participation. We look forward to speaking with you next quarter.
Operator
This does conclude today's conference. Thank you for your participation.
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