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Platinum Underwriters Holdings Ltd. (NYSE:PTP)

Q1 2008 Earnings Call

April 22, 2008 8:00 am ET

Executives

Michael Price - CEO

Jim Krantz - CFO

Analysts

Matthew Heimermann - JPMorgan

Larry Greenberg - Langen McAlenney

Jay Cohen - Merrill Lynch

Susan Spivak - Wachovia

Josh Shanker - Citigroup

Operator

Good morning, ladies and gentlemen, and welcome to the Platinum Underwriters Holdings' investment community teleconference to discuss the financial results for the quarter ended March 31st, 2008.

A press release with these results and financial supplement along with access to the webcast of this call to this is posted to 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, April 30th, 2008. Call can be accessed by dialing 8882031112 for US callers and for international callers by dialing 7194570820. Specify pass code 5665445.

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 include 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, anticipated 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.

Michael Price

Welcome to this morning's call. With me today are Jim Krantz, our Chief Financial Officer, and Neal Schmidt, our Chief Actuary.

I will provide an overview of our financial results for the quarter and then Jim will review them with you in more detail. Following that I will discuss our recent underwriting efforts, our outlook on market conditions and update you on our recent share buyback activity. We will then be happy to take your questions.

We produced record net income of $105.2 million and a record $1.76 per diluted common share. These strong results reflect our disciplined underwriting approach, lower than expected catastrophe activity, favorable prior period development, significant investment income and active capital management. Net premiums earned are higher than the same quarter last year, due primarily to a large contract written in the quarter and an increase in estimated ultimate premium for Casualty business written in prior underwriting years.

Investment income, although no longer growing, remains an important contributor to our results. Both lower interest rates and the smaller base of investment assets, due primarily to share repurchase activity, contributed to the reduction in investment income.

Jim will not take us through the numbers in more detail, Jim.

Jim Krantz

Thank you, Michael. I'll now provide some highlights for the quarter ended March 31, 2008 and add some detail to the results.

As Michael said our net income of $105.2 million and diluted earnings per common share of $1.76 for the quarter represent record results. These results reflect strong underwriting income of $65.4 million, as well as net investment income of $49.1 million. Overall, net premiums earned were $301.9 million in the first quarter of 2008, an increase of $17 million or 6% from last year's first quarter.

Looking at the separate segments, net premiums earned in the Property and Marine segment was $153.4 million, an increase of $33.7 million or 28.1% from the first quarter 2007. This increase was partially triggered due to new quota-share contract written late in the first quarter 2008, this contract has an effective date of January 1st, (inaudible) $80 million to net written and net earned premium in the quarter.

Net premiums earned in the Casualty segments were $147.5 million, a decrease of $6.5 million or 4.2%. This decrease was a result of less business written in North American casualty lines, as fewer opportunities met our underwriting standards.

Partially offsetting this cost was $15.4 million from additional net premiums earned this quarter resulting from increased estimated premiums and business written from prior underwriting years. Net premiums earned in the Finite Risk segment were $1.9 million, a decrease of $7.2 million [attracting] fewer opportunities throughout this business.

Our overall combined ratio was 78.4%, which was improved over last year's first quarter by 8.6 percentage points. This improvement was due primarily to a lower level of catastrophe losses and more in the favorable development quarters, compared to last year's first quarter. The details of our favorable development are in prepared form on page 21 of our financial supplement.

Underwriting corporate expenses were down, compared to last year's first quarter, primarily, due to the expiration of September of 2007 underwriting agreement. This expense reduction was partially offset by our short-term retention planning costs, which have [concluded] this quarter.

Net investment income decreased by $2.6 million or 5.1% from last year's first quarter to $49.1 million. This was due to lower yields.

Our effective tax rate for the quarter was 5% which was comparable with last year's first quarter. Interest rates comparative period, as pre-tax income varies by taxable jurisdictions. Our net income of $105.2 million and the share repurchases of $167.8 million are the principal components if the $69.3 million decrease in our shareholder's equity, which now stands at approximately at $1.93 billion.

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

Michael Price

Thank you, Jim. This is usually a relatively slow time of year from an underwriting standpoint. We have approximately $96 million of premium expires since January 1st, and we wrote approximately $113 million, an increase of 18%. Additionally, we found a large new January 1 contract late in the quarter, that will result in approximately $80 million more premium. So, on a year-to-date basis, we have approximately $716 million of premium expire, and we have written approximately $708 million. Thus, we have written approximately the same amount of premiums so far this year, as we did last year at this time.

In Property and Marine, we had approximately $35 million of business expire since January 1, and we wrote approximately $41 million. The new $80 million contract falls into this segment and demonstrates our willingness to commit significant capacity of programs that we believe offer appropriate returns. Year-to-date, we have approximately $378 million of premium expiring and we have written approximately $445 million, representing an increase of about 18%.

In the recent renewal period, we maintained our position in the Japanese excessive loss market and non-renews on proportional business. In this market, we continue to prefer the earthquake exposures rather than the pipeline exposures.

The US property cap market pricing appears to be stabilizing after the sharp drop witnessed at January 1. As we move into the June and July results, we expect increased demand and pricing at or above the January 1 levels.

Our 1 in 250 year net probable maximum catastrophe loss estimate now stands at $469 million, which is approximately 21.5% of our total capital. The Casualty market continues to steadily erode against the backdrop of perceived adequate rates and benign loss cost trends. Although the attractiveness of treaties varies within the various Casualty classes, there is significant variation from program to program.

We had $61 million of business expiring since January 1 and we wrote approximately $71 million. The increase results from a larger share on a single [provisional] liability treaty. So far this year, we have written approximately $253 million of Casualty business, versus an expiring base of $307 million, an 18% decrease. We expect continued softening in the Casualty market. We have written no Finite business since January 1st and continue to expect only minor activity in this segment.

The business written so far in 2008 reflects growth in the Property and Marine segment, offset by decreases in the Casualty segment. Thus, the mix of business has shifted toward Property and Marine, which now accounts for 63% of the business written so far this year. We have been deploying free capital into our share buyback program, allowing us to better align our capital base for business opportunities.

So far in 2008, we've repurchased approximately 4.9 million shares for approximately $168 million. This is an average cost of $34.06 per share. We currently have $123 million of buyback capacity remaining from $250 million authorized by our Board at its last meeting, and we will be discussing renewal of that authorization at our upcoming board meeting.

We will continue seeking reinsurance opportunities focusing on profitability not market share. To the extent of (inaudible) excess capital we intend to return it to shareholders through share repurchases, provided that we can do so at appropriate valuations.

And now we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we'll take our first question from Matthew Heimermann, JPMorgan.

Matthew Heimermann - JPMorgan

Good morning, everyone.

Michael Price

Good morning, Matt.

Matthew Heimermann - JPMorgan

On the large contract you mentioned for $80 million, was that written in first quarter? Based on the numbers you gave, it seemed like that was the case.

Michael Price

Yeah, that’s a January 1st contract that we bound late in the quarter. So, when we were on the call with you last February, we had not yet bound that contract, so we didn’t report on it at that time. So as we tell you about it this quarter, it's not really an April 1 item. It's a January 1 item but it occurred late in the game.

Matthew Heimermann - JPMorgan

Okay. And does that have the normal earn-out pattern of any of the other business you write?

Michael Price

Yeah. It does, it has impacted Q1, written and earned, and will have an effect on Q2, Q3 and Q4.

Matthew Heimermann - JPMorgan

Can you give some insight into what that contract was, given the size?

Michael Price

It’s a proportional contract, multiple-crop business in Untied States, and it's consistent with other crops business that we have written in prior years. It does not in our view contribute materially to our [heat zone] catastrophe exposures and so we consider is as diversifying business.

Matthew Heimermann - JPMorgan

Okay. And is it regionally distributed?

Michael Price

It's well distributed, although we tend to avoid Florida and California crops area, its more of a high (inaudible) exposure.

Matthew Heimermann - JPMorgan

Okay, and what loss trends are you seeing especially given the tick up in favorable development in the Casualty segment. Have you noticed any change? How are you feeling about confidence reserves and is anything on the margins yet?

Neal Schmidt

The latest quarter has been consistent with what we've been seeing over the last few years. We're seeing less reported losses than expected. Our Casualty excess business is a long tail of line, as you know Matt, and it can take many years. But we're developing some confidence in our early years, 2002, 2003, particularly in the claims made area, with the lower reported losses and therefore have reflected some capable development lowering loss ratios, particularly in that area.

Matthew Heimermann - JPMorgan

Do you have a sense about where you are with respect to releasing reserves on that book relative to the primary companies you're re-insuring?

Neal Schmidt

No, I don't really keep track of that, how the primary companies reserving that net?

Matthew Heimermann - JPMorgan

Okay. Thank you

Operator

We'll take our next question from Larry Greenberg, Langen McAlenney

Larry Greenberg - Langen McAlenney

Good Morning. Just a few quick questions, I think, you might have given a number related to the Casualty premium that was written in prior years which I missed. Can I get that number?

Jim Krantz

$0.4 million.

Larry Greenberg - Langen McAlenney

$0.4 million?

Jim Krantz

$13.4 million.

Larry Greenberg - Langen McAlenney

$13.4 million? Okay, thanks. And on the single large contract, just for clarification, was it a total of $80 million or did you say $80 million more to be booked this year?

Jim Krantz

The ultimate premium on that contract is approximately $80 million and it was earned itself out over the course of calendar year 2008. So we have an impact in Q1, and have a similar impact from that one contract in Q2, Q3 and Q4.

Larry Greenberg - Langen McAlenney

Okay great. And then finally your sanguine outlook for property, cash demand and pricing at mid-year, is that driven by what’s going on in Florida right now?

Jim Krantz

Yes it is Florida tends to (inaudible) in mid-year renewals. So yes you could take our comments and think of them as most based by Florida crops.

Larry Greenberg - Langen McAlenney

Great. Thanks very much.

Operator

We will take our next question from Jay Cohen, Merrill Lynch.

Jay Cohen - Merrill Lynch

I fully understand that one large contract, the $80 million, was that $80 million reflected in the written premium in the first quarter?

Jim Krantz

No the way that we recognized written premium on those contracts is that 25% of the $80 million which show-up as written in Q1 give or take and some of our amount would show-up as written in Q2, Q3 and Q4.

Jay Cohen - Merrill Lynch

Okay. And then it's written and earned almost at the same time?

Jim Krantz

Yes.

Jay Cohen - Merrill Lynch

Okay. That’s helpful. The prior year Casualty premium development at $13.4 million, what kind of margin should we associate with that? It comes into earned, but is there also loss recognition as well?

Jim Krantz

Yes, there is loss recognition that was mainly 2005, 2006 and 2007 underwriting years on the claims made side. So it was combined ratio in the mid-90s.

Jay Cohen - Merrill Lynch

Okay. So then it wouldn't [affect] earnings much at all then, in the quarter?

Jim Krantz

Correct.

Jay Cohen - Merrill Lynch

And then last question, the portfolio yield was down quite a bit from the third and fourth quarter, maybe I missed it in the call, but could talk about why that was?

Michael Price

We [have] the cash position, Jay, that we had accumulated because we weren't impressed with the risk reward trade off available to us in the fixed income markets until recently.

Jay Cohen - Merrill Lynch

Okay. So given that, it sounds as if you are kind of redeploying that cash if you will, should we expect a yield then to probably rise?

Jim Krantz

Well we are sensitive to the yields that we are earning. We are more focused on the risk reward tradeoffs that we face. But we are starting to deploy cash. So, we have increased our position in municipal bonds, which we think are attractively priced relative to treasuries and we have also moved some assets into AAA rated commercial mortgage backed securities. We are seeing that spreads are wider now and that the yield curve is steeper now. So that is inducing us to drop down the cash position and favor spread out to some extent. We are not going crazy at this point in time.

Jay Cohen - Merrill Lynch

Okay. That makes some sense. And then a last question, it looked like there was a modest negative mark-to-market from an unrealized loss standpoint in the quarter, and again it's not all that huge. But can you talk about where it occurred in your portfolio, what parts of the portfolio saw those negative marks?

Jim Krantz

It's the asset-backed securities and some of the subprime securities, the large security deals (inaudible).

Jay Cohen - Merrill Lynch

Okay. And it looked to be about $4 million, is that accurate?

Jim Krantz

There were some depreciated and that's the net decline (inaudible).

Jay Cohen - Merrill Lynch

Great, thanks for that.

Michael Price

Sure.

Operator

(Operator Instructions). We'll go next to Susan Spivak, Wachovia.

Susan Spivak - Wachovia

Good morning. I was hoping Michael, if you could talk a little bit about how you and the discussions with your Board have been going about the usage of capital. I guess you are nearing the end of the share repurchase. Can you talk about whether that will be your top priority or whether there are some M&A discussions? That's the first question. And second, I was hoping to follow-up on the reserve issue, can you could let us know if you are seeing any trends on the D&O side there?

Michael Price

Susan, lets go in reverse order and Neal can start us off with the discussion on reserves.

Neal Schmidt

Specifically about directors and officers, our exposure to directors and officers has been quite varied over the years. In 2003, we had over $100 million of that and that seems to be running off very-very well. More recently, our exposure has dropped dramatically to the $10 million to $20 million range and generally not in financial institution. So we haven't really seen much in the way of reported losses to-date on that portfolio.

Jim Krantz

On the capital management front, Susan, we have active dialog with our Board every quarter about our capital position. Our pattern has been to authorize $250 million as the share buyback and then renew that authorization on an as-needed basis. Recently, that has meant that we have re-upped it to $250 million each quarter. I cannot predict what we will do this quarter, the Board meetings will take place later this week. But we still have about $123 million outstanding on our current authorization and we will be discussing whether to go back up to the $250 million level. If we do, obviously we will report a press release to that extent.

Taking our excess capital and deploying it into a share buyback program, has been, up until now, our preferred approach in parts, because we think that our stock valuations enable us to do that effectively. You asked specifically about M&A, and I don't take any options off of the table for us. But as we look around [to us], property looks expensive right now, and particularly looks expensive relative to our own shares and so that's why we have been focusing on returning capital to shareholders through a buyback. What we have not been doing however is supporting excess capital. We have a way of defining how much we think we can afford to give back to shareholders. We try to give ourselves a comfortable cushion above rating agency targets. So that we believe we have a suitably low probability of [crossing the low] of rating agency targets. But once we exceed that cushion amount, we define the rest to the excess and we find something constructive to do with it and recently that has led us buying back shares.

Susan Spivak - Wachovia

Okay. Michael, it's interesting that you say the expectation of pricing with M&A is still pretty expensive. Especially as analysts and investors when we look at many of your peer companies trading at or below year end book value. So is it just the management expectations of what the companies are worth, or do you see something inside the reserves etcetera, which would lead you to say that this looks expensive?

Michael Price

I wasn't that fairly focusing my comments on our peers. Maybe, we have in mind different targets for M&A. That should partly explain the difference in viewpoints there.

Susan Spivak - Wachovia

Okay. What would you be referring to then?

Michael Price

When we think about M&A, it's in the context of what might we want that we don't currently have. We are a reinsurance only company, and we think that we have a suitable platform for running reinsurance. We think we have all the necessary skills and expertise to do so already on that. We have got the right people; we have got the right platform. So we don't foresee that we have any deficiencies on the reinsurance side. Unless we think about M&A, it comes in two flavors. One is they are a financially motivated deal that looks just too good to pass up. We don't see that right now. And then alternatively, we see means by which we expand our operations strategically into areas that we are not currently after. And those are the kinds of opportunities that strike us as being expensive right now.

Susan Spivak - Wachovia

Okay. Well thank you very much for your answers, that was very helpful.

Michael Price

You're welcome.

Operator

And we will go next to Josh Shanker with Citi.

Josh Shanker - Citigroup

Good morning.

Jim Krantz

Good morning, Josh.

Josh Shanker - Citigroup

It is not the clearer transmission that I hear you guys, you made some comments about the Japanese excessive loss market, in your opinion they are, I wonder if you could repeat them quickly?

Jim Krantz

Sure, in the prepared remarks I said that we maintained our position in the excessive loss market in Japan although we paired that with some proportional treaties there. And that we continued to prefer the earthquake exposures over the typhoon exposures. The Japanese renewals proceeded well I think. Clients were expecting some significant rate reductions, but that doesn’t really materialize to the same extent what they had in mind. The markets for the most part held steady. Our income, as we measured again, was about flat, but because of the depreciation of the dollar against the yen we are actually collecting in dollar terms about 15% more premium this year than last year.

Josh Shanker - Citigroup

Okay, great. The second thing when we look at 1Q ‘07 the expense ratio was a normalistically low and here obviously in 1Q its meaningfully higher. In trying to think about the cost of running your business, how should we view the expense ratio, is there a trend here or is somewhere in the middle likely the reality?

Jim Krantz

I think the middle is going to be the reality. We have some expenses in the quarter, last year we had some one re-expenses that are gone. We have short-term retention costs to conclude this quarter. So you see some cost follow-up next quarter.

Josh Shanker - Citigroup

Okay. And can you give greater detail on the line or vintage that you are releasing reserves from?

Michael Price

Well that is across many lines of business. Well our short term business, our risk business probably risk in the US, our crop business, we released a little bit on major catastrophes, (inaudible) and the UK flood and on some of the casualty access, as I mentioned earlier in the claims made area, in particular.

Josh Shanker - Citigroup

Okay, well, thank you for your answer. I appreciate it, great quarter.

Michael Price

Thanks, John.

Operator

And there are no further questions Mr. Price, I would like to turn the call back over to you for any additional of closing remarks.

Michael Price

Thank you, operator. Thanks for your participation and 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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Source: Platinum Underwriters Holdings Ltd. Q1 2008 Earnings Call Transcript
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