Executives
Michael D. Price – Chief Executive Officer
James A. Krantz – Chief Financial Officer
Neil J. Schmidt – Chief Actuary
Analysts
Matthew Heimermann – J.P. Morgan
Jay Cohen – Merrill Lynch
Platinum Underwriters Holdings Ltd. (PTP) Q2 2008 Earnings Call July 23, 2008 8:00 AM ET
Operator
Good morning ladies and gentlemen. And welcome to the Platinum Underwriters Holdings, Ltd. investment community teleconference to discuss the financial results for the quarter ended June 30th, 2008. 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 to the company’s investor relations section of their website at www.platinumre.com. A replay of this call and webcast will be available from 11 a.m. EST today until midnight EST on Wednesday, July 30th, 2008. The call can be accessed by dialing 1-888-203-1112 for US callers and for international callers by dialing 719-457-0820 specified pass code 9206842.
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 historically 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 in the company’s future financial conditions 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 the new information, future events or otherwise.
At this time, we will turn to the call over to Michael Price, Chief Executive Officer of Platinum. Please go ahead.
Michael D. Price
Thank you operator. Welcome to this morning’s call. With me today are Jim Krantz, our Chief Financial Officer and Neil Schmidt, our Chief Actuary. I will provide an overview of our results for the quarter. Jim will then offer a more detailed review of those results. Following that, I will discuss recent underwriting activity, our outlook on market conditions and update you on our capital management activity. Then we will be happy to take your questions.
We produced net income of $102.4 million in the quarter, a record $1.82 cents per diluted common share. Our book value per share grew by 2.7% in the quarter and now stands at $36.99. These results reflect disciplined underwriting, favorable reserve development, lower than expected catastrophe activity, significant investment income and active capital management.
While net income was very strong our book value growth was somewhat restrained by an increase in unrealized losses in our investment portfolio. Net premiums earned are 12.8% lower than the same quarter last year as growth in our property and marine segment was more than offset by declines in the casualty segment.
Jim will now take us through the numbers in a little bit more detail.
James A. Krantz
Thank you Michael and good morning to all of you on the call. I will now provide some highlights for the quarter ended June 30, 2008 and add detail to various items. Platinum’s second quarter net income was $102.4 million and a record diluted earnings per common share of a $1.82. These results reflect underwriting income of $81.5 million and net investment income of $46.9 million. Overall, net premiums earned were $258 million in the second quarter of 2008. A decrease of $37.9 million or 12.8% from last year’s second quarter.
Looking at the segments, net premiums earned in the property marine segment were $141.7 million. An increase of $16.6 million or 13.2% from the second quarter 2007. This increase was primarily attributable to the crop contract discussed last quarter. Net premiums earned in the casualty segment were $113.2 million, a decrease of $50.6 million or 30.9%.
This decrease was the result of less business been underwritten due to soft market conditions in most casualty lines. This decrease was also affected by decreases in premium estimates related to prior years of $13.5 million or 8 points of the 30.9% decline. Net premiums earned in the finance segment were $3 million, a decrease of $3.9 million reflecting fewer opportunities to write this business.
Our overall combined ratio was 68.4%, which improved over last year’s second quarter by 12.4 percentage points and is the lowest quarterly combined ratio since our inception. This improvement was due primarily to fewer catastrophe losses and 36.8 million of net favorable development in the quarter as compared with 22.2 million of net favorable development in last year’s second quarter.
Net investment income decreased by $7.8 million or 14.2% from last year’s second quarter to $46.9 million due to lower yields. Underwriting and corporate expenses was down approximately 4% compared to last year’s second quarter. Other expense in the second quarter included approximately six million net unrealized losses relating to changes in the fair value of fixed maturities classified trading. Our trading portfolio consists of non-US dollar denominated securities primarily euro and UK government bonds and during the quarter yields on those securities increased resulting in a decline in fair value.
Our effective tax rate for the quarter was 4.5%, which is approximately one percentage point lower than last year’s second quarter reflecting more income being generated by our Bermuda operating subsidiary. This rate may vary from period to period as pre-tax income varies by taxable jurisdiction.
(Inaudible 00:10:52) equity decreased by 29.8 million from December 31st, 2007. Book value per share however increased 8.7% year-to-date. Principle components of these changes were strong net income, changes in unrealized losses in our investment portfolio and our significant share of purchase activity.
Michael will now discuss our recent underwriting activity, our outlook on market conditions and our capital management activity, Michael.
Michael D. Price
Thank you Jim. The mid-year renewals were challenging with negotiations over price, terms and conditions being somewhat more intense than usual. Overall, we had approximately $221 million of premium expiring since late April and we wrote approximately $183 million, a 17% decrease. Year-to-date we had approximately $939 million of premium expiring. We have written approximately $902 million. Thus, we have written approximately 4% less business this year as compared to last year.
However, the mix of business is shifting toward property. So far, this year, business we have written is 60% property and marine, 39% casualty and about 1% finite risk. For reference, there is approximately $125 million of business expiring between now and year-end.
In property and marine we had approximately $100 million of business expiring since late April and we wrote approximately $93 million, a 7% decrease. Year-to-date we had approximately $476 million in premium expiring and we have written approximately $540 million, a 13% increase. We wrote roughly the same amount in Florida specific business this year as compared to last year.
Forecasters are expecting an active Atlantic hurricane season again this year. We expect the presence or absence of major loss events to significantly impact market pricing at January 1. If rates were to fall materially at January 1, 2009, we may significantly reduce the catastrophe capacity we offer in the marketplace.
Currently our 1 and 250 year net probably maximum catastrophe loss estimate remains within our stated risk tolerances at approximately 20% of total capital. Casualty market offers substantially fewer attractive opportunities than in recent years. Often underlying pricing combined with deteriorating reinsurance rates and positive loss cost trends render many treaties unwritable (ph 00:13:52) from our prospective.
We had approximately $121 million of business expiring since April. We wrote approximately $90 million, a 25% decrease. The reduction reflects our view that many treaties are now falling below our minimum pricing levels. In contrast, seeding companies continue their willingness to retain business net.
For the year-to-date we have written approximately $352 million of premium versus an expiring base of $432 million, a 19% decrease. The greatest reductions have come from umbrella and financial lines. Obviously, we continue to find some business attractive, particularly in specialty areas. Nevertheless, we expect that rate adequacy in the casualty lines will continue to deteriorate. Consequently, we anticipate further reducing our activity in this segment. We have written no finite business since January 1. And continue to expect little or no activity in this segment.
During the quarter, we re-purchased 1,315,000 shares at an average cost of $34.95, for a total of approximately $46 million. Based on our current reserve position, our net enforce portfolio, and our underwriting prospects for the balance of the year, we believe that we are well capitalized with an acceptable margin above the rating agency targets for our company with our ratings.
If the business performs as expected, we anticipated generating excess capital. Under those conditions, we would expect to continue buying back our shares, subject to appropriate evaluation. Reinsure First Base’s challenging market conditions for both their underwriting and investment activities. Through this turbulent period we will continue taking risks on both sides of the balance sheet; provided we believe we are being adequately compensated for doing so.
Now we will be happy to take your questions.
Question-and-Answer Session
Operator
Thank you and the question and answer will be conducted electronically. (Operator Instructions). And we will take our first question from Matthew Heimermann with JP Morgan.
Matthew Heimermann - JP Morgan
Good morning, everybody.
Michael D. Price
Good morning, Matt.
Neil Schmidt
Good morning.
Matthew Heimermann - JP Morgan
Hi. I had a couple of questions and maybe I will just go one by one. The other line, can you remind me what is in that that contributed to what seemed to be a bigger than normal loss on that line?
Neil Schmidt
Yes, it was the mark to market on the training portfolio of about six million.
Matthew Heimermann - JP Morgan
Oh, okay. I am sorry. I thought that came through realized gains so I just —
Neil Schmidt
No, we just put them together.
Matthew Heimermann - JP Morgan
Okay. The other question for you is then the investment allocation, any thought in changing duration or pursuing any specific types of securities given some changes in the credit market?
Michael D. Price
It might be helpful, Mat, just to characterize the portfolio first and then think about changes. It is a high-quality portfolio of fixed-income securities, relatively short duration and with a fairly significant cash allocation.
As we have gone through this credit crisis, we think that that portfolio has served us well. We have not really done any selling, but we have, of course, made investments from new money and we have targeted municipal bonds, we have purchased some more commercial mortgage-backed securities. A little bit more our corporate is focusing on the non-financial names and we have used some of our cash to finance share re-purchase. So, we have not made any material changes to the composition or quality of the portfolio.
The duration has extended just a little bit, but it is not a conscious strategy to go farther down in credit or farther out on the maturity curve. We like the portfolio that we have. We are looking for opportunities on the margin to take advantage of what are obviously distressed times for some issuers and that is probably the position that we will maintain for the foreseeable future.
Matthew Heimermann - JP Morgan
Okay, and then for Neil or Michael, and I know I might be nitpicking here, but the casi-loss (ph 00:18:51) ratio sequentially, excluding development, look like it fell a little bit and, I do not know, is that just quarterly noise or is there, given the significant development you have seen there, is there, maybe, a little bit more comfort in changing picks from here? I just did not know if it was a weighted--there are a lot of things it could be. I just did not know if there was anything you could point to.
Michael D. Price
If it is a nitpicky question, Matt, I am going to have to let Neil take it.
Matthew Heimermann - JP Morgan
[Laughter]. Fair enough.
Neil Schmidt
I think the best answer is that year-over-year, underwriting year over underwriting year, from 2005 to 2008, our casualty plus ratios or combined ratios are increasing and we have not taken favorable experience (inaudible 00:19:43) and forward our numbers in ’07 or ’08, if I understand your question.
Matthew Heimermann - JP Morgan
Yeah, that is fair. I just wanted to make sure it was noise rather than a big shift.
Neil Schmidt
Correct. The mixed differences quarter by quarter, that is really what it means.
Michael D. Price
Yeah, Matt, if you think about the fact that we are actively managing the treaty reinsurance portfolio, what we have seen recently is our tendency has been to say no more frequently on high-combined ratio ratings and so, as Neil suggests, there is a mix change that results from the active portfolio management.
Matthew Heimermann - JP Morgan
Okay. That makes sense. I guess, following up, then just on the casualty, Michael, could you just maybe give us some insight as you are looking at the market today? Are there any conclusions you can draw about excess business versus proportional business in terms of as we go forward, what might look more attractive to you?
And I know there are lots of moving pieces like attachment points and what underlying rates are doing and seeding commissions. But it just could be interesting because some people have the view that as the market is, often excess is much better. Some people say based on some of the changes, maybe excess is less attractive. So I just would like some of your insights there.
Michael D. Price
Well, I am afraid that I will have to disappoint you and say that I cannot a priori suggest that excess is necessarily going to be better than primary or vice versa. We have to evaluate each treaty on a case by case basis. And we have written some primary-oriented casualty business and we have, obviously, written some excess business.
Recently, we have been walking away from a lot of the excess umbrella business. We just do not think that it is going to stand up well with the passage of time. We do see a significant deterioration, in some cases, in rates, terms and conditions on casualty reinsurance business and so, as you can see, have been writing a lot less of that business.
We think the business that we are writing does make sense, does produce an acceptable return, but we are having to be quite selective in what we agree to accept onto the books this year.
Matthew Heimermann - JP Morgan
Okay, thank you very much.
Operator
And we will take our next question from Jay Cohen with Merrill Lynch.
Jay Cohen - Merrill Lynch
Good morning, thank you. Just, first, one clarifying question: you had mentioned on the casualty side, you had some premium re-estimates. I think it was almost 14 million. What gave rise to those re-estimates?
Neil Schmidt
Currently, we are estimating our premiums based on what our clients are telling us and then our own hinges to that. We got in last quarter, a couple of clients, one fairly large one, where they had lowered their estimate of prior underwriting year’s ultimate premium.
Jay Cohen - Merrill Lynch
Okay. That is what I thought. I just wanted to make sure. Next, on the buyback front, do you
sense you might be buying back stock a little bit more cautiously in the third quarter simply because of the seasonality, meaning hurricane season?
Michael D. Price
Well, I would say we were fairly aggressive in the first quarter. We were considerably less aggressive in the second quarter and the third quarter, I anticipate might fall somewhere in between the first two. In that second quarter, we really did not do much, if anything, in April and May. We got going again in June.
We had a couple of situations that we were evaluating in the early part of Q2 that had implications for capital adequacy and so we wanted to see how they played out before re-committing to share re-purchase. And we did resolve those evaluations toward the end of the quarter. And at the same time, our stock price began to decline and so we jumped back into the share re-purchase activity late in June.
We are, obviously, concerned that it has the potential to be an active Atlantic hurricane season and so, we would take that directly into consideration as respects the amount and timing of share re-purchase in Q3. But, there is no moratorium on share re-purchase in Q3. We are just going to have to see how things develop.
Jay Cohen - Merrill Lynch
Got it. Michael, you had mentioned that if the weather is quiet in the hurricane season, you would think it really affects the one-one renewal season negatively. I am just wondering, do you really think it is a capital issue? Because you do hear that, still for property contracts, there is some level of discipline and if the price gets too low, the capacity goes away. So are people more focused on their own capital or are they better risk-takers, essentially? I want to get your thoughts on that.
Michael D. Price
I think whenever you are talking about a marketplace in aggregate, we have to recognize that there are multiple parties making independent decisions and some of those parties are going to make prudent and responsible risk assessments and they are going to walk away from business if it does not make sense to them.
I would suggest that there are other market participants who will not be as sophisticated or careful and they will simply accept the prevailing market price on the great majority of their business and, in effect, follow a market down.
I do think that the tactical evaluation of cat-risk through commercially available models does provide some support to the pricing. But it is not an absolute floor and we see examples of contracts that get done at what we think are margins way too thin and way too close to the expected loss cost. I am not sure that the participants on those contracts would necessarily agree with our assessment of those contracts, but we have confidence in what we do and so, we are looking for those deals with reasonable margins.
I think there will be a significant opportunity to write cat-business next year. But I also expect that if we do not have an active hurricane season and we do not have significant losses in the marketplace, that you should expect rates will continue to trend down from here. And what that means is on the margin we are going to say no to some deals and probably end up with a somewhat smaller portfolio as a result.
Jay Cohen - Merrill Lynch
Great, thanks for that answer. Then, last question, what are you seeing from a claims standpoint? Claims notices are coming in. Do you get any sense, at all, this inflation we read about is starting to show up in insurance claims and also related to that, what about the frequency of claims?
Neil Schmidt
Generally, we have not seen any sort of up-tick in claims activity. Our claims are still (inaudible 00:27:24) where they are (inaudible 00:27:26) at (inaudible 00:27:27) below our initial expectation at this (inaudible 00:27:31). We have not seen any real up-tick at all.
Jay Cohen - Merrill Lynch
Interesting. Thanks, Neil. Thanks, Michael.
Operator
(Operator Instructions). And there are no further questions. I will turn the call back over to Mr. Price for closing remarks.
Michael D. Price
Thank you, operator. Thank you all for your participation and we look forward to speaking with you next quarter.
Operator
And that does conclude our conference for today. Thank you for your participation and have a wonderful day.
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