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PTP > SEC Filings for PTP > Form 10-Q on 24-Jul-2014All Recent SEC Filings

Show all filings for PLATINUM UNDERWRITERS HOLDINGS LTD

Form 10-Q for PLATINUM UNDERWRITERS HOLDINGS LTD


24-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q for the period ended June 30, 2014 (this "Form 10-Q") and the consolidated financial statements and related notes thereto and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"). This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Please see Item 1A, "Risk Factors", in our 2013 Form 10-K and the "Note on Forward-Looking Statements" below. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

Overview

Platinum Underwriters Holdings, Ltd. ("Platinum Holdings") is a holding company domiciled in Bermuda. Through our reinsurance subsidiaries we provide property and marine, casualty and finite risk reinsurance coverages, through reinsurance brokers, to a diverse clientele of insurers and select reinsurers on a worldwide basis.

Platinum Holdings and its consolidated subsidiaries (collectively, the "Company") include Platinum Holdings, Platinum Underwriters Bermuda, Ltd. ("Platinum Bermuda"), Platinum Underwriters Reinsurance, Inc. ("Platinum US"), Platinum Regency Holdings ("Platinum Regency"), Platinum Underwriters Finance, Inc. ("Platinum Finance") and Platinum Administrative Services, Inc. The terms "we", "us", and "our" refer to the Company, unless the context otherwise indicates.

As of June 30, 2014, our capital resources of $2.0 billion consisted of $1.8 billion of common shareholders' equity and $250.0 million of debt obligations. Investable assets, consisting of investments, cash and cash equivalents, accrued investment income and net balances due from brokers, were $3.5 billion as of June 30, 2014. Our net income was $36.2 million and $99.9 million for the three and six months ended June 30, 2014, respectively. Our net premiums written were $120.3 million and $256.1 million for the three and six months ended June 30, 2014, respectively. Book value per share was $67.38 as of June 30, 2014, an increase of 3.1% from $65.35 as of March 31, 2014 and an increase of 8.6% from $62.07 as of December 31, 2013.

Current Outlook

The mid-year underwriting period reflected deteriorating conditions for all lines of business and proved challenging to find attractively priced reinsurance opportunities. We anticipate that the remainder of 2014 will be characterized by ample capacity for insurance and reinsurance risk making it difficult to find adequately priced business.

We generally expect property catastrophe reinsurance rates for peak zones and perils to remain acceptable for the balance of the year. Due to the significant capital available to support catastrophe exposed risks, we anticipate continued downward pressure on pricing for this segment. We currently expect that the portfolio of business we write in our Property and Marine segment during 2014 will be similar to our current in-force book of business. We also expect that our Property and Marine segment will continue to represent a large proportion of our overall book of business, which could result in significant volatility in our results of operations.

Competition remains strong for casualty business and many treaties do not meet our pricing standards. We currently expect abundant casualty insurance and reinsurance capacity and we anticipate continued downward pressure on risk adjusted profitability for this segment.

Reflecting a continued lack of demand for finite risk covers, we expect to write a relatively small portfolio of business in our Finite Risk segment in 2014.

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.

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Since our inception, our financial performance has been supported by investment returns from fixed income assets of high credit quality and moderate interest rate risk. Over that same time frame, while we have maintained a low risk investment portfolio, the portfolios of other market participants have migrated toward a higher risk and higher expected return model. Companies have made significant allocations to public and private equities and alternative strategies. We continue to explore higher risk/higher return investment strategies and anticipate allocating funds to this purpose by year-end.

Based on our current reserve position, net in-force portfolio, asset portfolio, and underwriting prospects for the near term, we believe that we are well capitalized with a comfortable margin above the rating agency targets for a 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 and repurchase our common shares. Our decision-making will be guided by the risk adjusted pricing prevailing in the reinsurance and financial markets at the time.

Critical Accounting Estimates

The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that are inherently subjective in nature that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. Actual results may differ materially from these estimates. The critical accounting estimates used in the preparation of our consolidated financial statements include premiums written and earned, unpaid losses and loss adjustment expenses ("LAE"), valuation of investments and income taxes. In addition, estimates are used in our risk transfer analysis for assumed and ceded reinsurance transactions. For a detailed discussion of our critical accounting estimates, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2013 Form 10-K.

Reconciliation of Non-GAAP Financial Measures

In presenting our results, management has included financial measures that are not calculated under standards or rules that comprise U.S. GAAP. Such measures, including underwriting income or loss and related underwriting ratios, book value per common share and fully converted book value per common share, are referred to as non-GAAP measures. These non-GAAP measures may be defined or calculated differently by other companies. Management believes these measures allow for a more complete understanding of the underlying business. These measures are used to monitor our results and should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Reconciliations of such measures to the most comparable GAAP figures are included below or elsewhere within this Form 10-Q in accordance with Regulation G.

Underwriting Income (Loss) and Ratios

We believe that underwriting income or loss and related underwriting ratios allow for a more complete understanding of the profitability of our reinsurance operations and operating segments. Underwriting income or loss consists of net premiums earned less net losses and LAE and net underwriting expenses. Net underwriting expenses include net acquisition expenses and operating costs related to underwriting. Underwriting income or loss excludes revenues and expenses related to net investment income, net realized gains or losses on investments, net impairment losses on investments, corporate expenses not allocated to underwriting operations, net foreign currency exchange gains or losses, interest expense and other income and expense.

Underwriting ratios are calculated for net losses and LAE, net acquisition expense and other underwriting expense. The ratios are calculated by dividing the related expense by net earned premiums. The combined ratio is the sum of the net losses and LAE, net acquisition expense and other underwriting expense ratios.

Segment underwriting income or loss is reconciled to the U.S. GAAP measure of income or loss before income taxes in Note 7 to the "Consolidated Financial Statements" in this Form 10-Q.

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Book Value and Fully Converted Book Value per Common Share

The following summary sets forth the calculation of book value and fully
converted book value per common share as of June 30, 2014, March 31, 2014 and
December 31, 2013 ($ and amounts in thousands, except per share amounts):

                                                      June 30,        March 31,       December 31,
                                                        2014            2014              2013
Market price per share at period end                 $     64.85     $     60.10     $        61.28

Shareholders' equity                                 $ 1,777,869     $ 1,759,943     $    1,746,707
Add: Proceeds from exercise of share options               4,994           4,994              4,994
Shareholders' equity - diluted                       $ 1,782,863     $ 1,764,937     $    1,751,701

Basic common shares outstanding                           26,385          26,933             28,143
Add: Common share options (1)                                148             148                148
Add: Restricted share units                                  554             553                598
Diluted common shares outstanding                         27,087          27,634             28,889

Book value per common share
Book value per common share                          $     67.38     $     65.35     $        62.07
Fully converted book value per common share          $     65.82     $     63.87     $        60.64

(1) Options with an exercise price below the market price per share at period end.

Results of Operations

Three Months Ended June 30, 2014 as Compared with the Three Months Ended June 30, 2013

In discussing our Results of Operations, we refer to the financial measures net losses from major catastrophes and net favorable or unfavorable development.

Generally, an event causing more than $1 billion of property losses to the insurance industry or $10 million of property losses to the Company is considered and tracked as a major catastrophe. Net losses from major catastrophes consist of gross losses and LAE, net of any retrocessional recoveries and reinstatement premiums earned.

Net favorable or unfavorable development is the development of prior years' unpaid losses and LAE and the related impact of premiums and commissions. Net favorable or unfavorable loss development, the unpaid loss and LAE component of net favorable or unfavorable development, excludes the related impact of premiums and commissions.

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Net income and diluted earnings per common share for the three months ended June 30, 2014 and 2013 were as follows ($ and amounts in thousands, except diluted earnings per common share):

                                                  Three Months Ended
                                                       June 30,
                                                  2014          2013
Underwriting income                             $  32,144     $  36,542
Net investment income                              17,645        17,808
Net realized gains (losses) on investments           (596 )      11,686
Net impairment losses on investments                 (136 )      (1,516 )
Other revenues (expenses)                         (11,094 )     (10,543 )
Income before income taxes                         37,963        53,977
Income tax expense                                 (1,783 )      (4,123 )
Net income                                      $  36,180     $  49,854
Weighted average shares outstanding - diluted      26,928        30,970
Diluted earnings per common share               $    1.34     $    1.61

The decrease in net income for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013 was primarily due to decreases in net realized gains on investments and underwriting income. The decrease in diluted earnings per common share was due to the decrease in net income, partially offset by a decrease in the diluted weighted average shares outstanding. The decrease in the diluted weighted average shares outstanding related to share repurchases during the last twelve months.

Underwriting Results

Net underwriting income was $32.1 million and $36.5 million for the three months ended June 30, 2014 and 2013, respectively. Although there was a reduction in net losses from current year major catastrophe events for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013, net underwriting income decreased as there was a decrease in net favorable development and we experienced an increase in losses from non-major catastrophe events.

There were no net losses from current year major catastrophes for the three months ended June 30, 2014 as compared with net losses from current year major catastrophes of $18.6 million for the three months ended June 30, 2013. Net favorable development was $28.6 million and $44.1 million for the three months ended June 30, 2014 and 2013, respectively.

The following discussion and analysis reviews our underwriting results by operating segment.

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Property and Marine

The following table sets forth underwriting results, ratios and the period over
period change for the Property and Marine segment for the three months ended
June 30, 2014 and 2013 ($ in thousands):

                                                         Three Months Ended June 30,
                                                                                               Increase
                                                          2014                 2013           (decrease)
Gross premiums written                               $       59,692       $       58,841     $         851
Ceded premiums written                                        1,174                1,491              (317 )
Net premiums written                                         58,518               57,350             1,168
Net premiums earned                                          55,528               58,832            (3,304 )
Net losses and LAE                                           31,400               21,292            10,108
Net acquisition expenses                                     10,229                9,698               531
Other underwriting expenses                                   8,085                7,414               671
Property and Marine segment underwriting income      $        5,814       $       20,428     $     (14,614 )

Underwriting ratios:
Net loss and LAE                                               56.5 %               36.2 %     20.3 points
Net acquisition expense                                        18.4 %               16.5 %      1.9 points
Other underwriting expense                                     14.6 %               12.6 %      2.0 points
Combined                                                       89.5 %               65.3 %     24.2 points

The Property and Marine segment underwriting income decreased by $14.6 million for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013. The decrease was primarily due to net unfavorable development for the three months ended June 30, 2014 as compared with net favorable development for the three months ended June 30, 2013, partially offset by a decrease in net losses from current year major catastrophes. We also experienced an increase in losses from non-major catastrophe events for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013.

Net unfavorable development was $2.6 million for the three months ended June 30, 2014 and net favorable development was $22.2 million for the three months ended June 30, 2013.

There were no net losses from current year major catastrophes for the three months ended June 30, 2014 as compared with net losses from current year major catastrophes of $18.6 million for the three months ended June 30, 2013.

Net Premiums Written and Earned

The Property and Marine segment generated 48.6% and 39.2% of our net premiums written for the three months ended June 30, 2014 and 2013, respectively.

The Property and Marine segment gross premiums written increased by $0.9 million, and by $2.4 million excluding reinstatement premiums written related to major catastrophes, for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013. Gross premiums written were relatively unchanged as an increase in North American property proportional business was partially offset by a decrease in international property catastrophe business.

Net premiums earned decreased by $3.3 million for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013, primarily as a result of decreases in net premiums written in prior periods. Net premiums written and earned were also impacted by changes in the mix of business and the structure of the underlying reinsurance contracts.

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Net Losses and LAE

The following table sets forth the components of net losses and LAE for the
three months ended June 30, 2014 and 2013 ($ in thousands):

                                                                    Three Months Ended June 30,
                                                                     2014                 2013
Current year major catastrophes                                 $            -       $      (20,104 )
Prior years' favorable (unfavorable) loss development                   (1,977 )             24,491
Calendar year losses, excluding prior years' loss development          (29,423 )            (25,679 )
Net losses and LAE                                              $      (31,400 )     $      (21,292 )

Current Year Major Catastrophe Losses

There were no net losses from current year major catastrophes for the three
months ended June 30, 2014. Net losses from current year major catastrophes,
with related premium adjustments, increased the net loss and LAE ratio by 34.1
points for the three months ended June 30, 2013.

The following table sets forth the components of pre-tax net losses from 2013
major catastrophes for the three months ended June 30, 2013 ($ in thousands):

                                                                                            Net Losses from
                                                     Net Losses        Reinstatement             Major
                Major Catastrophe                      and LAE        Premiums Earned        Catastrophes
Floods in central and eastern Europe, primarily in
Germany                                              $   (16,182 )   $           1,527     $         (14,655 )
PCS 14 - tornadoes in the U.S. Midwest, primarily
Oklahoma                                                  (3,922 )                  11                (3,911 )
Total                                                $   (20,104 )   $           1,538     $         (18,566 )

Any development of losses related to 2013 major catastrophes subsequent to December 31, 2013 is included in prior years' loss development in the major catastrophes class of business for the three months ended June 30, 2014.

Prior Years' Loss Development

The Property and Marine segment net unfavorable loss development was $2.0 million for the three months ended June 30, 2014 and net favorable loss development was $24.5 million for the three months ended June 30, 2013. Net unfavorable loss development and related premium adjustments increased the net loss and LAE ratio by 4.0 points and net favorable loss development and related premium adjustments decreased the net loss and LAE ratio by 38.5 points for the three months ended June 30, 2014 and 2013, respectively. Net favorable loss development for the three months ended June 30, 2013 was primarily attributable to a level of cumulative losses reported by our ceding companies that was lower than expected and that, in our judgment, resulted in sufficient credibility in the loss experience to change our previously selected loss ratios.

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The following table sets forth the net favorable (unfavorable) development by class of business for the three months ended June 30, 2014 ($ in thousands):

                                           Net Losses      Net Acquisition
           Class of Business                 and LAE          Expenses          Net Premiums       Net Development
Marine, aviation and satellite             $    (6,739 )   $            (4 )   $         (231 )   $          (6,974 )
Crop                                             1,272                 (22 )                -                 1,250
Major catastrophes                               1,658                  (1 )             (450 )               1,207
Other                                            1,832                (149 )              189                 1,872
Total                                      $    (1,977 )   $          (176 )   $         (492 )   $          (2,645 )

Net unfavorable development in the marine, aviation and satellite class resulted primarily from an increase of $8.9 million in our estimate of ultimate losses related to the 2012 grounding and ongoing wreck removal of the cruise ship Costa Concordia. Net favorable development in the crop class arose primarily from the 2013 underwriting year. Net favorable development in the major catastrophes class arose primarily from 2011 and 2012 events, partially offset by net unfavorable development from 2010 events.

The following table sets forth the net favorable (unfavorable) development by class of business for the three months ended June 30, 2013 ($ in thousands):

                                                Net Losses      Net Acquisition
              Class of Business                   and LAE          Expenses          Net Premiums       Net Development
Major catastrophes                              $    22,510     $            (8 )   $       (2,403 )   $          20,099
Property per risk                                     2,365                 199               (184 )               2,380
Catastrophe excess-of-loss (non-major events)         1,920                (147 )              (99 )               1,674
Property proportional                                (1,299 )              (193 )                -                (1,492 )
Other                                                (1,005 )               287                264                  (454 )
Total                                           $    24,491     $           138     $       (2,422 )   $          22,207

Net favorable development in the major catastrophes class resulted primarily from Hurricane Sandy and the Tohoku earthquake as well as marine losses from Hurricanes Katrina and Ike. Net favorable development in the property per risk class arose primarily from the 2006 and 2012 underwriting years. Net favorable development in the catastrophe excess-of-loss (non-major events) class arose primarily from the 2011 and 2012 underwriting years. Net unfavorable development in the property proportional class arose primarily from one contract in the 2007 underwriting year.

Calendar Year Losses - Excluding Current Year Major Catastrophes and Prior Years' Loss Development

The Property and Marine segment calendar year losses, excluding current year major catastrophes and prior years' loss development, were $29.4 million and $25.7 million for the three months ended June 30, 2014 and 2013, respectively. The calendar year loss ratios, excluding current year major catastrophes and prior years' loss development, were 52.5% and 43.0% for the three months ended June 30, 2014 and 2013, respectively. The increase in calendar year losses and the calendar year loss ratio resulted primarily from an increase in losses of $5.5 million from non-major catastrophe events in 2014 as compared with 2013.

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Net Acquisition Expenses

The Property and Marine segment net acquisition expenses were $10.2 million and $9.7 million for the three months ended June 30, 2014 and 2013, respectively. The net acquisition expense ratios were 18.4% and 16.5% for the three months ended June 30, 2014 and 2013, respectively. The increase in the net acquisition expenses and net acquisition expense ratios for the three months ended June 30, 2014 as compared with the same period in 2013 was primarily due to an increase in North American property proportional business which has a higher acquisition expense ratio than the remainder of the segment and a reduction in international property catastrophe business which has a lower acquisition expense ratio than the remainder of the segment.

Other Underwriting Expenses

The Property and Marine segment other underwriting expenses were $8.1 million and $7.4 million for the three months ended June 30, 2014 and 2013, respectively.

Casualty

The following table sets forth underwriting results, ratios and the period over
period change for the Casualty segment for the three months ended June 30, 2014
and 2013 ($ in thousands):

                                                         Three Months Ended June 30,
                                                                                               Increase
                                                          2014                 2013           (decrease)
Net premiums written                                 $       54,806       $       79,711     $     (24,905 )
Net premiums earned                                          61,555               75,629           (14,074 )
Net losses and LAE                                           15,261               35,358           (20,097 )
Net acquisition expenses                                     15,636               18,068            (2,432 )
Other underwriting expenses                                   5,537                5,670              (133 )
Casualty segment underwriting income                 $       25,121       $       16,533     $       8,588

Underwriting ratios:
Net loss and LAE                                               24.8 %               46.8 %   (22.0) points
Net acquisition expense                                        25.4 %               23.9 %      1.5 points
. . .
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