Platinum Underwriters Holdings is the first of the reinsurance firms to announce its third-quarter 2014 earnings and there appears to be little change to its strategy of adapting to soft market conditions by pulling back on all lines of business.
As the first of the larger reinsurance firms to report results for the third-quarter, Platinum gives us our first chance to see what an analysis of reinsurer results can tell us about what to expect for reinsurance rates moving forwards. Also the strategies adopted by reinsurers to navigate the soft market can provide useful strategic insights.
Platinum has been pulling back from reinsurance business it felt was underpriced all year and the firms third-quarter results show another big drop in premiums written, more of its income driven by positive development from prior years and also a slight uptick in combined ratio.
At the same time Platinum CEO Michael D. Price said that he does not foresee an end to the softening of reinsurance pricing anytime soon, or any erosion of excess reinsurance capital, alternative or traditional. “Absent major events in the insurance or capital markets, we expect capacity for insurable risks to remain high, resulting in continued downward pressure on overall rate adequacy,” Price explained.
However, Platinum’s approach of becoming ever more selective, an approach which has been followed by a majority of reinsurers in recent quarters, is set to continue and on underwriting results alone sees it remain profitable. The contribution of favourable development from prior year losses is worth watching though, as if this starts to dwindle the results could begin to look much less attractive very quickly.
Platinum did see some catastrophe losses during the third-quarter, particularly from U.S. tornado and hail activity, but these still remain light. Price said; “Our results reflect favorable prior period development, investment results on a total return basis, and active capital management, as well as the impact of tornado and hail activity in North America which affected certain regional catastrophe covers and crop/hail programs.”
For Q3 2014 gross premiums written at Platinum were down 9.2% on Q3 2013 at $133.3m, while net premiums were down a little more by 10.2% at $123.8m. Net premiums earned were down 4.4% at $129.5m. The combined ratio for the quarter jumped by 17.3 percentage points, likely a reflection of the attritional catastrophe losses, to 82.8%.
At the same time investment income has dropped a little by 1.3% to $17.5m. Also of note, total expenses for the quarter were up 17%, largely on losses and loss adjustment expenses. Platinum shows evidence of controlling operating expenses well however. Net income for the quarter was $29.1m compared to $38.3m a year earlier.
For the first nine months Platinum’s gross premiums written are down 8.3% to $394.4, while net premiums written are down 9.3% to $379.9m. Net premiums earned are down 6.1% at $380.6m. The combined ratio of 70.1% for the first 9 months of 2014 is up 7.8 percentage points.
Investment income for the nine months is down 2.3% and net realised gains on investments decreased $22.7m. Again, total expenses are up but do not look to be driven by operating costs again, more the loss and loss adjustment expenses. Net income for the first nine months of 2014 was $129m, down from $174.7m for the prior year.
During Q3 net premiums written in property declined by 15.2%, in casualty declined by 3.5% and in finite risk reinsurance declined by 31.2%, as Platinum showed evidence of beginning to move away from the finite risk arena.
So Platinum continues to pull back. The fundamentals still look strong, in terms of income generated from business underwritten. However the contribution of prior year development cannot last forever and the results may look very different when that happens.
The firm missed analysts consensus on its earnings per share by a fair margin, which could result in some pressure on its stock price today. Analysts had expected earnings per share of $1.32 but the firm actually reported just $1.03, well short of expectations.
CEO Price remains convinced that Platinum is adopting the right strategy to navigate the soft reinsurance market by adapting its business to find the best opportunities for underwriting.
“With a strong balance sheet and broad market access, our talented and experienced underwriting, investment, and risk professionals are well positioned to assume and manage a variety of risks in the current challenging market environment,” he commented.
Reinsurers like Platinum must be hoping that the market improves before their favourable prior year development runs out. But with the market remaining soft and that softness spreading, the chances of that happening look increasingly slim. Investors will likely accept more quarters like this, as in terms of profit and with more capital return likely why wouldn’t they? How long this strategy can work for, of pulling back and attempting to focus on profitable business areas without seeking any growth, remains the big question.
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