Platinum shows one way to adapt to soft market. Focus

In its second quarter 2014 earnings Platinum Underwriters Holdings showed one way that reinsurance firms can adapt to the pressures of the softening reinsurance market, as it focuses on core profitable business and pulls back across all business lines.

Platinum Underwriters, a Bermuda based provider of global property, casualty and finite risk reinsurance coverage, is the first of the larger reinsurers to announce its Q2 results. The firm has reduced its premiums written across almost all of its core lines of business, with premiums written down 17%, premiums earned down nearly 13%, combined ratio almost flat on a year ago but up on recent quarters, investment income relatively flat and some underwriting expenses up.

The above doesn’t sound too good now does it? Money coming in down, investment flat, combined ratio flat and some expenses up. Not exactly a glowing report. However, this is Platinum and many other reinsurers strategy for adapting to the soft market and the impact of higher competition and new sources of capital, pulling back on underwriting to ensure only the profitable business is entered into.

Michael D. Price, Platinum’s CEO, said; “Our results reflect favorable prior period development, strong investment results on a total return basis, no losses from major catastrophes and active capital management. Our book value per common share grew to $67.38 as of June 30, 2014, an increase of 3.1% from March 31, 2014.”

Platinum is attempting to avoid the worst of the soft market environment by doubling down on what it does best, being selective in its underwriting and trying to avoid the competition. Hence its premiums written are down across the board, but particularly in casualty where it has pulled back on a year earlier by 31% and finite risk where it has pulled back by almost 25%. Property and marine premiums are actually up very slightly by 2%, nowhere near enough to compensate for the reduction in casualty and finite business.

It’s interesting that for Platinum the pull back has been in casualty and finite lines, perhaps areas where you’d expect it to have sought to deploy more capital. Given the potential volatility of this business though it may not be a bad move, as underwriting casualty at low rates is something you either have an appetite to do or you don’t.

It’s possible that Platinum is feeling the pressure from some of the newer casualty focused entrants in reinsurance more than from the property catastrophe focused alternative capital, ILS and catastrophe focused reinsurers. Also of note is the high combined ratio of 96.4% on the finite risk segment, which could be a reason that area has seen a pull back.

Platinum’s results show a company trying to focus on what it does best and likely still in the process of attempting to optimise its underwriting portfolio for the best return. These efforts, of honing in on the best and most profitable renewal business will take time and we should expect some quarters of interesting earnings as a result.

One other point worth noting about Platinum’s latest quarter is the slight drop in investment income year on year. Platinum recently said that it was considering employing a more active or aggressive investment strategy in order to continue delivering the returns its investors expect even in a soft reinsurance rate environment. So far no change in strategy is evident, at least by the reported results.

Platinum expects the current softer reinsurance market conditions will continue, with more downward pressure likely. As a result it intends to continue to attempt to focus in on the business that makes it the most money. Alongside the focus on profitable business it will need to focus on overall profitability too.

Michael Price commented; “Absent major events in the insurance or capital markets, we expect continued downward pressure on overall reinsurance 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.”

The question (among others) is how long reinsurers like Platinum can continue to do this, pull back, optimise and hone, but effectively bring in less income? How long will reinsurers shareholders stick with them when income is reducing, perhaps feeling like they are spending a lot to have someone manage their capital? If the combined ratio rises, due to catastrophe events or a creep in expense ratios, when does it start to look bad from a sustainability point of view? What happens if reinsurers have been easing terms and conditions and that starts to show in a higher loss ratio? Just how many quarters can this be maintained?

Right now we have no answers, but it is going to be fascinating to watch as reinsurers continue to strive to adapt to the current market environment and the new competitive pressures created by abundant traditional reinsurance capital and growing capital from third-party and ILS sources.

Read our article from earlier: With few places to hide from soft market, reinsurers need to adapt: S&P.