UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 001-31341
PLATINUM UNDERWRITERS HOLDINGS, LTD.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Bermuda 98-0416483
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
The Belvedere Building
69 Pitts Bay Road
Pembroke, Bermuda HM 08
(Address of principal executive offices) (Zip Code)
(441) 295-7195
--------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of April 30, 2004, there were outstanding 43,278,275 common shares, par
value $0.01 per share, of the Registrant.
PLATINUM UNDERWRITERS HOLDINGS, LTD.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and
December 31, 2003............................................................ 1
Consolidated Statements of Income and Comprehensive Income for the Three
Months Ended March 31, 2004 and 2003 (Unaudited)............................. 2
Consolidated Statements of Changes in Shareholders' Equity for the Three
Months Ended March 31, 2004 and 2003 (Unaudited)............................. 3
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2004 and 2003 (Unaudited).......................................... 4
Notes to Condensed Consolidated Financial Statements (Unaudited) for the
Three Months Ended March 31, 2004 and 2003................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Three Months Ended March 31, 2004 and 2003................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................... 21
Item 4. Controls and Procedures......................................................... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 25
Item 6. Exhibits and Reports on Form 8-K................................................ 25
(a) Exhibits................................................................ 25
(b) Reports on Form 8-K..................................................... 26
SIGNATURES.................................................................................. 27
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except share data)
(Unaudited)
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Investments:
Fixed maturities available-for-sale at fair value
(amortized cost - $1,696,889 and $1,560,807, respectively) $ 1,742,821 $ 1,583,505
Fixed maturity trading securities at fair value
(amortized cost - $78,975 and $95,926, respectively) 78,000 94,633
Other invested asset 6,749 6,910
------------ ------------
Total investments 1,827,570 1,685,048
Cash and cash equivalents 199,523 105,461
Accrued investment income 22,805 17,492
Reinsurance premiums receivable 643,970 487,441
Reinsurance recoverable on ceded losses and loss adjustment expenses 5,268 5,102
Prepaid reinsurance premiums 12,162 6,129
Funds held by ceding companies 71,263 65,060
Deferred acquisition costs 115,924 79,307
Income tax recoverable - 9,360
Other assets 9,259 21,461
------------ ------------
Total assets $ 2,907,744 $ 2,481,861
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses $ 835,734 $ 736,934
Unearned premiums 471,359 305,985
Reinsurance deposit liabilities 19,854 5,699
Debt obligations 137,500 137,500
Ceded premiums payable 10,770 6,205
Commissions payable 228,964 176,310
Current income taxes payable 1,419 -
Deferred tax liabilities 10,807 1,792
Other liabilities 48,320 44,233
------------ ------------
Total liabilities 1,764,727 1,414,658
------------ ------------
Shareholders' Equity
Preferred shares, $.01 par value, 25,000,000 shares authorized, no
shares issued or outstanding - -
Common shares, $.01 par value, 200,000,000 shares authorized,
43,268,025 and 43,054,125 shares issued and outstanding, respectively 433 430
Additional paid-in capital 915,819 910,505
Accumulated other comprehensive income 37,918 18,774
Retained earnings 188,847 137,494
------------ ------------
Total shareholders' equity 1,143,017 1,067,203
------------ ------------
Total liabilities and shareholders' equity $ 2,907,744 $ 2,481,861
============ ============
See accompanying notes to condensed consolidated financial statements.
- 1 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
($ in thousands, except per share data)
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Revenue:
Net premiums earned $ 321,042 $ 238,069
Net investment income 17,484 14,203
Net realized gains on investments 452 744
Other income 511 1,150
---------- ----------
Total revenue 339,489 254,166
---------- ----------
Expenses:
Losses and loss adjustment expenses 161,969 138,803
Acquisition expenses 88,921 51,719
Operating expenses 18,774 20,169
Net foreign currency exchange (gains) losses (866) 75
Interest expense 2,306 2,468
---------- ----------
Total expenses 271,104 213,234
---------- ----------
Income before income tax expense 68,385 40,932
Income tax expense 13,571 10,346
---------- ----------
Net income $ 54,814 $ 30,586
========== ==========
Earnings per share:
Basic earnings per share $ 1.27 $ 0.71
Diluted earnings per share $ 1.10 $ 0.66
Comprehensive income:
Net income $ 54,814 $ 30,586
Other comprehensive income:
Net change in unrealized gains on available-for-sale securities,
net of deferred taxes 19,173 7,647
Cumulative translation adjustments, net of deferred tax (29) -
---------- ----------
Comprehensive income $ 73,958 $ 38,233
========== ==========
See accompanying notes to condensed consolidated financial statements.
- 2 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
($ in thousands)
Three Months Ended
March 31,
----------------------------
2004 2003
------------ ------------
Preferred shares:
Balances at beginning and end of periods $ - $ -
------------ ------------
Common shares:
Balances at beginning of periods 430 430
Exercise of share options 3 -
------------ ------------
Balances at end of periods 433 430
------------ ------------
Additional paid-in-capital:
Balances at beginning of periods 910,505 903,797
Exercise of share options 4,810 -
Stock based compensation 504 -
------------ ------------
Balances at end of periods 915,819 903,797
------------ ------------
Accumulated other comprehensive income:
Balances at beginning of periods 18,774 10,581
Net change in unrealized gains on available-for-sale securities,
net of deferred taxes 19,173 7,647
Cumulative translation adjustments, net of deferred tax (29) -
------------ ------------
Balances at end of periods 37,918 18,228
------------ ------------
Retained earnings:
Balances at beginning of periods 137,494 6,438
Net income 54,814 30,586
Dividends paid to shareholders (3,461) (3,440)
------------ ------------
Balances at end of periods 188,847 33,584
------------ ------------
Total shareholders' equity $ 1,143,017 $ 956,039
============ ============
See accompanying notes to condensed consolidated financial statements.
- 3 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
($ in thousands)
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Operating Activities:
Net income $ 54,814 $ 30,586
Adjustments to reconcile net income to cash used in operations:
Depreciation and amortization 5,679 4,760
Net realized gains on investments (452) (744)
Net foreign currency exchange gains (866) -
Stock based compensation 504 -
Trading securities activities 17,520 -
Changes in assets and liabilities:
Increase in accrued investment income (5,313) (6,307)
Increase in reinsurance premiums receivable (156,529) (315,301)
Increase in funds held by ceding companies (6,203) (4,881)
Increase in deferred acquisition costs (36,617) (21,122)
Increase in net unpaid losses and loss adjustment expenses 98,634 135,263
Increase in net unearned premiums 159,341 121,369
Increase in commissions payable 52,654 68,566
Increase in income taxes payable 10,779 10,613
Increase in deferred taxes 4,954 1,185
Increase in reinsurance deposit liabilities 14,155 5,569
Increase in ceded premiums payable 4,565 3,691
Decrease in other assets and liabilities 2,961 43,085
Cash from St. Paul related to the November 1, 2002 assumption of
liabilities on reinsurance contracts becoming effective in 2002 - 108,336
Other net 135 (3,022)
---------- ----------
Net cash provided by operating activities 220,715 181,646
---------- ----------
Investing Activities:
Proceeds from sale of available-for-sale fixed maturities 58,006 95,004
Proceeds from maturity or paydown of available-for-sale fixed maturities 16,164 -
Acquisition of available-for-sale fixed maturities (202,175) (394,409)
---------- ----------
Net cash used in investing activities (128,005) (299,405)
---------- ----------
Financing Activities:
Dividends paid to shareholders (3,461) (3,440)
Proceeds from exercise of share options 4,813 -
---------- ----------
Net cash provided by (used in) financing activities 1,352 (3,440)
---------- ----------
Net increase (decrease) in cash and cash equivalents 94,062 (121,199)
Cash and cash equivalents at beginning of period 105,461 281,486
---------- ----------
Cash and cash equivalents at end of period $ 199,523 $ 160,287
========== ==========
Supplemental disclosures of cash flow information:
Income taxes paid $ - $ -
Interest paid $ 2,406 $ 2,807
See accompanying notes to condensed consolidated financial statements.
- 4 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
NOTE 1 BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("U.S. GAAP") and include the accounts of Platinum Underwriters
Holdings, Ltd. and its subsidiaries (the "Company"), including Platinum Re (UK)
Limited, Platinum Underwriters Bermuda, Ltd., Platinum Underwriters Finance,
Inc., Platinum Regency Holdings and Platinum Underwriters Reinsurance, Inc. All
material inter-company transactions have been eliminated in preparing these
consolidated financial statements. The amounts included in this report as of and
for the three months ended March 31, 2004 and 2003 are unaudited and include
those adjustments, consisting of normal recurring items, that management
considers necessary for a fair presentation under U.S. GAAP. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ from these
estimates. The results of operations for any interim period are not necessarily
indicative of results for the full year.
In November 2002, Platinum Underwriters Holdings, Ltd. ("Platinum
Holdings") completed an initial public offering of 33,044,000 common shares.
Concurrent with the public offering, Platinum Holdings sold 6,000,000 common
shares to The St. Paul Travelers Companies, Inc., formerly The St. Paul
Companies, Inc., ("St. Paul") and 3,960,000 common shares to RenaissanceRe
Holdings Ltd. ("RenaissanceRe") in private placements. In addition to the common
shares issued, the Company issued Equity Security Units, consisting of a
contract to purchase common shares in 2005 and an ownership interest in a senior
note due 2007. Also, concurrent with these transactions, the Company and St.
Paul entered into several agreements for the transfer of continuing reinsurance
business and certain related assets of St. Paul. Among these agreements were
quota share retrocession agreements effective November 2, 2002 under which the
Company assumed from St. Paul unpaid losses and loss adjustment expenses
("LAE"), unearned premiums and certain other liabilities on reinsurance
contracts becoming effective in 2002 (the "Quota Share Retrocession
Agreements").
Stock-Based Compensation
During 2003, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Awards of Stock Based Compensation to
Employees" ("SFAS 123") and Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
148"). SFAS 123 requires that the fair value of shares granted under the
Company's share option plan subsequent to adoption of SFAS 148 be amortized in
earnings over the vesting periods. The fair value of the share options granted
are determined through the use of an option-pricing model. SFAS 148 amends SFAS
123 and provides transitioning guidance for a voluntary adoption of FAS 123 as
well as amends the disclosure requirements of SFAS 123. Prior to the adoption of
SFAS 123, the Company elected to use the intrinsic value method of accounting
for stock-based awards granted to employees established by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
continues to use the intrinsic method for share options granted in 2002. Under
APB 25, if the exercise price of the Company's employee share options is equal
to or greater than
- 5 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three Months Ended March 31, 2004 and 2003
the fair market value of the underlying shares on the date of the grant, no
compensation expense is recorded.
Had the Company calculated and recorded compensation expense for all share
option grants based on the "fair value" method described in SFAS 123, net income
and earnings per share, net of tax, would have been the pro forma amounts for
the three months ended March 31, 2004 and 2003 as indicated below ($ in
thousands, except per share data):
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Stock-based compensation expense:
As reported $ 504 $ -
Pro forma 1,758 1,633
Net income:
As reported $ 54,814 $ 30,586
Pro forma 53,560 28,953
Basic earnings per share:
As reported $ 1.27 $ 0.71
Pro forma 1.24 0.67
Diluted earnings per share:
As reported $ 1.10 $ 0.66
Pro forma 1.08 0.62
Reclassifications
Certain reclassifications have been made to the 2003 financial statements
in order to conform to the 2004 presentation.
NOTE 2 INVESTMENTS
Investments classified as available-for-sale are carried at fair value as
of the balance sheet date. Net change in unrealized investment gains for the
three months ended March 31, 2004 and 2003 were as follows ($ in thousands):
Three Months Ended
March 31,
--------------------
2004 2003
-------- --------
Fixed maturities $ 23,234 $ 10,090
Less - deferred taxes (4,061) (2,443)
-------- --------
Net change in unrealized gains $ 19,173 $ 7,647
-------- --------
Gross unrealized gains and losses on available-for-sale fixed maturities
as of March 31, 2004 were $47,699,000 and $1,767,000, respectively. As of March
31, 2004, there were no available-for-sale fixed maturities that have been in an
unrealized loss position for more than twelve months. Since March
- 6 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three Months Ended March 31, 2004 and 2003
31, 2004, interest rates have risen and, consequently, the net unrealized gains
on fixed maturities have reversed.
NOTE 3 EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted earnings per share
computations for the three months ended March 31, 2004 and 2003 (amounts in
thousands, except per share data):
Weighted
Average
Net Shares Earnings
Income Outstanding Per Share
---------- ------------ ----------
Three Months Ended March 31, 2004:
Basic earnings per share:
Income available to common shareholders $ 54,814 43,143 $ 1.27
Effect of dilutive securities:
Share options - 2,759
Equity Security Units 1,522 5,009
Restricted Share Units - 73
Diluted earnings per share:
---------- ------------
Income available to common shareholders $ 56,336 50,984 $ 1.10
---------- ------------
Three Months Ended March 31, 2003:
Basic earnings per share:
Income available to common shareholders $ 30,586 43,004 $ 0.71
Effect of dilutive securities:
Share options - 279
Equity Security Units 1,633 5,725
Diluted earnings per share:
---------- ------------
Income available to common shareholders $ 32,219 49,008 $ 0.66
---------- ------------
NOTE 4 OPERATING SEGMENT INFORMATION
The Company conducts its worldwide reinsurance business through three
operating segments: Property and Marine, Casualty and Finite Risk. The Property
and Marine operating segment includes principally property and marine
reinsurance coverages that are written in the United States and international
markets. This business includes property per-risk excess-of-loss treaties,
property proportional treaties and catastrophe excess-of-loss reinsurance
treaties. The Casualty operating segment includes principally reinsurance
treaties that cover umbrella liability, general and product liability,
professional liability, directors and officers liability, workers' compensation,
casualty clash and automobile liability. This segment also includes accident and
health reinsurance treaties, which are predominantly reinsurance of health
insurance products. The Finite Risk operating segment includes principally
structured reinsurance contracts with ceding companies whose needs may not be
met efficiently through traditional reinsurance products. The Company focuses on
providing such clients with customized solutions for their financial management
needs.
- 7 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three Months Ended March 31, 2004 and 2003
In managing the Company's operating segments, management uses measures
such as underwriting income and underwriting ratios to evaluate segment
performance. Management does not allocate by segment its assets or certain
income and expenses such as investment income, interest expense and certain
corporate expenses. Segment underwriting income is reconciled to income before
income taxes. The measures used by management in evaluating the Company's
operating segments should not be used as a substitute for measures determined
under U.S. GAAP. The following table summarizes underwriting activity and ratios
for the operating segments together with a reconciliation of underwriting income
to income before income taxes for the three months ended March 31, 2004 and 2003
($ in thousands):
Property
and Marine Casualty Finite Risk Total
---------- ---------- ------------ ----------
Three months ended March 31, 2004:
Net premiums written $ 171,294 223,965 84,847 $ 480,106
---------- ---------- ------------ ----------
Net premiums earned 118,065 136,222 66,755 321,042
Losses and LAE 48,578 94,784 18,607 161,969
Acquisition expenses 21,752 34,836 32,333 88,921
Other underwriting expenses 8,150 5,057 2,597 15,804
---------- ---------- ------------ ----------
Segment underwriting income $ 39,585 1,545 13,218 $ 54,348
---------- ---------- ------------
Corporate expenses not allocated to segments (2,970)
Net foreign currency exchange gains 866
Interest expense (2,306)
Other income 511
Net investment income and net realized gains on investments 17,936
----------
Income before income tax expense $ 68,385
----------
Ratios:
Losses and LAE 41.1% 69.6% 27.9% 50.5%
Acquisition expense 18.4% 25.6% 48.4% 27.7%
Other underwriting expense 6.9% 3.7% 3.9% 4.9%
---------- ---------- ------------ ----------
Combined 66.4% 98.9% 80.2% 83.1%
---------- ---------- ------------ ----------
- 8 -
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three Months Ended March 31, 2004 and 2003
Property
and Marine Casualty Finite Risk Total
---------- ---------- ------------ ----------
Three months ended March 31, 2003:
Net premiums written $ 117,767 113,694 128,630 $ 360,091
---------- ---------- ------------ ----------
Net premiums earned 89,932 77,726 70,411 238,069
Losses and LAE 41,585 53,907 43,311 138,803
Acquisition expenses 15,618 19,029 17,072 51,719
Other underwriting expenses 10,459 4,618 2,137 17,214
---------- ---------- ------------ ----------
Segment underwriting income $ 22,270 172 7,891 $ 30,333
---------- ---------- ------------
Corporate expenses not allocated to segments (2,955)
Net foreign currency exchange losses (75)
Interest expense (2,468)
Other income 1,150
Net investment income and net realized gains on investments 14,947
----------
Income before income tax expense $ 40,932
----------
Ratios:
Losses and LAE 46.2% 69.4% 61.5% 58.3%
Acquisition expense 17.4% 24.5% 24.2% 21.7%
Other underwriting expense 11.6% 5.9% 3.0% 7.2%
---------- ---------- ------------ ----------
Combined 75.2% 99.8% 88.7% 87.2%
---------- ---------- ------------ ----------
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
BUSINESS OVERVIEW
Platinum Underwriters Holdings, Ltd. ("Platinum Holdings") is a Bermuda
holding company organized in 2002. Platinum Holdings and its subsidiaries (the
"Company") operate through three licensed reinsurance subsidiaries: Platinum
Underwriters Reinsurance, Inc. ("Platinum US"), Platinum Re (UK) Limited
("Platinum UK") and Platinum Underwriters Bermuda, Ltd. ("Platinum Bermuda").
The Company provides property and marine, casualty and finite risk reinsurance
coverages, through reinsurance intermediaries, to a diverse clientele of
insurers and select reinsurers on a worldwide basis.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto and management's
discussion and analysis of financial condition and results of operations
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003. The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP").
In November 2002, Platinum Holdings completed an initial public offering
of 33,044,000 common shares. Concurrent with the public offering, Platinum
Holdings sold 6,000,000 common shares to The St. Paul Travelers Companies, Inc.,
formerly The St. Paul Companies, Inc., ("St. Paul") and 3,960,000 common shares
to RenaissanceRe Holdings Ltd. ("RenaissanceRe") in private placements. In
addition to the common shares issued, the Company issued Equity Security Units,
consisting of a contract to purchase common shares in 2005 and an ownership
interest in a senior note due 2007. Also, concurrent with these transactions,
the Company and St. Paul entered into several agreements for the transfer of
continuing reinsurance business and certain related assets of St. Paul. Among
these agreements were quota share retrocession agreements effective November 2,
2002 under which the Company assumed from St. Paul unpaid losses and loss
adjustment expenses ("LAE"), unearned premiums and certain other liabilities on
reinsurance contracts becoming effective in 2002 (the "Quota Share Retrocession
Agreements").
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2004 and 2003 was
$54,814,000 and $30,586,000, respectively. The increase in net income is
primarily attributable to an increase in underwriting income. Underwriting
income for the three months ended March 31, 2004 and 2003 was $54,348,000 and
$30,333,000, respectively. The increase in underwriting income was principally
the result of favorable development of prior years' losses in the Property and
Marine and Finite Risk segments. Both periods were favorably impacted by the
absence of any major catastrophe losses during the quarters.
Net premiums written for the three months ended March 31, 2004 and 2003
were $480,106,000 and $360,091,000, respectively. Net premiums written increased
due to rate increases and the growth in business underwritten in 2003 and 2004
in the Casualty and Property and Marine segments, partially offset by a decline
in the net premiums written in the Finite Risk segment.
Net premiums earned for the three months ended March 31, 2004 and 2003
were $321,042,000 and $238,069,000, respectively. Net premiums earned for the
three months ended March 31, 2004
- 10 -
increased over the three months ended March 31, 2003 consistent with the
increase in net premiums written. Net premiums earned as a percentage of net
premiums written for the three months ended March 31, 2004 and 2003 were 66.9%,
and 66.1%, respectively.
Net investment income for the three months ended March 31, 2004 and 2003
was $17,484,000 and $14,203,000, respectively. Net investment income increased
during 2004 as invested assets increased from positive cash flow. Net investment
income in the three months ended March 31, 2003 included $1,357,000 of interest
received from St. Paul on balances due relating to the Quota Share Retrocession
Agreements. Net realized gains on investments of $452,000 and $744,000 for the
three months ended March 31, 2004 and 2003, respectively, were the result of
investment sale activity to manage the credit quality and duration of the
investment portfolio.
Other income for the three months ended March 31, 2004 and 2003 was
$511,000 and $1,150,000, respectively. Other income included net earnings on a
small number of reinsurance contracts in the Finite Risk segment accounted for
as deposits. Other income in the three months ended March 31, 2004 also includes
net unrealized gains relating to changes in fair value of fixed maturities
classified as trading. There were no unrealized gains included in other income
for the three months ended March 31, 2003.
Net foreign currency exchange gain (losses) for the three months ended
March 31, 2004 and 2003 were $866,000 and ($75,000), respectively. Gains and
losses result from the re-valuation into U.S. dollars of insurance liabilities
and invested assets denominated in foreign currencies. The Company seeks to
match its significant foreign currency denominated assets and liabilities to
manage exposures to foreign currency exchange rate fluctuations.
Losses and LAE incurred for the three months ended March 31, 2004 and 2003
were $161,969,000 and $138,803,000, respectively. The increase is consistent
with the increased claim exposures due to the growth in business in the three
months ended March 31, 2004 over the three months ended March 31, 2003. The
ratios of losses and LAE incurred to premiums earned, also referred to as loss
ratios, for the three months ended March 31, 2004 and 2003 were 50.5%, and
58.3%, respectively. Losses incurred for the three months ended March 31, 2004
and 2003 were favorably impacted by the absence of catastrophe losses.
Additionally, losses incurred for the three months ended March 31, 2004 included
a reduction of a case loss reserve of $7,500,000 and a reduction of $9,700,000
related to the commutation of a reinsurance contract, which together represent
approximately 5.4% of the 7.8% loss ratio decrease. Additionally, losses and LAE
include approximately $14,200,000 of favorable development of prior years'
unpaid losses and LAE in the Property and Marine segment.
Acquisition expenses for the three months ended March 31, 2004 and 2003
were $88,921,000 and $51,719,000, respectively. The increase is due primarily to
the increase in net premiums earned in the three months ended March 31, 2004
over the three months ended March 31, 2003. The resulting ratios of acquisition
expenses to net premiums earned for the three months ended March 31, 2004 and
2003 were 27.7% and 21.7%, respectively. The increase in the ratio in 2004 over
2003 is due to profit commissions of $8,700,000 related to the commutation
mentioned above, as well as additional profit commissions in the Property and
Marine segment as a result of favorable development.
Operating expenses for the three months ended March 31, 2004 and 2003 were
$18,774,000 and $20,169,000, respectively, and represent costs such as salaries,
rent and like items. Operating expenses include other underwriting expenses
related to reinsurance operations as well as costs associated with Platinum
Holdings. Operating expenses for the three months ended March 31, 2003 were
higher due to the additional expenses that were required to be incurred in
connection with our start-up in late 2002 and the early stage of our operations.
- 11 -
Interest expense for the three months ended March 31, 2004 and 2003 was
$2,306,000 and $2,468,000, respectively, and is due to the Company's Equity
Security Units, which are classified as debt obligations on the Company's
balance sheet.
Income tax expense for the three months ended March 31, 2004 and 2003 was
$13,571,000 and $10,346,000, respectively. The resulting effective tax rates
were 19.8% and 25.3%, respectively. The effective tax rate in 2004 decreased as
a greater portion of the Company's income before income taxes was derived from
Platinum Bermuda, which pays no corporate income taxes.
SEGMENT INFORMATION
The Company conducts its worldwide reinsurance business through three
operating segments: Property and Marine, Casualty and Finite Risk. In managing
the Company's operating segments, management uses measures such as underwriting
income and underwriting ratios to evaluate segment performance. Management does
not allocate by segment its assets or certain income and expenses such as
investment income, interest expense and certain corporate expenses. Segment
underwriting income is reconciled to income before income taxes. The measures
used by management in evaluating the Company's operating segments should not be
used as a substitute for measures determined under U.S. GAAP. The following
table summarizes underwriting activity and ratios for the three operating
segments for the three months ended March 31, 2004 and 2003 ($ in thousands):
Property
and Marine Casualty Finite Risk Total
---------- -------- ----------- --------
Three months ended March 31, 2004:
Net premiums written $ 171,294 223,965 84,847 $480,106
---------- -------- ----------- --------
Net premiums earned 118,065 136,222 66,755 321,042
Losses and LAE 48,578 94,784 18,607 161,969
Acquisition expenses 21,752 34,836 32,333 88,921
Other underwriting expenses 8,150 5,057 2,597 15,804
---------- -------- ----------- --------
Segment underwriting income $ 39,585 1,545 13,218 $ 54,348
---------- -------- -----------
Corporate expenses not allocated to segments (2,970)
Net foreign currency exchange gains 866
Interest expense (2,306)
Other income 511
Net investment income and net realized gains on investments 17,936
--------
Income before income tax expense $ 68,385
--------
Ratios:
Losses and LAE 41.1% 69.6% 27.9% 50.5%
Acquisition expense 18.4% 25.6% 48.4% 27.7%
Other underwriting expense 6.9% 3.7% 3.9% 4.9%
---------- -------- ----------- --------
Combined 66.4% 98.9% 80.2% 83.1%
---------- -------- ----------- --------
- 12 -
Property
and Marine Casualty Finite Risk Total
---------- -------- ----------- --------
Three months ended March 31, 2003:
Net premiums written $ 117,767 113,694 128,630 $360,091
---------- -------- ----------- --------
Net premiums earned 89,932 77,726 70,411 238,069
Losses and LAE 41,585 53,907 43,311 138,803
Acquisition expenses 15,618 19,029 17,072 51,719
Other underwriting expenses 10,459 4,618 2,137 17,214
---------- -------- ----------- --------
Segment underwriting income $ 22,270 172 7,891 $ 30,333
---------- -------- -----------
Corporate expenses not allocated to segments (2,955)
Net foreign currency exchange losses (75)
Interest expense (2,468)
Other income 1,150
Net investment income and net realized gains on investments 14,947
--------
Income before income tax expense $ 40,932
--------
Ratios:
Losses and LAE 46.2% 69.4% 61.5% 58.3%
Acquisition expense 17.4% 24.5% 24.2% 21.7%
Other underwriting expense 11.6% 5.9% 3.0% 7.2%
---------- -------- ----------- --------
Combined 75.2% 99.8% 88.7% 87.2%
---------- -------- ----------- --------
PROPERTY AND MARINE
The Property and Marine operating segment includes principally property
and marine reinsurance coverages that are written in the United States and
international markets. This business includes property per-risk excess-of-loss
treaties, property proportional treaties and catastrophe excess-of-loss
reinsurance treaties. This operating segment generated 35.7% and 32.7% of the
Company's net premiums written for the three months ended March 31, 2004 and
2003, respectively.
Net premiums written for the three months ended March 31, 2004 and 2003
were $171,294,000 and $117,767,000, respectively. Net premiums written increased
in the three months ended March 31, 2004 over the three months ended March 31,
2003 as a result of the growth in business underwritten in both 2003 and 2004
that together generate net premiums written in 2004.
Net premiums earned for the three months ended March 31, 2004 and 2003
were $118,065,000 and $89,932,000, respectively. The increase in net premiums
earned is consistent with the increase in net premiums written and normal
recognition of premiums earned over the exposure periods for the business
written.
Losses and LAE incurred for the three months ended March 31, 2004 and 2003
were $48,578,000 and $41,585,000, respectively. The increase is consistent with
the increased claim exposures due to the growth in business in the three months
ended March 31, 2004 over the three months ended March 31, 2003. The resulting
loss ratios for the three months ended March 31, 2004 and 2003 were 41.1% and
46.2%, respectively. Losses incurred for the three months ended March 31, 2004
and 2003 were favorably impacted by the absence of catastrophe losses.
Additionally, losses and LAE incurred for the three months ended March 31, 2004
included approximately $14,200,000 of favorable development of prior years'
unpaid losses and LAE. Losses and LAE incurred for the three months ended March
31, 2003 included approximately $6,200,000 of favorable development.
- 13 -
Acquisition expenses for the three months ended March 31, 2004 and 2003
were $21,752,000 and $15,618,000, respectively. The increase is due primarily to
the increase in net premiums earned in the three months ended March 31, 2004
over the three months ended March 31, 2003. The resulting ratios of acquisition
expenses to net premiums earned for the three months ended March 31, 2004 and
2003 were 18.4%, and 17.4%, respectively. The increase in the acquisition ratio
is due to profit commissions in 2004 related to contracts experiencing favorable
development.
Other underwriting expenses for the three months ended March 31, 2004 and
2003 were $8,150,000 and $10,459,000, respectively, and represent costs such as
salaries, rent and like items. Other underwriting expenses included fees of
$2,406,000 and $2,822,000 for the three months ended March 31, 2004 and 2003,
respectively, relating to an agreement with RenaissanceRe that provides for a
periodic review of aggregate property catastrophe exposures. The resulting other
underwriting expense ratios for the three months ended March 31, 2004 and 2003
were 6.9% and 11.6%, respectively. The decrease in the ratio in the three months
ended March 31, 2004 over the three months ended March 31, 2003 is due primarily
to the increase in net premiums earned as well as cost reductions in the
Property and Marine segment.
CASUALTY
The Casualty operating segment includes principally reinsurance treaties
that cover umbrella liability, general and product liability, professional
liability, directors and officers liability, workers' compensation, casualty
clash and automobile liability. This segment also includes accident and health
reinsurance treaties, which are predominantly reinsurance of health insurance
products. This operating segment generated 46.6% and 31.6% of the Company's net
premiums written for the three months ended March 31, 2004 and 2003,
respectively.
Net premiums written for the three months ended March 31, 2004 and 2003
were $223,965,000 and $113,694,000, respectively. The increase in premiums
written is due to rate increases and the growth in business underwritten in both
2003 and 2004 that together generate net premiums written in 2004. In response
to market conditions, the Company previously increased its involvement in the
directors and officers and umbrella lines of business that generate net premiums
written. The Company expanded its participation with existing clients and formed
new client relationships.
Net premiums earned for the three months ended March 31, 2004 and 2003
were $136,222,000 and $77,726,000, respectively. The increase in net premiums
earned is consistent with the increase in premiums written and normal
recognition of premiums earned over the exposure periods for the business
written.
Losses and LAE incurred for the three months ended March 31, 2004 and 2003
were $94,784,000 and $53,907,000, respectively. The increase is consistent with
the increased claim exposures due to the growth in business in the three months
ended March 31, 2004 over the three months ended March 31, 2003. The resulting
loss ratios incurred for the Casualty segment for the three months ended March
31, 2004 and 2003 were 69.6% and 69.4%, respectively. Improvements in the loss
ratio for the three months ended March 31, 2004 due to increased profitability
of the 2003 underwriting year over the 2002 underwriting year were offset by
adverse development in the U.K. Motor class of the Casualty segment.
Acquisition costs for the three months ended March 31, 2004 and 2003 were
$34,836,000 and $19,029,000, respectively. The increase is due primarily to the
increase in net premiums earned in the three months ended March 31, 2004 over
the three months ended March 31, 2003. The resulting acquisition expense ratios
for the three months ended March 31, 2004 and 2003 were 25.6% and 24.5%,
respectively.
- 14 -
Other underwriting expenses for the three months ended March 31, 2004 and
2003 were $5,057,000 and $4,618,000, respectively, and represent costs such as
salaries, rent and like items. The resulting other underwriting expense ratios
for the three months ended March 31, 2004 and 2003 were 3.7% and 5.9%,
respectively. The decrease in the ratio in the three months ended March 31, 2004
over the three months ended March 31, 2003 is due primarily to the increase in
net premiums earned.
FINITE RISK
The Finite Risk operating segment includes principally structured
reinsurance contracts with ceding companies whose needs may not be met
efficiently through traditional reinsurance products. The Company focuses on
providing such clients with customized solutions for their financial management
needs. This operating segment generated 17.7% and 35.7% of the Company's net
premiums written for the three months ended March 31, 2004 and 2003,
respectively. For this segment, the Company believes it is especially important
to evaluate the overall combined ratio, not its component parts of loss and
expense ratios.
Net premiums written for the three months ended March 31, 2004 and 2003
were $84,847,000 and $128,630,000, respectively. The Finite Risk portfolio
consists of a small number of contracts that can be large in premium size and
are written on an intermittent basis. Consequently, net premiums written can be
expected to vary significantly from year to year. Two significant finite quota
share treaties were written in the three months ended March 31, 2003 and were
not renewed in 2004.
Net premiums earned for the three months ended March 31, 2004 and 2003
were $66,755,000 and $70,411,000, respectively. Net premiums earned tend to lag
net premiums written and consequently, are impacted by net premiums written in
prior quarters.
Losses and LAE incurred for the three months ended March 31, 2004 and 2003
were $18,607,000 and $43,311,000, respectively. The decrease is consistent with
the decreased claim exposures due to the decline in net premiums earned in the
three months ended March 31, 2004 over the three months ended March 31, 2003.
The loss ratios incurred for the Finite Risk segment for the three months ended
March 31, 2004 and 2003 were 27.9% and 61.5%, respectively. Losses incurred for
the three months ended March 31, 2004 and 2003 were favorably impacted by the
absence of catastrophe losses. Additionally, losses incurred for the three
months ended March 31, 2004 included a reduction of case loss reserve of
$7,500,000 and a reduction of $9,700,000 related to the commutation of a
reinsurance contract, which together represent approximately 25.8% of the 33.6%
loss ratio decrease.
Acquisition costs for the three months ended March 31, 2004 and 2003 were
$32,333,000 and $17,072,000, respectively. The increase is due primarily to the
decrease in net premiums earned in the three months ended March 31, 2004 over
the three months ended March 31, 2003. The resulting acquisition expense ratios
for the three months ended March 31, 2004 and 2003 were 48.4% and 24.2%,
respectively. The increase in the ratio in the three months ended March 31, 2004
over the three months ended March 31, 2003 is due primarily to a profit
commission of $8,700,000 related to the commutation of a reinsurance contract in
the three months ended March 31, 2004 mentioned above.
Other underwriting expenses for the three months ended March 31, 2004 and
2003 were $2,597,000 and $2,137,000, respectively, and represent costs such as
salaries, rent and like items. The resulting other underwriting expense ratios
for the three months ended March 31, 2004 and 2003 were 3.9% and 3.0%,
respectively. The increase in the ratio in the three months ended March 31, 2004
over the three months ended March 31, 2003 is due primarily to the decline in
net premiums earned.
- 15 -
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
Cash and cash equivalents were $199,523,000 as of March 31, 2004. Fixed
maturities were $1,820,821,000 as of March 31, 2004. The Company's fixed
maturity investment portfolio is comprised entirely of publicly traded
investment grade bonds. The investment portfolio, including cash and cash
equivalents, had a weighted average duration of 3.5 years as of March 31, 2004.
Management monitors the composition of the investment portfolio and cash flows
from the portfolio to maintain liquidity necessary to meet the Company's
obligations. The Company believes it has sufficient cash on hand to meet its
short-term obligations and to maintain the liquidity necessary for portfolio
management. All cash flow in excess of this requirement is invested in a timely
manner. Since March 31, 2004, interest rates have risen and, consequently, the
net unrealized gains on fixed maturities have reversed.
Certain assets and liabilities associated with underwriting have increased
significantly, some of which include significant estimates. Premiums receivable,
deferred acquisition costs, unpaid losses and LAE, unearned premiums and
commissions payable all include significant estimates. Premiums receivable of
$643,970,000 includes $594,951,000 of estimates of premiums that are earned but
not reported ("EBNR"). Premiums receivable increased by approximately
$156,529,000 from December 31, 2003 to March 31, 2004, of which $198,410,000
represents increases in EBNR. Unpaid losses and LAE, net of reinsurance
recoverable of $830,466,000 includes $717,468,000 of estimates of losses that
were incurred but not reported ("IBNR"). Unpaid losses and LAE, net of
reinsurance recoverable on ceded losses and LAE, increased by approximately
$98,548,000 from December 31, 2003 to March 31, 2004, of which $79,202,000
represents increases in IBNR. Commissions payable of $228,964,000 includes
$203,303,000 which are estimated or contingent commissions payable.
SOURCES OF LIQUIDITY
The consolidated sources of funds of the Company consist primarily of
premiums written, losses recovered from retrocessionaires, investment income and
proceeds from sales and redemption of investments and actual cash and cash
equivalents held by the Company. Net cash flow provided by operations for the
three months ended March 31, 2004 was $220,715,000 and was used primarily to
acquire additional investments. Our cash flows are derived from our premium
volume and the relatively low level of claim payments we have made to date due,
in part, to the start-up nature of our business and the less than expected level
of catastrophe losses we have incurred during the current year.
The Company actively manages the cash and cash equivalent component of its
overall investment portfolio in order to manage the overall duration of its
investment portfolio and to ensure there is adequate cash on hand to meet
ongoing operational requirements along with other potential liquidity
requirements.
Platinum Holdings is a holding company that conducts no reinsurance
operations of its own. All of its reinsurance operations are conducted through
its wholly owned operating subsidiaries Platinum US, Platinum UK and Platinum
Bermuda. As a holding company, the cash flow of Platinum Holdings consists
primarily of dividends, interest and other permissible payments from its
subsidiaries. Platinum Holdings depends on such payments for general corporate
purposes and to meet its obligations, including the contract adjustment payments
related to the Equity Security Units and the payment of any dividends to its
shareholders.
The Company has filed an unallocated universal shelf registration
statement with the Securities and Exchange Commission ("SEC"), which the SEC
declared effective on April 5, 2004. The securities registered under the shelf
registration statement for possible future sales include up to $750,000,000 of
- 16 -
common shares, preferred shares and various types of debt securities. The
registration statement also includes common shares held by St. Paul and
RenaissanceRe and common shares issuable upon exercise of options owned by St.
Paul and RenaissanceRe. The common shares held by and issuable upon exercise of
options by St. Paul and RenaissanceRe account for $586,381,900 of the
$750,000,000 of securities registered under the shelf registration statement,
with the remaining $163,618,100 available for securities offerings by the
Company. To effect any such sales from time to time, Platinum Holdings will file
one or more supplements to the registration statement, which will provide
details of any proposed offering or sale.
LIQUIDITY REQUIREMENTS
The principal consolidated cash requirements of the Company are the
payment of losses and LAE, commissions, brokerages, operating expenses,
dividends to its shareholders, the servicing of debt (including interest
payments on the senior notes and contract adjustment payments on the purchase
contracts included in the Company's Equity Security Units), the acquisition of
and investment in businesses, capital expenditures, premiums retroceded and
excise taxes.
Platinum UK and Platinum Bermuda are not licensed, approved or accredited
as reinsurers anywhere in the United States and therefore, under the terms of
most of their contracts with United States ceding companies, they are required
to provide security to these ceding companies for unpaid ceded liabilities in a
form acceptable to state insurance commissioners. Typically, this type of
security takes the form of a letter of credit issued by an acceptable bank, the
establishment of a trust, or a cash advance. Platinum UK and Platinum Bermuda
expect to obtain letters of credit through commercial banks and may be required
to provide the banks a security interest in certain of Platinum UK's and
Platinum Bermuda's investments.
The payment of dividends and other distributions from the Company's
regulated reinsurance subsidiaries is limited by applicable laws and statutory
requirements of the jurisdictions in which the subsidiaries operate, including
Bermuda, the United States and the United Kingdom. Based on the regulatory
restrictions of the applicable jurisdictions, the maximum amount available for
payment of dividends or other distributions by the reinsurance subsidiaries of
the Company in 2004 without prior regulatory approval is estimated to be
$139,190,000.
Management believes that the cash flow generated by the operating
activities of the Company's subsidiaries will provide sufficient funds for the
Company to meet its liquidity needs over the next twelve months. Beyond the next
twelve months, cash flow available to the Company may be influenced by a variety
of factors, including general economic conditions and conditions in the
insurance and reinsurance markets, as well as fluctuations from year to year in
claims experience and the presence or absence of large catastrophic events.
ECONOMIC CONDITIONS
Periods of moderate economic recession or inflation tend not to have a
significant direct effect on the Company's underwriting operations. Significant
inflationary or recessionary periods can, however, impact the Company's
underwriting operations and investment portfolio. Management considers the
potential impact of economic trends in estimating its unpaid losses and LAE.
Management believes that the underwriting controls it maintains assist in
estimating ultimate claim costs and lessen the potential adverse impact of the
economy on the Company.
- 17 -
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
It is important to understand the Company's accounting policies in order
to understand its financial position and results of operations. Management
considers certain of these policies to be critical to the presentation of the
financial results since they require management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets, liabilities, revenues, expenses, and related disclosures at the
financial reporting date and throughout the relevant periods. Certain of the
estimates and assumptions result from judgments that can be subjective and
complex, and consequently actual results may differ from these estimates. The
Company's most critical accounting policies involve written and unearned
premium, unpaid losses and LAE, reinsurance, investments, income taxes and
stock-based compensation. The critical accounting policies discussed herein are
discussed in more detail in the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
PREMIUMS
Assumed reinsurance premiums are recognized as revenues when premiums
become earned proportionately over the coverage period. Net premiums earned are
recorded in the statement of income, net of the cost of retrocession. Net
premiums written not yet recognized as revenue are recorded in the balance sheet
as unearned premiums, gross of any ceded unearned premiums.
Due to the nature of reinsurance, ceding companies routinely report and
remit premiums subsequent to the contract coverage period. Consequently,
reinsurance premiums written include amounts reported by the ceding companies,
supplemented by EBNR. Along with estimating EBNR the Company records the
expenses associated with these premiums in the form of losses, LAE and
commissions. As actual premiums are reported by the ceding companies, management
evaluates the appropriateness of the premium estimates and any adjustment to
these estimates is recorded in the period in which it becomes known. Adjustments
to original premium estimates could be material and could significantly impact
earnings in the period they are recorded. Due to the time lag inherent in the
reporting of premiums by ceding companies, a significant portion of amounts
included as premiums written and receivable represents estimated premiums, net
of commissions, and is not currently due based on the terms of the underlying
contracts.
Certain of our reinsurance contracts include provisions that adjust
premiums or acquisition expenses based upon the experience under the contracts.
Premiums written and earned, as well as related acquisition expenses under these
contracts, are recognized based upon the losses recorded under those contracts.
Reinstatement premiums and additional premiums are recognized in
accordance with the provisions of assumed reinsurance contracts, based on losses
recorded under such contracts. Reinstatement premiums are the premiums charged
for the restoration of the reinsurance limit of a reinsurance contract to its
full amount, generally coinciding with the payment by the reinsurer of losses.
These premiums relate to the future coverage obtained during the remainder of
the initial policy term and are earned over the remaining policy term.
Additional premiums are those premiums triggered by losses and not related to
reinstatement of limits and are earned immediately. An allowance for
uncollectible premiums is established for possible non-payment of such amounts
due, as deemed necessary.
UNPAID LOSSES AND LAE
The most significant judgment made by management in the preparation of
financial statements is the estimation of unpaid losses and LAE liabilities also
referred to as "loss reserves." These liabilities are
- 18 -
balance sheet estimates of future amounts required to pay losses and LAE for
reinsured claims which have occurred at or before the balance sheet date. Every
quarter, the Company's actuaries prepare estimates of the loss reserves based on
established actuarial techniques. Because the ultimate amount of unpaid losses
and LAE is uncertain, we believe that quantitative techniques to estimate these
amounts are enhanced by professional and managerial judgment. Company management
reviews these estimates and determines its best estimate of the liabilities to
record in the Company's financial statements.
Loss reserves include estimates of the cost of claims that were reported
but not yet paid ("case reserves") and the cost of IBNR. Case reserves are
usually based upon claim reports received from ceding companies, and may be
increased or reduced by the Company's claims personnel. IBNR is based on
actuarial methods including the loss ratio method, the Bornhuetter-Ferguson
method and the chain ladder method. IBNR related to a specific event may be
based on the Company's estimated exposure to an industry loss. This estimation
process may include the use of catastrophe modeling software.
Generally, initial actuarial estimates of IBNR not related to a specific
event are based on the loss ratio method applied to each underwriting year for
each class of business. Actual paid losses and case reserves ("reported losses")
are subtracted from expected ultimate losses to determine IBNR. The initial
expected ultimate losses involve management judgment and are based on: (i)
contract by contract expected loss ratios derived from the Company's pricing
process, and (ii) historical loss ratios of the Company and St. Paul adjusted
for rate changes and trends. These judgments will take into account
management's view of past, current and future: (i) market conditions, (ii)
changes in the business underwritten, (iii) changes in timing of the emergence
of claims and (iv) other factors that may influence expected ultimate losses.
Over time, as a greater number of claims are reported, actuarial estimates
of IBNR are based on the Bornhuetter-Ferguson and the chain ladder techniques.
The Bornhuetter-Ferguson technique utilizes actual reported losses and expected
patterns of reported losses, taking the initial expected ultimate losses into
account to determine a new estimate of expected ultimate losses. This technique
is most appropriate when there are few reported claims and a relatively less
stable pattern of reported losses. The chain ladder technique utilizes actual
reported losses and expected patterns of reported losses to determine a new
estimate of expected ultimate losses that is independent of the initial expected
ultimate losses. This technique is most appropriate when there are a large
number of reported losses with significant statistical credibility and a
relatively stable pattern of reported losses. The pattern of reported losses is
determined utilizing actuarial analysis including judgment and is based on
historical patterns of the recording of paid losses and case reserves to the
Company, as well as industry patterns. Information that may cause historical
patterns to differ from future patterns is considered and reflected in expected
patterns as appropriate. For property and health coverages these patterns
indicate that a substantial portion of the ultimate losses are reported within 2
to 3 years after the contract is effective. Casualty patterns can vary from 3
years to well over 20 years depending on the type of business.
While the Company commenced operations in 2002, the business written is
sufficiently similar to the historical business of St. Paul Re that the Company
uses the historical loss experience of this business to estimate its initial
expected ultimate losses and its expected patterns of reported losses. These
patterns can span more than a decade and, given its own limited history, the
availability of the St. Paul Re data is a valuable asset to the Company.
Under U.S. GAAP, we are not permitted to establish liabilities until the
occurrence of an event that may give rise to a loss. When an event occurs of
sufficient magnitude we may establish a specific IBNR reserve. Generally, this
involves a catastrophe occurrence which affects many ceding company clients.
Ultimate losses and LAE are based on management's judgment that reflects
estimates gathered
- 19 -
from ceding company clients, estimates of insurance industry losses gathered
from public sources and estimates from catastrophe modeling software.
Estimated amounts recoverable from retrocessionaires on unpaid losses and
LAE are determined based on the Company's estimate of ultimate losses and LAE
and the terms and conditions of its retrocessional contracts. These amounts are
reflected as assets.
Unpaid losses and LAE represent management's best estimates, at a given
point in time, of the ultimate settlement and administration costs of claims
incurred, and it is possible that the ultimate liability may materially differ
from such estimates. Such estimates are not precise because, among other things,
they are based on predictions of future developments and estimates of future
trends in claim severity and frequency and other factors.
The uncertainty inherent in loss estimation is particularly pronounced for
casualty coverages, such as umbrella liability, general and product liability,
professional liability, directors and officers liability and automobile
liability, where information, such as required medical treatment and costs for
bodily injury claims, only emerges over time. In the overall loss reserving
process, provisions for economic inflation and changes in the social and legal
environment are considered. The uncertainty inherent in the reserving process
for primary insurers is even greater for the reinsurer. This is because of, but
not limited to, the time lag inherent in reporting information from the primary
insurer to the reinsurer and differing reserving practices among ceding
companies.
Loss reserves are refined and adjusted as new information becomes
available. Any such adjustments are accounted for as changes in estimates and
are reflected in results of operations in the period in which they are made.
REINSURANCE
Written premiums, earned premiums, incurred losses and LAE reflect the net
effects of assumed and ceded reinsurance transactions. Reinsurance accounting is
followed for assumed and ceded transactions when risk transfer requirements have
been met. Evaluating risk transfer involves significant assumptions relating to
the amount and timing of expected cash flows, as well as the interpretation of
underlying contract terms. Reinsurance contracts that do not transfer
significant insurance risk are generally accounted for as reinsurance deposit
liabilities with interest expense charged to other income and credited to the
liability.
INVESTMENTS
In accordance with our investment guidelines, our investments consist
largely of high-grade marketable fixed income securities. Fixed maturities owned
that the Company may not have the positive intent to hold until maturity are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from net income and reported in other comprehensive
income as a separate component of shareholders' equity, net of deferred taxes.
Fixed maturities owned that the Company has the intent to sell prior to maturity
are classified as trading securities and reported at fair value, with unrealized
gains and losses included in other income. Securities classified as trading
securities are generally foreign currency denominated securities intended to
match foreign currency denominated assets and liabilities in order to minimize
net exposures arising from fluctuations in foreign currency exchange rates.
Realized gains and losses on sales of investments are determined on a specific
identification basis. In addition, unrealized depreciation in the value of
individual securities considered by management to be other than temporary is
charged to income in the period it is determined. Investment income is recorded
when earned and includes the amortization of premiums and discounts on
investments.
- 20 -
INCOME TAXES
Platinum Holdings and Platinum Bermuda are domiciled in Bermuda. The
Company also has subsidiaries in the United States, United Kingdom and Ireland
that are subject to the tax laws thereof.
The Company applies the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applicable to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period the change is enacted. A valuation
allowance is established for deferred tax assets where it is more likely than
not that future tax benefits will not be realized.
STOCK-BASED COMPENSATION
During 2003, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Awards of Stock Based Compensation to
Employees" ("SFAS 123") and Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
148"). SFAS 123 requires that the fair value of shares granted under the
Company's share option plan subsequent to adoption of SFAS 148 be amortized in
earnings over the vesting periods. The fair value of the share options granted
are determined through the use of an option-pricing model. SFAS 148 amends SFAS
123 and provides transitioning guidance for a voluntary adoption of FAS 123 as
well as amends the disclosure requirements of SFAS 123. Prior to the adoption of
SFAS 123, the Company elected to use the intrinsic value method of accounting
for stock-based awards granted to employees established by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
continues to use the intrinsic method for share option granted in 2002. Under
APB 25, if the exercise price of the Company's employee share options is equal
to or greater than the fair market value of the underlying shares on the date of
the grant, no compensation expense is recorded.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET AND CREDIT RISK
The Company's principal invested assets are fixed maturities, which are
subject to the risk of potential losses from adverse changes in market rates and
prices and credit risk resulting from adverse changes in the borrower's ability
to meet its debt service obligations. The Company's strategy to limit this risk
is to place its investments in high quality credit issues and to limit the
amount of credit exposure with respect to any one issuer or industry. The
Company also selects investments with characteristics such as duration, yield,
currency and liquidity to reflect the underlying characteristics of related
estimated claim liabilities. The Company attempts to minimize the credit risk by
actively monitoring the portfolio and requiring a minimum average credit rating
of A2 as defined by Moody's Investor Service. As of March 31, 2004, the
portfolio has a dollar weighted average rating of Aa3.
The Company has other receivable amounts subject to credit risk. The most
significant of these are reinsurance premiums receivable from ceding companies
and losses recoverable from retrocessionaires. To mitigate credit risk related
to losses recoverable from retrocessionaires, we establish business and
financial standards for retrocessionaire approval, incorporate ratings by major
rating agencies, consider current market information, and obtain letters of
credit or other forms of security where deemed necessary. To mitigate credit
risk related to premium receivables, we have established
- 21 -
standards for ceding companies and, in most cases, have a contractual right of
offset thereby allowing the Company to settle claims net of any premium
receivable.
INTEREST RATE RISK
The Company is exposed to fluctuations in interest rates. Movements in
rates can result in changes in the market value of our fixed income portfolio
and can cause changes in the actual timing of when we expect to receive certain
principal payments. Rising interest rates result in a decline in the market
value of our fixed income portfolio and can expose our portfolio, in particular
our mortgage backed securities, to extension risk. Conversely, a decline in
interest rates will result in a rise in the market value of our fixed income
portfolio and can expose our portfolio, in particular our mortgage backed
securities, to prepayment risk. The aggregate hypothetical impact on our fixed
income portfolio, generated from an immediate parallel shift in the treasury
yield curve, as of March 31, 2004 is approximately as follows ($ in thousands):
Interest Rate Shift in Basis Points
-------------------------------------------------------------------------------
- 100 bp - 50 bp Current + 50 bp + 100 bp
------------ ------------ ------------ ------------ ------------
Total market value $ 1,884,632 1,852,736 1,820,821 1,788,533 $ 1,756,157
Percent change in market value 3.5% 1.8% - (1.8%) (3.6%)
Resulting unrealized
appreciation / (depreciation) $ 109,743 77,847 45,932 13,644 $ (18,732)
FOREIGN CURRENCY RISK
The Company writes business on a worldwide basis. Consequently, the
Company's principal exposure to foreign currency risk is its obligation to
settle claims in foreign currencies. Changes in foreign currency exchange rates
can impact revenues, costs, receivables and liabilities, as measured in the U.S.
dollar, our financial reporting currency. The Company seeks to minimize its
exposure to its largest foreign currency risks by holding invested assets
denominated in foreign currencies to offset liabilities denominated in foreign
currencies.
SOURCES OF FAIR VALUE
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments as of March 31, 2004 ($ in
thousands):
Carrying
Amount Fair Value
---------- ----------
Financial assets:
Fixed maturities $1,820,821 $1,820,821
Other invested asset 6,749 6,749
Financial liabilities:
Debt obligations $ 137,500 $ 178,750
The fair value of fixed maturities are based on quoted market prices at
the reporting date for those or similar investments. The fair values of debt
obligations are based on quoted market prices. Other invested asset represents a
strategic investment in a non-public reinsurance company and is carried at
estimated fair value.
- 22 -
CURRENT OUTLOOK
We believe that our markets continue to provide strong opportunities.
Currently, we believe that premium rates in certain casualty reinsurance markets
have strengthened to attractive levels. We believe that premiums in our Casualty
segment will grow. Because there are areas of the casualty market where pricing
remains inadequate, in our view we are being selective and write business only
when we believe it will be profitable.
We believe that the additional capacity provided to the reinsurance market
subsequent to September 11, 2001, as well as light catastrophe losses in 2002
and 2003 have begun to cause pricing in the property catastrophe market to
decrease. Decreases to date have been modest and we believe that rates remain at
attractive levels. Significant time and effort has been invested in developing
sophisticated catastrophe modeling tools that assist us in identifying
profitable business opportunities. We believe we can improve the risk/reward
relationship in our portfolio and grow the Property and Marine segment while
managing our catastrophe exposure risk within acceptable levels.
We believe that the Finite Risk segment has performed exceptionally well
in 2003. Profitability was favorably influenced by a relatively low level of
current losses and contractual terms and conditions that provided for greater
profit opportunity as a result of significant losses incurred in prior periods
by St. Paul Re. We believe opportunities to write finite contracts will remain
though the terms and conditions of the contracts will not allow the same profit
opportunity as we move farther away from the adverse loss experience of St. Paul
Re.
We are routinely reviewing various opportunities for investments or
transactions that would provide an attractive return on equity or an opportunity
to write new classes of business or access additional markets.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of
1934. Based on that evaluation, our management, including the Chief Executive
Officer and Chief Financial Officer, concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic reports to be filed with the Securities
and Exchange Commission. In addition, there have been no significant changes in
our internal control over financial reporting that have materially affected or
are reasonably likely to materially affect the Company's internal control over
financial reporting subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies or material
weaknesses. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are necessarily based on
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
subject to
- 23 -
change. These uncertainties and contingencies can affect actual results and
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, us.
In particular, statements using words such as "may," "should," "estimate,"
"expect," "anticipate," "intend," "believe," "predict," "potential," or words of
similar import generally involve forward-looking statements. For example, we may
have included certain forward-looking statements in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" with regard to trends
in results, prices, volumes, operations, investment results, margins, risk
management and exchange rates. This Form 10-Q may also contain forward-looking
statements with respect to our business and industry, such as those relating to
our strategy and management objectives and trends in market conditions, market
standing, product volumes, investment results and pricing conditions.
In light of the risks and uncertainties inherent in all future
projections, the inclusion of forward-looking statements in this Form 10-Q
should not be considered as a representation by us or any other person that our
objectives or plans will be achieved. Numerous factors could cause our actual
results to differ materially from those in the forward-looking statements,
including the following:
(1) our ability to successfully execute our business strategy;
(2) conducting operations in a competitive environment;
(3) our ability to maintain our A.M. Best Company rating;
(4) significant weather-related or other natural or man-made disasters
over which the Company has no control;
(5) the effectiveness of our loss limitation methods;
(6) the adequacy of the Company's liability for unpaid losses and loss
adjustment expenses;
(7) the availability of retrocessional reinsurance on acceptable terms;
(8) our ability to maintain our business relationships with reinsurance
brokers;
(9) general political and economic conditions, including the effects of
civil unrest, war or a prolonged U.S. or global economic downturn or
recession;
(10) the cyclicality of the property and casualty reinsurance business;
(11) market volatility and interest rate and currency exchange rate
fluctuation;
(12) tax, regulatory or legal restrictions or limitations applicable to
the Company or the property and casualty reinsurance business
generally; and
(13) changes in the Company's plans, strategies, objectives, expectations
or intentions, which may happen at any time at the Company's
discretion.
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. The foregoing factors should not
be construed as exhaustive. Additionally, forward-looking statements speak only
as of the date they are made, and we undertake no obligation to release publicly
the results of any future revisions or updates we may make to forward-looking
statements to reflect new information or circumstances after the date hereof or
to reflect the occurrence of future events.
- 24 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Company may become involved in
various claims and legal proceedings. The Company is not currently aware of any
pending or threatened material litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
10.1* Annual Incentive Plan.
10.2* Executive Incentive Plan.
10.3* 2002 Share Incentive Plan
10.4* Section 162(m) Performance Incentive Plan
10.5* Amendment dated March 12, 2004, to the Employment
Agreement dated July 5, 2002, between Michael E.
Lombardozzi and Platinum Holdings.
10.6* Amendment dated March 12, 2004, to the Employment
Agreement dated July 3, 2002, between William A. Robbie
and Platinum Holdings.
10.7* Amendment dated March 12, 2004, to the Consulting
Agreement dated March 1, 2002, between SHN Enterprises,
Inc. and Platinum US.
10.8 Excess of Loss Retrocession Agreement dated as of April
15, 2004 between Platinum UK and Platinum US.
10.9 Registration Rights Demand Letter dated March 22, 2004
between St. Paul and Platinum Holdings.
10.10 Reimbursement Letter Agreement dated March 25, 2004
between St. Paul and Platinum Holdings.
10.11 Novation and Transfer Agreement for the Property
Catastrophe Excess of Loss Reinsurance Agreement, dated
February 19, 2004, among Platinum US, St. Paul Fire and
Marine Insurance Company and Germantown Mutual Insurance
Company, effective as of January 1, 2003.
10.12 Novation and Transfer Agreement for the Workers'
Compensation and Employer's Liability Excess of Loss
Reinsurance Agreement, dated February 19, 2004, among
Platinum US, St. Paul Fire and Marine Insurance Company
and Germantown Mutual Insurance Company, effective as of
January 1, 2003.
10.13 Novation and Transfer Agreement for the Property Per Risk
Excess of Loss Reinsurance Agreement, dated February 19,
2004, among Platinum US, St. Paul Fire and Marine
Insurance Company and Germantown Mutual Insurance Company,
effective as of January 1, 2003.
- 25 -
Exhibit
Number Description
10.14 Novation and Transfer Agreement for the Casualty Excess of
Loss Reinsurance Agreement, dated February 19, 2004, among
Platinum US, St. Paul Fire and Marine Insurance Company
and Germantown Mutual Insurance Company, effective as of
January 1, 2003.
10.15 Property Catastrophe Excess of Loss Reinsurance Contract
dated September 10, 2003 between the Glencoe Group of
Companies and Platinum US (15% participation).
10.16 Property Catastrophe Excess of Loss Reinsurance Contract
dated September 10, 2003 between the Glencoe Group of
Companies and Platinum US (5% participation).
10.17 Addendum No. 1 effective January 1, 2004, to the Security
Agreement dated as of November 26, 2002, between Platinum
Bermuda and Platinum UK.
10.18 Quota Share Retrocession Agreement dated as of March 27,
2003 between Platinum UK and Platinum Bermuda.
10.19 Addendum No. 1 effective April 1, 2003, to the Quota Share
Retrocession Agreement dated as of March 27, 2003, between
Platinum UK and Platinum Bermuda.
10.20 Addendum No. 2 effective March 27, 2003, to the Quota
Share Retrocession Agreement dated as of March 27, 2003,
between Platinum UK and Platinum Bermuda.
10.21* Executive Retirement Savings Plan.
10.22* Executive Bonus Deferral Plan of Platinum Holdings. (The
Executive Bonus Deferral Plans of Platinum Bermuda and
Platinum US are omitted pursuant to Instruction 2 of
Item 601 of Regulation S-K.)
31.1 Certification of Gregory E.A. Morrison, Chief Executive
Officer of Platinum Holdings, pursuant to Rule 13a-14(a)
or Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended.
31.2 Certification of William A. Robbie, Chief Financial
Officer of Platinum Holdings, pursuant to Rule 13a-14(a)
or Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended.
32.1 Certification of Gregory E.A. Morrison, Chief Executive
Officer of Platinum Holdings, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of William A. Robbie, Chief Financial
Officer of Platinum Holdings, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
------------------
* Items denoted with an asterik represent management contracts or compensatory
plans or arrangements
(b) Reports on Form 8-K
On February 12, 2004, Platinum Holdings filed with the SEC
a report on Form 8-K containing a press release, issued on
February 11, 2004, reporting its financial results as of
and for the fourth quarter and year ended December 31,
2003.
- 26 -
On February 17, 2004, Platinum Holdings filed with the SEC
a report on Form 8-K containing slides utilized in
presentations to analysts and investors.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLATINUM UNDERWRITERS HOLDINGS, LTD
Date: May 7, 2004 /s/ GREGORY E. A. MORRISON
-------------------------------------------
By: Gregory E. A. Morrison
President and Chief Executive Officer
Date: May 7, 2004 /s/ WILLIAM A. ROBBIE
-------------------------------------------
By: William A. Robbie
Executive Vice President and Chief Financial Officer
- 27 -