UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
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 July 15, 2005, there were outstanding 43,482,288 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 JUNE 30, 2005
This Amendment No. 1 on Form 10-Q/A amends Platinum Underwriters Holdings,
Ltd.'s Report on Form 10-Q for the six months ended June 30, 2005, (the "June
30, 2005 Form 10-Q") as initially filed with the Securities and Exchange
Commission ("SEC") on August 5, 2005. This amendment is being filed in response
to comments received from the SEC staff. We believe that the SEC staff's
comments result from a routine review of our Annual Report on Form 10-K for the
year ended December 31, 2004 and a review of our Form S-4 filed on July 26, 2005
(File No. 333-126883) and that the comments are generally similar to comments
received by other companies in the reinsurance industry in connection with the
SEC's review of their filings under the Securities Exchange Act of 1934 and the
Securities Act of 1933. In response to the comments received from the SEC staff,
this Amendment contains additional disclosure under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Critical Accounting
Policies, Estimates and Judgments" regarding the premium estimation process,
claims reserving process, loss reserving process and development of loss
reserves and includes consolidating financial information regarding Platinum
Underwriters Finance, Inc. as a new Footnote 6 to the consolidated financial
statements. This amendment presents the June 30, 2005 Form 10-Q, as amended, in
its entirety, but does not modify or update the disclosure in the June 30, 2005
Form 10-Q in any way other than as required to reflect the changes discussed
above and does not reflect events occurring after the initial filing of the June
30, 2005 Form 10-Q on August 5, 2005.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (Unaudited) and
December 31, 2004........................................... 1
Consolidated Statements of Income and Comprehensive Income for
the Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)................................................. 2
Consolidated Statements of Changes in Shareholders' Equity
for the Six months Ended June 30, 2005 and 2004
(Unaudited)................................................. 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2005 and 2004 (Unaudited).......................... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) for the Three and Six Months Ended
June 30, 2005 and 2004...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Six Months Ended
June 30, 2005 and 2004...................................... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 47
Item 4. Controls and Procedures........................................ 49
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 50
Item 4. Submission of Matters to a Vote of Security Holders............ 51
Item 6. Exhibits....................................................... 51
SIGNATURES............................................................... 52
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) December 31,
June 30, 2005 2004
------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost - $2,639,061 and $2,144,290,
respectively) $2,649,121 $2,157,529
Fixed maturities - trading, at fair value
(amortized cost - $73,301 and $82,931, respectively) 73,571 82,673
Other invested asset 6,000 6,769
---------- ----------
Total investments 2,728,692 2,246,971
Cash and cash equivalents 409,539 209,897
Accrued investment income 28,316 23,663
Reinsurance premiums receivable 576,457 580,048
Reinsurance recoverable on ceded losses and
loss adjustment expenses 10,447 2,005
Prepaid reinsurance premiums 6,241 2,887
Funds held by ceding companies 271,795 198,048
Deferred acquisition costs 144,844 136,038
Income tax recoverable -- 1,325
Deferred tax assets 12,849 8,931
Other assets 10,056 12,182
---------- ----------
Total assets $4,199,236 $3,421,995
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $1,559,092 $1,380,955
Unearned premiums 575,727 502,423
Reinsurance deposit liabilities 5,821 20,189
Debt obligations 387,500 137,500
Ceded premiums payable 18,119 2,384
Commissions payable 216,459 181,925
Funds withheld 13,224 11,999
Deferred taxes 10,545 10,404
Other liabilities 140,021 41,213
---------- ----------
Total liabilities 2,926,508 2,288,992
---------- ----------
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, 43,406,788 and 43,087,407 shares
issued and outstanding, respectively 434 430
Additional paid-in capital 921,271 911,851
Unearned share grant compensation (2,246) --
Accumulated other comprehensive income 10,637 12,252
Retained earnings 342,632 208,470
---------- ----------
Total shareholders' equity 1,272,728 1,133,003
---------- ----------
Total liabilities and shareholders' equity $4,199,236 $3,421,995
========== ==========
See accompanying notes to condensed consolidated financial statements.
-1-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Unaudited)
For the Three and Six Months Ended June 30, 2005 and 2004
($ in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
-------- ------- ------- --------
Revenue:
Net premiums earned $431,470 310,867 842,510 $631,909
Net investment income 28,904 19,377 55,809 36,861
Net realized losses on investments (555) (1,279) (183) (827)
Other income 588 605 232 1,116
-------- ------- ------- --------
Total revenue 460,407 329,570 898,368 669,059
-------- ------- ------- --------
Expenses:
Losses and loss adjustment expenses 240,852 189,466 478,550 351,435
Acquisition expenses 103,928 62,694 197,177 151,615
Operating expenses 23,480 19,262 43,488 38,036
Net foreign currency exchange losses 160 1,168 1,958 302
Interest expense 4,174 2,324 6,347 4,630
-------- ------- ------- --------
Total expenses 372,594 274,914 727,520 546,018
-------- ------- ------- --------
Income before income tax expense 87,813 54,656 170,848 123,041
Income tax expense 19,828 4,857 29,775 18,428
-------- ------- ------- --------
Net income $ 67,985 49,799 141,073 $104,613
======== ======= ======= ========
Earnings per share:
Basic earnings per share $ 1.57 1.15 3.26 $ 2.42
Diluted earnings per share $ 1.39 1.01 2.88 $ 2.12
Comprehensive income (loss):
Net income $ 67,985 49,799 141,073 $104,613
Other comprehensive income:
Net change in unrealized gains and losses on
available-for-sale securities, net of
deferred taxes 33,051 (52,356) (1,578) (33,183)
Cumulative translation adjustments, net of
deferred taxes (46) (123) (37) (152)
-------- ------- ------- --------
Comprehensive income (loss) $100,990 (2,680) 139,458 $ 71,278
======== ======= ======= ========
Shareholder dividends:
Dividends declared $ 3,462 3,464 6,911 $ 6,925
Dividends declared per share $ 0.08 0.08 0.16 $ 0.16
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 Six Months Ended June 30, 2005 and 2004
($ in thousands)
2005 2004
---------- ----------
Preferred shares:
Balances at beginning and end of period $ -- $ --
---------- ----------
Common shares:
Balances at beginning of period 430 430
Exercise of share options 3 3
Issuance of restricted shares 1 --
---------- ----------
Balances at end of period 434 433
---------- ----------
Additional paid-in-capital:
Balances at beginning of period 911,851 910,505
Exercise of share options 4,981 5,046
Issuance of restricted shares 2,750 --
Share based compensation 1,689 1,087
---------- ----------
Balances at end of period 921,271 916,638
---------- ----------
Unearned share grant compensation:
Balances at beginning of period -- --
Shares issued (2,750) --
Amortization 504 --
---------- ----------
Balances at end of period (2,246) --
---------- ----------
Accumulated other comprehensive income (loss):
Balances at beginning of period 12,252 18,774
Net change in unrealized gains and losses on available-for-sale
securities, net of deferred taxes (1,578) (33,183)
Net change in cumulative translation adjustments, net of deferred tax (37) (152)
---------- ----------
Balances at end of period 10,637 (14,561)
---------- ----------
Retained earnings:
Balances at beginning of period 208,470 137,494
Net income 141,073 104,613
Dividends paid to shareholders (6,911) (6,925)
---------- ----------
Balances at end of period 342,632 235,182
---------- ----------
Total shareholders' equity $1,272,728 $1,137,692
========== ==========
See accompanying notes to condensed consolidated financial statements.
-3-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2005 and 2004
($ in thousands)
2005 2004
--------- ---------
Operating Activities:
Net income $ 141,073 $ 104,613
Adjustments to reconcile net income to cash used in operations:
Depreciation and amortization 10,231 10,551
Net realized losses on investments 183 827
Net foreign currency exchange losses 1,958 302
Share-based compensation 2,193 1,087
Trading securities activities 4,329 41,978
Changes in assets and liabilities:
Increase in accrued investment income (4,653) (3,215)
(Increase) decrease in reinsurance premiums receivable 3,591 (62,291)
Increase in funds held by ceding companies (73,747) (16,202)
Increase in deferred acquisition costs (8,806) (42,839)
Increase in net unpaid losses and loss adjustment expenses 173,745 161,108
Increase in net unearned premiums 69,950 177,244
Increase (decrease) in reinsurance deposit liabilities (14,368) 14,214
Increase (decrease) in ceded premiums payable 15,735 (840)
Increase in commissions payable 34,534 30,996
Increase in funds withheld 1,225 --
Changes in other assets and liabilities 19,002 20,030
Other net 227 (621)
--------- ---------
Net cash provided by operating activities 376,402 436,942
--------- ---------
Investing Activities:
Proceeds from sale of available-for-sale fixed maturities 207,840 190,589
Proceeds from maturity or paydown of available-for-sale fixed
maturities 66,796 43,927
Acquisition of available-for-sale fixed maturities (696,372) (602,816)
--------- ---------
Net cash used in investing activities (421,736) (368,300)
--------- ---------
Financing Activities:
Dividends paid to shareholders (6,911) (6,925)
Proceeds from exercise of share options 4,984 5,049
Proceeds from issuance of debt 246,900 --
--------- ---------
Net cash used in financing activities 244,973 (1,876)
--------- ---------
Net increase in cash and cash equivalents 199,639 66,766
Cash and cash equivalents at beginning of period 209,900 105,461
--------- ---------
Cash and cash equivalents at end of period $ 409,539 $ 172,227
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid $ 28,573 $ 4,799
Interest paid $ 3,671 $ 3,729
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 and Six Months Ended June 30, 2005 and 2004
(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. ("Platinum Holdings") and its subsidiaries (collectively, the
"Company"), including Platinum Underwriters Bermuda, Ltd. ("Platinum Bermuda"),
Platinum Underwriters Reinsurance, Inc. ("Platinum US"), Platinum Re (UK)
Limited ("Platinum UK"), Platinum Underwriters Finance, Inc. ("Platinum
Finance"), Platinum Regency Holdings, and Platinum Administrative Services, Inc.
All material inter-company transactions have been eliminated in preparing these
condensed consolidated financial statements. The condensed consolidated
financial statements included in this report as of and for the three and six
months ended June 30, 2005 and 2004 are unaudited and include adjustments
consisting of normal recurring items that management considers necessary for a
fair presentation under U.S. GAAP. These condensed 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, 2004.
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 Holdings completed an initial public offering of
33,044,000 common shares (the "Initial Public Offering"). Concurrent with the
Initial 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. St. Paul sold its 6,000,000 common
shares in June 2004. As part of the Initial Public Offering, St. Paul and
RenaissanceRe received options to purchase up to 6,000,000 and 2,500,000 of
additional common shares, respectively, at any time during the ten years
following the Initial Public Offering at a price of $27.00 per share. Both St.
Paul and RenaissanceRe have amended their options to provide that in lieu of
paying $27.00 per share, any option exercise will be settled on a net share
basis, which will result in Platinum Holdings issuing a number of common shares
equal to the excess of the market price per share, determined in accordance with
the amendments, over $27.00 less the par value per share multiplied by the
number of common shares issuable upon exercise of the option divided by that
market price per share. Also, concurrent with the transactions in November 2002,
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"). In addition to these transactions the Company issued Equity
Security Units ("ESU's"), consisting of a contract to purchase common shares of
the Company in 2005 and an ownership interest in a senior note due 2007 issued
by Platinum Finance, a U.S. based intermediate holding company subsidiary of
Platinum Holdings. In May 2005, Platinum Finance issued $250,000,000 aggregate
principal amount of the Series A 7.5% Notes due June 1, 2017 (the "Series A
Notes") unconditionally guaranteed by Platinum Holdings. The proceeds of the
Series A Notes were used primarily to increase the capital of Platinum Bermuda
and Platinum US.
-5-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
Share-Based Compensation
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") effective
January 1, 2003. SFAS 123 requires that the fair value of share options granted
under the Company's share option plan subsequent to the adoption of SFAS 148 be
amortized into earnings over the vesting periods. The fair value of the share
options granted is determined through the use of an option-pricing model. SFAS
148 provides transition guidance for a voluntary adoption of SFAS 123 and 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 its
share-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 the fair market value of the underlying shares on the date of
the grant, no compensation expense is recorded.
Restricted shares awarded are amortized into earnings over the vesting
period based on the fair value of the shares at the time of the grant. There are
limits on the transferability of the restricted shares and such restricted
shares may be forfeited in the event of certain types of terminations of the
recipient's employment. The unearned or unvested portion of the restricted
shares issued is presented as a separate component of shareholders' equity.
In December 2004, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 123R "Share-Based Payment"
("SFAS 123R"). SFAS 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services and for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R requires that, prospectively,
compensation costs be recognized for the fair value of all share options over
the remaining vesting period, including the cost related to the unvested portion
of all outstanding share options as of December 31, 2004. The share-based
compensation expense for share options currently outstanding are to be based on
the same cost model used to calculate the pro forma disclosures under SFAS 123.
Consequently, the pro forma share-based compensation expense and pro forma
income below approximates the expense under SFAS 123R.
The following table illustrates the effect on the Company's net income and
earnings per share for the three and six months ended June 30, 2005 and 2004 of
applying the "fair value" method to all share option grants ($ in thousands,
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
------ ----- ----- ------
Share-based compensation expense:
As reported $ 507 583 1,802 $1,087
Pro forma 1,595 1,587 4,116 3,345
-6-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------- ------ ------- --------
Net income:
As reported 67,985 49,799 141,073 104,613
Pro forma 66,897 48,795 138,759 102,355
Basic earnings per share:
As reported 1.57 1.15 3.26 2.42
Pro forma 1.55 1.11 3.21 2.40
Diluted earnings per share:
As reported 1.39 1.01 2.88 2.12
Pro forma $ 1.37 0.98 2.83 $ 2.10
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a
new rule that allows SEC registrants to implement SFAS 123R as of January 1,
2006. The SEC's new rule does not change the accounting required by SFAS 123R;
it delays the date for compliance with the standard. Previously under SFAS 123R,
the Company would have been required to implement the standard as of July 1,
2005. The Company plans to adopt the provisions of the SFAS 123R in the first
quarter of 2006.
Reclassifications
Certain reclassifications have been made to the 2004 financial statements
in order to conform to the 2005 presentation.
(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 six
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
2005 2004
------- --------
Fixed maturities $(3,179) $(41,134)
Less - deferred taxes 1,601 7,951
------- --------
Net change in unrealized gains (losses) $(1,578) $(33,183)
------- --------
Gross unrealized gains and losses on available-for-sale fixed maturities as
of June 30, 2005 were $21,275,000 and $11,215,000, respectively.
-7-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
The unrealized losses on fixed maturities classified as available-for-sale,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position as of June 30, 2005 were as
follows ($ in thousands):
Unrealized
Fair Value Loss
---------- ----------
Less than twelve months:
U.S. Government and U.S. Government agencies $ 132,689 $ 58
Corporate bonds 589,711 5,456
Mortgage and asset backed securities 205,043 614
Municipal bonds 96,504 489
Foreign governments and states 18,646 109
Redeemable preferred stocks 8,441 294
---------- -------
Total 1,051,034 7,020
---------- -------
Twelve months or more:
Corporate bonds 109,388 2,274
Mortgage and asset backed securities 69,749 938
Municipal bonds 40,678 713
Foreign governments and states 11,290 270
---------- -------
Total 231,105 4,195
---------- -------
Total of securities with unrealized losses:
U.S. Government and U.S. Government agencies 132,689 58
Corporate bonds 699,099 7,730
Mortgage and asset backed securities 274,792 1,552
Municipal bonds 137,182 1,202
Foreign governments and states 29,936 379
Redeemable preferred stocks 8,441 294
---------- -------
Total $1,282,139 $11,215
---------- -------
The Company routinely reviews its investments to determine whether
unrealized losses represent temporary changes in fair value or are the result of
"other-than-temporary impairments." The process of determining whether a
security is other than temporarily impaired is subjective and involves analyzing
many factors. These factors include but are not limited to the length and
magnitude of an unrealized loss, specific credit events, overall financial
condition of the issuer, and the Company's ability to hold a security for a
sufficient period of time for the value to recover the unrealized loss. The
Company's ability to hold a security is based on current and anticipated future
positive cash flow from operations that generates sufficient liquidity in order
to meet its obligations. If the Company has determined that an unrealized loss
on a security is other than temporary, the Company writes down the carrying
value of the security and records a realized loss in the statement of income. As
of June 30, 2005 management believes that the Company's investment portfolio
does not contain any securities that have other-than-temporary impairments.
-8-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
Other invested asset represents an investment in Inter-Ocean, Ltd., a
non-public reinsurance company. As a result of the routine evaluation of
investments, the Company wrote down the carrying value of the investment in
Inter-Ocean, Ltd. and recorded a realized loss of $769,000. The Company has no
ceded or assumed reinsurance business with Inter-Ocean, Ltd.
(3) EARNINGS PER SHARE
Following is a calculation of the basic and diluted earnings per share for
the three and six months ended June 30, 2005 and 2004 ($ in thousands, except
per share data):
Weighted
Average
Net Shares Earnings
Income Outstanding Per Share
-------- ----------- ---------
Three Months Ended June 30, 2005:
Basic earnings per share $ 67,985 43,293 $1.57
Diluted earnings per share:
Share options and restricted share units -- 1,707
Interest expense related to ESU's, net of related
income tax benefit 1,506 --
Common share conversion of ESU's 5,009
-------- ------
Diluted earnings per share: $ 69,491 50,009 $1.39
-------- ------
Three Months Ended June 30, 2004:
Basic earnings per share $ 49,799 43,290 $1.15
Diluted earnings per share:
Share options and restricted share units -- 2,489
Interest expense related to ESU's, net of related
income tax benefit 1,530 --
Common share conversion of ESU's -- 5,009
-------- ------
Diluted earnings per share: $ 51,329 50,788 $1.01
-------- ------
Six Months Ended June 30, 2005:
Basic earnings per share $141,073 43,224 $3.26
Diluted earnings per share:
Share options and restricted share units -- 1,807
Interest expense related to ESU's, net of related
income tax benefit 2,929 --
Common share conversion of ESU's -- 5,009
-------- ------
Diluted earnings per share: $144,002 50,040 $2.88
-------- ------
-9-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
Weighted
Average
Net Shares Earnings
Income Outstanding Per Share
-------- ----------- ---------
Six Months Ended June 30, 2004:
Basic earnings per share $104,613 43,216 $2.42
Diluted earnings per share:
Share options and restricted share units -- 2,616
Interest expense related to ESU's, net of
related income tax benefit 3,052 --
Common share conversion of ESU's -- 5,009
-------- ------
Diluted earnings per share: $107,665 50,841 $2.12
-------- ------
(4) OPERATING SEGMENT INFORMATION
The Company conducts its worldwide reinsurance business through three
operating segments: Property and Marine, Casualty and Finite Risk. The Property
and Marine operating segment includes principally property and marine
reinsurance coverages that are written in the United States and international
markets. This business includes property per-risk excess-of-loss treaties,
property proportional treaties and catastrophe excess-of-loss reinsurance
treaties. The Casualty operating segment includes principally reinsurance
treaties that cover umbrella liability, general and product liability,
professional liability, directors and officers liability, workers' compensation,
casualty clash, automobile liability, trade credit and surety. This segment also
includes accident and health reinsurance treaties, which are predominantly
reinsurance of health insurance products. The Finite Risk operating segment
includes principally structured reinsurance contracts with ceding companies
whose needs may not be met efficiently through traditional reinsurance products.
The Company focuses on providing such clients with customized solutions.
In managing the Company's operating segments, management uses measures such
as underwriting income and underwriting ratios to evaluate segment performance.
Management does not allocate by segment its assets or certain income and
expenses such as investment income, interest expense and certain corporate
expenses. Segment underwriting income is reconciled to income before income tax
expense. The measures used by management in evaluating the Company's operating
segments should not be used as a substitute for measures determined under U.S.
GAAP. The following table summarizes underwriting activity and ratios for the
operating segments together with a reconciliation of underwriting income to
income before income tax expense for the three and six months ended June 30,
2005 and 2004 ($ in thousands):
-10-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
Property
and Marine Casualty Finite Risk Total
--------- -------- ----------- -------
Three months ended June 30, 2005:
Net premiums written $134,953 188,890 99,116 $422,959
-------- ------- ------- --------
Net premiums earned 140,669 198,723 92,078 431,470
Losses and LAE 58,499 127,531 54,822 240,852
Acquisition expenses 29,695 47,963 26,270 103,928
Other underwriting expenses 8,240 8,972 1,333 18,545
-------- ------- ------- --------
Segment underwriting income $ 44,235 14,257 9,653 $ 68,145
-------- ------- -------
Corporate expenses not allocated to segments (4,935)
Net foreign currency exchange losses (160)
Interest expense (4,174)
Other income 588
Net investment income and net realized losses on investments 28,349
--------
Income before income tax expense $ 87,813
--------
Ratios:
Losses and LAE 41.6% 64.2% 59.5% 55.8%
Acquisition expense 21.1% 24.1% 28.5% 24.1%
Other underwriting expense 5.9% 4.5% 1.4% 4.3%
-------- ------- ------- --------
Combined 68.6% 92.8% 89.4% 84.2%
-------- ------- ------- --------
Three months ended June 30, 2004:
Net premiums written $101,841 112,761 115,925 $330,527
-------- ------- ------- --------
Net premiums earned 99,928 132,230 78,709 310,867
Losses and LAE 40,974 93,391 55,101 189,466
Acquisition expenses 14,905 31,994 15,795 62,694
Other underwriting expenses 7,174 5,305 2,567 15,046
-------- ------- ------- --------
Segment underwriting income $ 36,875 1,540 5,246 $ 43,661
-------- ------- -------
Corporate expenses not allocated to segments (4,216)
Net foreign currency exchange losses (1,168)
Interest expense (2,324)
Other income 605
Net investment income and net realized losses on investments 18,098
--------
Income before income tax expense $ 54,656
--------
Ratios:
Losses and LAE 41.0% 70.6% 70.0% 60.9%
Acquisition expense 14.9% 24.2% 20.1% 20.2%
Other underwriting expense 7.2% 4.0% 3.3% 4.8%
-------- ------- ------- --------
Combined 63.1% 98.8% 93.4% 85.9%
-------- ------- ------- --------
-11-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
Property
and Marine Casualty Finite Risk Total
---------- -------- ----------- --------
Six months ended June 30, 2005:
Net premiums written $320,002 404,559 192,197 $916,758
-------- ------- ------- --------
Net premiums earned 268,866 383,491 190,153 842,510
Losses and LAE 118,539 245,969 114,042 478,550
Acquisition expenses 51,684 93,165 52,328 197,177
Other underwriting expenses 15,963 16,285 2,904 35,152
-------- ------- ------- --------
Segment underwriting income $ 82,680 28,072 20,879 $131,631
-------- ------- -------
Corporate expenses not allocated to segments (8,336)
Net foreign currency exchange losses (1,958)
Interest expense (6,347)
Other income 232
Net investment income and net realized losses on investments 55,626
--------
Income before income tax expense $170,848
--------
Ratios:
Losses and LAE 44.1% 64.1% 60.0% 56.8%
Acquisition expense 19.2% 24.3% 27.5% 23.4%
Other underwriting expense 5.9% 4.2% 1.5% 4.2%
-------- ------- ------- --------
Combined 69.2% 92.6% 89.0% 84.4%
-------- ------- ------- --------
Six months ended June 30, 2004:
Net premiums written $273,135 336,726 200,772 $810,633
-------- ------- ------- --------
Net premiums earned 217,993 268,452 145,464 631,909
Losses and LAE 89,552 188,175 73,708 351,435
Acquisition expenses 36,657 66,830 48,128 151,615
Other underwriting expenses 15,324 10,362 5,164 30,850
-------- ------- ------- --------
Segment underwriting income $ 76,460 3,085 18,464 $ 98,009
-------- ------- -------
Corporate expenses not allocated to segments (7,186)
Net foreign currency exchange losses (302)
Interest expense (4,630)
Other income 1,116
Net investment income and net realized losses on investments 36,034
--------
Income before income tax expense $123,041
--------
Ratios:
Losses and LAE 41.1% 70.1% 50.7% 55.6%
Acquisition expense 16.8% 24.9% 33.1% 24.0%
Other underwriting expense 7.0% 3.9% 3.6% 4.9%
-------- ------- ------- --------
Combined 64.9% 98.9% 87.4% 84.5%
-------- ------- ------- --------
-12-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
(5) INCOME TAXES
The Company provides for income taxes based upon amounts reported in the
consolidated financial statements and the provisions of currently enacted tax
laws. Platinum Holdings and Platinum Bermuda are incorporated in Bermuda. Under
current Bermuda law, they are not taxed on any Bermuda income or capital gains
and they have received an assurance that if any legislation is enacted in
Bermuda that would impose tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax will not be applicable to
Platinum Holdings or Platinum Bermuda or any of their respective operations,
shares, debentures or other obligations until March 28, 2016. The Company also
has subsidiaries in the United States, United Kingdom and Ireland that are
subject to the tax laws thereof.
A reconciliation of expected income tax expense, computed by applying a 35
% income tax rate to income before income taxes, to actual income tax expense
for the three and six months ended June 30, 2005 and 2004 is as follows ($ in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
-------- ------- ------- --------
Expected income tax expense at 35% $ 30,735 19,130 59,797 $ 43,064
Effect of foreign income subject to tax at
rates other than 35% (19,635) (14,233) (38,258) (24,341)
Tax exempt investment income (438) (567) (964) (961)
U.S. withholding tax on deemed taxable
transfer to foreign affiliate 9,150 -- 9,150 --
Other, net 16 527 50 666
-------- ------- ------- --------
Income tax expense $ 19,828 4,857 29,775 $ 18,428
-------- ------- ------- --------
The Company incurred approximately $9,150,000 of income taxes associated
with the transfer from Platinum Finance to Platinum Holdings of $183,350,000 of
the proceeds from the sale of the Series A Notes in May 2005. This transaction
is deemed to be a taxable distribution under U.S. tax law and subject to U.S.
withholding tax.
(6) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In November 2002, the Company issued Equity Security Units ("ESUs")
consisting of a contract to purchase common shares of the Company in 2005 and an
ownership interest in a senior note due 2007 issued by Platinum Finance, a U.S.
based intermediate holding company and indirect wholly owned subsidiary of
Platinum Holdings. The senior notes are fully and unconditionally guaranteed by
Platinum Holdings on a senior unsecured basis and are pledged to collateralize
the holders' obligations to acquire common shares in 2005.
The payment of dividends 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
-13-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
applicable jurisdictions, the maximum amount available for payment of dividends
or other distributions by Platinum US to Platinum Finance in 2005 without prior
regulatory approval is $40,312,000. The maximum amount available for payment of
dividends or other distributions by the reinsurance subsidiaries of Platinum
Holdings in 2005, including Platinum US, without prior regulatory approval is
estimated to be $139,620,000.
The tables below present condensed consolidating financial information for
the period ending June 30, 2005 and 2004 respectively, of Platinum Holdings,
Platinum Finance and the non-guarantor subsidiaries of Platinum Holdings ($ in
thousands):
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2005
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
---------- -------- ------------- ------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale,
at fair value $ -- 7,088 2,642,033 -- $2,649,121
Fixed maturity trading securities
at fair value -- -- 73,571 -- 73,571
Other invested asset -- -- 6,000 -- 6,000
---------- ------- --------- ---------- ----------
Total investments -- 7,088 2,721,604 -- 2,728,692
Investment in subsidiaries 1,270,760 472,597 413,539 (2,156,896) --
Cash and cash equivalents 6,137 36,179 367,223 -- 409,539
Reinsurance assets -- -- 2,193,584 (1,183,800) 1,009,784
Other assets 908 4,082 146,231 (100,000) 51,221
---------- ------- --------- ---------- ----------
Total assets $1,277,805 519,946 5,842,181 (3,440,696) $4,199,236
========== ======= ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reinsurance liabilities $ -- -- 3,582,576 (1,194,134) $2,388,442
Debt obligations -- 387,500 -- -- 387,500
Other liabilities 5,079 6,981 128,172 10,334 150,566
---------- ------- --------- ---------- ----------
Total liabilities 5,079 394,481 3,710,748 (1,183,800) 2,926,508
---------- ------- --------- ---------- ----------
Shareholders' Equity:
Preferred shares -- -- -- -- --
Common shares 434 -- 1,250 (1,250) 434
Additional paid-in capital 921,269 51,533 1,442,034 (1,493,565) 921,271
Unearned share based comp (2,246) -- -- -- (2,246)
Accumulated other comprehensive income 10,637 176 12,512 (12,688) 10,637
Retained earnings 342,632 73,756 675,637 (749,393) 342,632
---------- ------- --------- ---------- ----------
Total shareholders' equity 1,272,726 125,465 2,131,433 (2,256,896) 1,272,728
---------- ------- --------- ---------- ----------
Total liabilities and shareholders'
equity $1,277,805 519,946 5,842,181 (3,440,696) 4,199,236
========== ======= ========= ========== ==========
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
-------- ------- ------------ ------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ - 3,740 2,153,789 - $2,157,529
Fixed maturity trading securities at fair value - - 82,673 - 82,673
Other invested asset - - 6,769 - 6,769
---------- ------- --------- ---------- ----------
Total investments - 3,740 2,243,231 - 2,246,971
Investment in subsidiaries 1,135,434 414,105 470,776 (2,020,315) -
Cash and cash equivalents 1,945 8,204 199,748 - 209,897
Reinsurance assets - - 2,009,245 (1,090,219) 919,026
Other assets 1,648 1,502 142,951 (100,000) 46,101
---------- ------- --------- ---------- ----------
Total assets $1,139,027 427,551 5,065,951 (3,210,534) $3,421,995
========== ======= ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reinsurance liabilities $ - - 3,233,233 (1,133,358) $2,099,875
Debt obligations - 137,500 - - 137,500
Other liabilities 6,024 928 1,525 43,140 51,617
---------- ------- --------- ---------- ----------
Total liabilities 6,024 138,428 3,234,758 (1,090,218) 2,288,992
---------- ------- --------- ---------- ----------
Shareholders' Equity:
Preferred shares - - - - -
Common shares 430 - 1,250 (1,250) 430
Additional paid-in capital 911,851 147,238 1,417,032 (1,564,270) 911,851
Accumulated other comprehensive income 12,252 3,309 17,068 (20,377) 12,252
Retained earnings 208,470 138,576 395,843 (534,419) 208,470
---------- ------- --------- ---------- ----------
Total shareholders' equity 1,133,003 289,123 1,831,193 (2,120,316) 1,133,003
---------- ------- --------- ---------- ----------
Total liabilities and shareholders' equity . $1,139,027 427,551 5,065,951 (3,210,534) $3,421,995
========== ======= ========= ========== ==========
-14-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
-------- -------- ------------- ------------- ------------
Revenue:
Net premiums earned $ -- -- 842,510 -- $842,510
Net investment income 72 257 55,480 -- 55,809
Net realized gains on investments -- 1 (184) -- (183)
Other income, net -- -- 97,528 (97,296) 232
-------- ------ ------- -------- --------
Total revenue 72 258 995,334 (97,296) 898,368
-------- ------ ------- -------- --------
Expenses:
Losses and loss adjustment expenses -- -- 478,550 -- 478,550
Acquisition expenses -- -- 200,214 (3,037) 197,177
Operating expenses 7,873 308 32,270 3,037 43,488
Net foreign currency exchange gains 1 -- 1,957 -- 1,958
Interest expense 53 6,294 -- -- 6,347
-------- ------ ------- -------- --------
Total expenses 7,927 6,602 712,991 -- 727,520
-------- ------ ------- -------- --------
Income (loss) before income
tax expense (7,855) (6,344) 282,343 (97,296) 170,848
Income tax expense (benefit) -- (2,221) 31,996 -- 29,775
-------- ------ ------- -------- --------
Net income (loss) before equity
in earnings of subsidiaries (7,855) (4,123) 250,347 (97,296) 141,073
Equity in earnings of subsidiaries 148,928 36,600 41,444 (226,972) --
-------- ------ ------- -------- --------
Net income $141,073 32,477 291,791 (324,268) $141,073
======== ====== ======= ======== ========
CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
-------- -------- ------------- ------------- ------------
Revenue:
Net premiums earned $ -- -- 631,907 2 $631,909
Net investment income 31 79 36,751 -- 36,861
Net realized gains on investments -- -- (827) -- (827)
Other income, net 4,500 -- (3,603) 219 1,116
-------- ------ ------- -------- --------
Total revenue 4,531 79 664,228 221 669,059
-------- ------ ------- -------- --------
Expenses:
Losses and loss adjustment expenses -- -- 351,435 -- 351,435
Acquisition expenses -- -- 154,090 (2,475) 151,615
Operating expenses 6,949 139 28,473 2,475 38,036
Net foreign currency exchange (gain)
loss (2) -- 304 -- 302
Interest expense 120 4,510 -- -- 4,630
-------- ------ ------- -------- --------
Total expenses 7,067 4,649 534,302 -- 546,018
-------- ------ ------- -------- --------
Income (loss) before income
tax expense (2,536) (4,570) 129,926 221 123,041
Income tax expense (benefit) -- (1,599) 20,027 -- 18,428
-------- ------ ------- -------- --------
Net income (loss) before equity
in earnings of subsidiaries (2,536) (2,971) 109,899 221 104,613
Equity in earnings of subsidiaries 107,149 32,646 34,499 (174,294) --
-------- ------ ------- -------- --------
Net income $104,613 29,675 144,398 (174,073) $104,613
======== ====== ======= ======== ========
-15-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2005
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
-------- -------- ------------- ------------- ------------
Revenue:
Net premiums earned $ -- -- 431,470 -- $431,470
Net investment income 47 180 28,677 -- 28,904
Net realized gains on investments -- -- (555) -- (555)
Other income, net -- -- 97,884 (97,296) 588
------- ------ ------- -------- --------
Total revenue 47 180 557,476 (97,296) 460,407
------- ------ ------- -------- --------
Expenses:
Losses and loss adjustment expenses -- -- 240,852 -- 240,852
Acquisition expenses -- -- 105,433 (1,505) 103,928
Operating expenses 4,633 231 17,111 1,505 23,480
Net foreign currency exchange loss 1 -- 159 -- 160
Interest expense 22 4,152 -- -- 4,174
------- ------ ------- -------- --------
Total expenses 4,656 4,383 363,555 -- 372,594
------- ------ ------- -------- --------
Income (loss) before income tax expense (4,609) (4,203) 193,921 (97,296) 87,813
Income tax expense (benefit) -- (1,471) 21,299 -- 19,828
------- ------ ------- -------- --------
Net income (loss) before equity in earnings
of subsidiaries (4,609) (2,732) 172,622 (97,296) 67,985
Equity in earnings of subsidiaries 72,594 18,647 21,555 (112,796) --
------- ------ ------- -------- --------
Net income $67,985 15,915 194,177 (210,092) $ 67,985
======= ====== ======= ======== ========
-16-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2004
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
-------- -------- ------------- ------------- ------------
Revenue:
Net premiums earned $ -- -- 310,865 2 $310,867
Net investment income 14 29 19,334 -- 19,377
Net realized gains on investments -- -- (1,279) -- (1,279)
Other income, net -- -- 605 -- 605
------- ------ ------- ------- --------
Total revenue 14 29 329,525 2 329,570
------- ------ ------- ------- --------
Expenses:
Losses and loss adjustment expenses -- -- 189,466 -- 189,466
Acquisition expenses -- -- 63,783 (1,089) 62,694
Operating expenses 4,058 60 14,055 1,089 19,262
Net foreign currency loss -- -- 1,168 -- 1,168
Interest expense 56 2,268 -- -- 2,324
------- ------ ------- ------- --------
Total expenses 4,114 2,328 268,472 -- 274,914
------- ------ ------- ------- --------
Income (loss) before income tax expense (4,100) (2,299) 61,053 2 54,656
Income tax expense (benefit) -- (805) 5,662 -- 4,857
------- ------ ------- ------- --------
Net income (loss) before equity in
earnings of subsidiaries (4,100) (1,494) 55,391 2 49,799
Equity in earnings of subsidiaries 53,899 7,336 9,174 (70,409) --
------- ------ ------- ------- --------
Net income $49,799 5,842 64,565 (70,407) $ 49,799
======= ====== ======= ======= ========
-17-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
-------- -------- ------------- ------------- ------------
Net cash provided by (used in) operating activities $(5,880) (1,157) 480,732 (97,293) $ 376,402
------- ------- -------- ------- ---------
Investing Activities:
Proceeds from sale of available-for-sale fixed
maturities -- -- 207,840 -- 207,840
Proceeds from maturity or paydown of
available-for-sale fixed maturities -- 221 66,575 -- 66,796
Acquisition of available-for-sale fixed maturities -- 12 (696,384) -- (696,372)
Dividends from subsidiaries 12,000 -- -- (12,000) --
Contributions to subsidiaries -- (25,000) 25,000 -- --
------- ------- -------- ------- ---------
Net cash provided by (used in) investing activities 12,000 (24,767) (396,969) (12,000) (421,736)
------- ------- -------- ------- ---------
Financing Activities:
Dividends paid to shareholders (6,911) -- (12,000) 12,000 (6,911)
Proceeds from exercise of share options 4,984 -- -- -- 4,984
Proceeds from issuance of debt -- 53,900 193,000 -- 246,900
------- ------- -------- ------- ---------
Net cash provided by (used in) financing activities (1,927) 53,900 181,000 12,000 244,973
------- ------- -------- ------- ---------
Net increase (decrease) in cash and cash equivalents 4,193 27,976 264,763 (97,293) 199,639
Cash and cash equivalents at beginning of year 1,945 8,204 199,751 -- 209,900
------- ------- -------- ------- ---------
Cash and cash equivalents at end of year $ 6,138 36,180 464,514 (97,293) $ 409,539
======= ======= ======== ======= =========
-18-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Platinum Platinum Non-guarantor Consolidating
Holdings Finance Subsidiaries Adjustments Consolidated
-------- -------- ------------- ------------- ------------
Net cash provided by (used in) operating activities $ (449) (3,844) 441,234 -- $ 436,941
------- ------ -------- --- ---------
Investing Activities:
Proceeds from sale of available-for-sale fixed
maturities -- -- 190,589 -- 190,589
Proceeds from maturity or paydown of
available-for-sale fixed maturities -- 441 43,486 -- 43,927
Acquisition of available-for-sale fixed maturities -- (2,973) (599,842) -- (602,815)
------- ------ -------- --- ---------
Net cash (used in) investing activities -- (2,532) (365,767) -- (368,299)
------- ------ -------- --- ---------
Financing Activities:
Dividends paid to shareholders (6,925) -- -- -- (6,925)
Proceeds from exercise of share options 5,049 -- -- -- 5,049
------- ------ -------- --- ---------
Net cash (used in) financing activities (1,876) -- -- -- (1,876)
------- ------ -------- --- ---------
Net increase (decrease) in cash and cash equivalents (2,325) (6,376) 75,467 -- 66,766
Cash and cash equivalents at beginning of year 3,414 9,917 92,130 -- 105,461
------- ------ -------- --- ---------
Cash and cash equivalents at end of year $ 1,089 3,541 167,597 -- $ 172,227
======= ====== ======== === =========
(7) SERIES A NOTES
In May 2005, Platinum Finance issued $250,000,000 aggregate principal
amount of Series A Notes due June 1, 2017, unconditionally guaranteed by
Platinum Holdings. The Series A Notes were issued in a transaction exempt from
the registration requirements under the Securities Act of 1933, as amended. The
proceeds of the Series A Notes were used primarily to increase the capital of
Platinum Bermuda and Platinum US. Interest at a per annum rate of 7.5% is
payable on the Series A Notes on each June 1 and December 1 commencing on
December 1, 2005. Platinum Finance may redeem the Series A Notes, at its option,
at any time in whole, or from time to time in part, prior to maturity. The
redemption price will be equal to the greater of: (i) 100 percent of the
principal amount of the Notes and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest, discounted to the
redemption date on a semiannual basis at a comparable treasury rate plus 50
basis points, plus in each case, interest accrued but not paid to the date of
redemption.
Pursuant to the registration rights agreement executed in connection with
the offering of the Series A Notes, Platinum Holdings and Platinum Finance have
filed with the SEC a registration statement on Form S-4 to enable holders to
exchange the Series A Notes for publicly registered notes. Platinum Holdings and
Platinum Finance have agreed to: (i) use reasonable best efforts to cause the
registration statement to become or be declared effective within 180 days after
the issue date of the Series A Notes; (ii) use reasonable best efforts to
commence and complete the exchange offer within 45 days after the effective date
of the registration statement and keep the exchange offer open for a period of
not less than 30 days after notice is mailed to holders; and (iii) file a shelf
registration statement for the resale of the
-19-
PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), continued
For the Three and Six Months Ended June 30, 2005 and 2004
Series A Notes if, under the circumstances specified in the registration rights
agreement, Platinum Holdings and Platinum Finance are unable to effect the
exchange offer. If Platinum Holdings and Platinum Finance do not comply with
certain obligations under the registration rights agreement, additional interest
shall accrue at a per annum rate of 0.25% of the aggregate principal amount of
the outstanding Series A Notes during the first 90-day period following the
occurrence of such registration default and at a per annum rate of 0.50%
thereafter for any remaining period during which a registration default
continues.
(8) REGULATORY EXAMINATION
In connection with its examination of the statutory financial statements of
Platinum US as of December 31, 2003, the Maryland Insurance Administration (the
"Administration") reached a different conclusion from that of the Company
regarding the accounting for one health reinsurance contract written by Platinum
US, which was effective from January 1 to December 31, 2003. Platinum US
accounted for this contract as reinsurance under statutory accounting principles
and U.S. GAAP. While the examination report has not been issued, the
Administration has advised Platinum US that due to the immaterial effect, no
changes or adjustments would be required with respect to its previously filed
statutory financial statements nor would the financial statements in the
examination report be adjusted for the accounting for this contract.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
BUSINESS OVERVIEW
Platinum Underwriters Holdings, Ltd. ("Platinum Holdings") is a Bermuda
holding company organized in 2002. Platinum Holdings and its subsidiaries
(collectively, the "Company") operate through three licensed reinsurance
subsidiaries: Platinum Underwriters Bermuda, Ltd. ("Platinum Bermuda"), Platinum
Underwriters Reinsurance, Inc. ("Platinum US"), Platinum Re (UK) Limited
("Platinum UK"). 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, 2004. 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 ("the Initial Public Offering"). Concurrent with the
Initial 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. St. Paul sold its 6,000,000 common
shares in June 2004. As part of the Initial Public Offering, St. Paul and
RenaissanceRe received options to purchase up to 6,000,000 and 2,500,000 of
additional common shares, respectively, at any time during the ten years
following the Initial Public Offering at a price of $27.00 per share. Both St.
Paul and RenaissanceRe have amended their options to provide that in lieu of
paying $27.00 per share, any option exercise will be settled on a net share
basis, which will result in Platinum Holdings issuing a number of common shares
equal to the excess of the market price per share, determined in accordance with
the amendments, over $27.00 less the par value per share multiplied by the
number of common shares issuable upon exercise of the option divided by that
market price per share. Also, concurrent with the transactions in November 2002,
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"). In addition to these transactions the Company issued Equity
Security Units ("ESU's"), consisting of a contract to purchase common shares of
the Company in 2005 and an ownership interest in a senior note due 2007 issued
by Platinum Underwriters Finance, Inc. ("Platinum Finance"), a U.S. based
intermediate holding company subsidiary of Platinum Holdings. In May 2005,
Platinum Finance issued $250,000,000 aggregate principal amount of Series A 7.5%
Notes due June 1, 2017 (the "Series A Notes") unconditionally guaranteed by
Platinum Holdings. The proceeds of the Series A Notes were used primarily to
increase the capital of Platinum Bermuda and Platinum US.
The Company writes property and casualty reinsurance. Property reinsurance
protects a ceding company against financial loss arising out of damage to
property or loss of its use caused by an insured peril. Examples of property
reinsurance are property catastrophe and property per-risk coverages. Property
catastrophe reinsurance protects a ceding company against losses arising out of
multiple claims
-21-
for a single event while property per-risk reinsurance protects a ceding company
against loss arising out of a single claim for a single event. Casualty
reinsurance protects a ceding company against financial loss arising out of the
obligation to others for loss or damage to persons or property. Examples of
casualty reinsurance are reinsurance treaties that cover umbrella liability,
general and product liability, professional liability, directors and officers
liability, workers' compensation, casualty clash, automobile liability, surety
and trade credit. Casualty reinsurance also includes accident and health
reinsurance treaties, which are predominantly reinsurance of health insurance
products.
The property and casualty reinsurance industry is highly competitive. The
Company competes with reinsurers worldwide, many of which have greater
financial, marketing and management resources. The Company's competitors can
vary by type of business. Large multi-national and multi-line reinsurers
represent some of the Company's competitors in all lines and classes, while
other specialty reinsurance companies in the United States compete in selective
lines. Financial institutions have also created alternative capital market
products that compete with reinsurance products, such as reinsurance
securitization. Bermuda-based reinsurers tend to be the significant competitors
on property catastrophe business. Lloyd's of London syndicates are significant
competitors on marine business. For casualty and other international classes of
business, the large U.S. and European reinsurers are significant competitors.
The reinsurance industry historically has been cyclical, characterized by
periods of price competition due to excessive underwriting capacity as well as
periods of favorable pricing due to shortages of underwriting capacity. Cyclical
trends in the industry and the industry's profitability can also be affected
significantly by volatile developments, including natural and other disasters,
such as hurricanes, windstorms, earthquakes, floods, fires, explosions and other
catastrophic events, including terrorist attacks, the frequency and severity of
which are inherently difficult to predict. Property and casualty reinsurance
rates often rise in the aftermath of significant catastrophe losses. As
liabilities are established to cover expected claims, the industry's capacity to
write new business diminishes. The industry is also affected by changes in the
propensity of courts to expand insurance coverage and grant large liability
awards, as well as by fluctuations in interest rates, inflation and other
changes in the economic environment that affect market prices of investments.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2005 as Compared with the Three Months Ended June
30, 2004
Net income for the three months ended June 30, 2005 and 2004 was as follows
($ in thousands):
2005 2004 Increase
------- ------ --------
Net income $67,985 49,799 $18,186
The increase in net income in 2005 as compared with 2004 is attributable to
an increase in underwriting income of $24,484,000 and an increase in investment
income of $9,527,000, partially offset by an increase in operating expenses of
$4,218,000 and an increase in income tax expense of $14,971,000. Underwriting
income includes net favorable development of $15,157,000 and $9,210,000 in 2005
and 2004, respectively. Net favorable development includes the development of
prior years unpaid losses and LAE and the related impact on premiums and profit
commissions.
Net premiums written and net premiums earned for the three months ended
June 30, 2005 and 2004 were as follows ($ in thousands):
-22-
2005 2004 Increase
-------- ------- --------
Net premiums written $422,959 330,527 $ 92,432
Net premiums earned $431,470 310,867 $120,603
The increase in net premiums written in 2005 is attributable to growth in
both the Property and Marine and Casualty segments, partially offset by a
decline in the Finite segment. The increase in net premium earned is related to
the growth in current and prior periods' net premiums written in the Property
and Marine and Casualty segments and is also affected by changes in the mix of
business and the structure of the underlying reinsurance contracts.
Net investment income for the three months ended June 30, 2005 and 2004 was
$28,904,000 and $19,377,000, respectively. Net investment income increased in
2005 primarily due to increased invested assets. The increase in invested assets
is attributable to positive cash flow from operations in 2005 and 2004 and the
proceeds from the Series A Notes. Net investment income includes interest earned
on funds held of $3,183,000 and $178,000 in 2005 and 2004, respectively. Net
realized losses on investments were $555,000 and $1,279,000 for the three months
ended June 30, 2005 and 2004, respectively. Net realized losses on investments
in 2005 include a provision of $769,000 for the permanent impairment of an
investment in Inter-Ocean, Ltd., a non-public reinsurance company, included in
other invested asset. Exclusive of this provision, net realized gains and losses
on investments were the result of the Company's efforts to manage the credit
quality and duration of the investment portfolio.
Other income for the three months ended June 30, 2005 and 2004 was $588,000
and $605,000, respectively. Other income is comprised primarily of changes in
fair value of fixed maturities classified as trading, net earnings or expense on
several reinsurance contracts in the Finite Risk segment that are accounted for
as deposits and interest expense or other charges related to funds withheld.
Other income for the three months ended June 30, 2005 includes $865,000 of net
unrealized gains relating to fixed maturities classified as trading, $225,000 of
net income on reinsurance contracts accounted for as deposits and $502,000 of
interest expense related to funds withheld. Other income for the three months
ended June 30, 2004 includes $727,000 of net unrealized losses relating to fixed
maturities classified as trading, $162,000 of net income on reinsurance
contracts accounted for as deposits and a gain of $1,000,000 on the sale of
assets.
Net foreign currency exchange losses for the three months ended June 30,
2005 and 2004 were $160,000 and $1,168,000, respectively. The Company routinely
does business in various foreign currencies. Foreign currency exchange gains and
losses result from the re-valuation into U.S. dollars of assets and liabilities
denominated in foreign currencies. The Company periodically monitors its largest
foreign currency exposures and purchases or sells foreign currency denominated
invested assets to match these exposures. Net foreign currency exchange gains
and losses arise as a result of fluctuations in the amounts of assets and
liabilities denominated in foreign currencies as well as fluctuations in the
currency exchange rates.
Losses and LAE and the resulting loss ratios for the three months ended
June 30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
-------- ------- --------------
Losses and LAE $240,852 189,466 $ 51,386
Losses and LAE ratios 55.8% 60.9% (5.1) points
The increase in losses and LAE in 2005 as compared with 2004 is due
primarily to the increased net premiums earned. The loss and LAE ratio decreased
in 2005 as compared with 2004 due primarily to
-23-
more favorable loss development in 2005 than in 2004 in all segments. Losses and
LAE included net favorable loss development of approximately $17,256,000
representing 4.0% of net premiums earned in 2005 and approximately $3,029,000
representing 1.0% of net premiums earned in 2004.
Acquisition expenses and resulting acquisition expense ratios for the three
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
-------- ------ -----------
Acquisition expenses $103,928 62,694 $ 41,234
Acquisition expense ratios 24.1% 20.2% 3.9 points
The increase in acquisition expenses is due primarily to the increase in
net premiums earned in 2005 as compared with 2004 as well as shifts in the mix
of business. As a result of loss experience from prior years, profit commissions
were increased in 2005, primarily in the Property and Marine segment, and
decreased in 2004, primarily in the Finite Risk segment. Profit commission
increases in 2005 related to prior years were approximately $3,293,000,
representing 0.8% of net premiums earned and profit commission reductions in
2004 related to prior years were approximately $6,181,000, representing 2.0% of
net premiums earned. Exclusive of profit commissions, the increase in the
acquisition expense ratio in 2005 as compared with 2004 is primarily due to
shifts in the mixes of business in the Property and Marine segment toward
proportional business and in the Finite Risk segment toward proportional
casualty business that generally has higher acquisition costs.
Operating expenses for the three months ended June 30, 2005 and 2004 were
$23,480,000 and $19,262,000, respectively. Operating expenses include costs such
as salaries, rent and like items related to reinsurance operations as well as
costs associated with Platinum Holdings. Operating expenses in 2005 increased as
compared with 2004 primarily due to increased salaries and benefits, increased
regulatory compliance costs and an increase in incentive-based compensation in
2005 as compared with 2004 due to increased net income. Regulatory compliance
costs were higher in 2005 than in 2004 as the majority of such costs in 2004
were incurred in the third and fourth quarters of 2004.
Interest expense for the three months ended June 30, 2005 and 2004 was
$4,174,000 and $2,324,000, respectively and includes interest on the ESU's as
well as the Series A Notes. The increase in 2005 as compared with 2004 is due to
interest on the Series A Notes issued in May 2005.
Income tax expense and the effective income tax rate for the three months
ended June 30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
------- ----- ------------
Income tax expense $19,828 4,857 $ 14,971
Effective income tax rates 22.6% 8.9% 13.7 points
The increase in income tax expense in 2005 as compared with 2004 is due, in
part, to the increase in income before income tax expense. An increasing
percentage of the Company's income before income taxes is generated by Platinum
Bermuda, which is not subject to corporate income tax. However, the Company
incurred approximately $9,150,000 of income taxes associated with the transfer
from Platinum Finance to Platinum Holdings of $183,350,000 of the proceeds from
the sale of the Series A Notes. This transaction is deemed to be a taxable
distribution under U.S. tax law and subject to U.S. withholding tax. The
effective tax rate in 2004 was favorably affected by a reduction in the
estimated annual effective tax rate.
-24-
Six Months Ended June 30, 2005 as Compared with the Six Months Ended June 30,
2004
Net income for the six months ended June 30, 2005 and 2004 was as follows
($ in thousands):
2005 2004 Increase
-------- ------- --------
Net income $141,073 104,613 $36,460
The 34.9% increase in net income in 2005 as compared with 2004 is
principally attributable to the increase in underwriting income of $33,622,000
and an increase in investment income of $18,948,000, offset by an increase in
operating expenses of $5,452,000 and income tax expense of $11,347,000.
Underwriting income in 2005 as compared with 2004 was impacted by more favorable
net development in 2005. Net favorable development was $35,633,000 and
$23,547,000 in 2005 and 2004, respectively. Net favorable development includes
the development of prior years unpaid losses and LAE and the related impact on
premiums and profit commissions.
Net premiums written and net premiums earned for the six months ended June
30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
-------- ------- --------
Net premiums written $916,758 810,633 $106,125
Net premiums earned $842,510 631,909 $210,601
The increase in net premiums written in 2005 as compared with 2004 is
primarily attributable to growth in the Property and Marine and Casualty
segments. The increase in net premiums earned is related to the growth in
current and prior periods' net premiums written and is affected by changes in
the mix of business and the structure of the underlying reinsurance contracts.
Net investment income for the six months ended June 30, 2005 and 2004 was
$55,809,000 and $36,861,000, respectively. Net investment income increased
during 2005 primarily due to increased invested assets. The increase in invested
assets is attributable to positive cash flow from operations in 2005 and 2004
and the proceeds from the Series A Notes. Net cash flow from operations,
excluding trading securities activities, was $372,073,000 for the six months
ended June 30, 2005 and $698,223,000 for the year ended December 31, 2004,
respectively. Net investment income includes interest earned on funds held of
$5,494,000 and $220,000 in 2005 and 2004, respectively. Net realized losses on
investments were $183,000 and $827,000 for the six months ended June 30, 2005
and 2004, respectively. Net realized losses on investments in 2005 also include
a provision of $769,000 for the permanent impairment of an investment in
Inter-Ocean, Ltd. included in other invested asset. Exclusive of this provision,
net realized gains and losses on investments were the result of the Company's
efforts to manage the quality, diversity, currency exposure, duration and tax
profile of the investment portfolio.
Other income for the six months ended June 30, 2005 and 2004 was $232,000
and $1,116,000, respectively. Other income is comprised primarily of changes in
fair value of fixed maturities classified as trading, net earnings on several
reinsurance contracts in the Finite Risk segment that are accounted for as
deposits and interest expense or other charges related to funds withheld. Other
income for the six months ended June 30, 2005 includes $531,000 of net
unrealized gains relating to changes in fair value of fixed maturities
classified as trading, $203,000 of earnings on reinsurance contracts accounted
for as deposits and $502,000 of interest expense related to funds withheld.
Other income for the six months ended June 30, 2004 includes $409,000 of net
unrealized losses relating to fixed maturities classified as trading, $259,000
of earnings on reinsurance contracts accounted for as deposits and a gain of
$1,000,000 on the sale of assets.
-25-
Net foreign currency exchange losses for the six months ended June 30, 2005
and 2004 were $1,958,000 and $302,000, respectively. Net foreign currency
exchange gains and losses arise as a result of fluctuations in the amounts of
assets and liabilities denominated in foreign currencies as well as fluctuations
in the currency exchange rates.
Losses and LAE and the resulting loss ratios for the six months ended June
30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
-------- ------- -----------
Losses and LAE $478,550 351,435 $ 127,115
Loss and LAE ratios 56.8% 55.6% 1.2 points
The increase in losses and LAE in 2005 as compared with 2004 is due to the
increased net premiums earned. Losses and LAE included net favorable loss
development of approximately $33,119,000 representing 3.9% of net premiums
earned in 2005 and approximately $28,239,000 representing 4.5% of net premiums
earned in 2004. The loss and LAE ratio increased in 2005 as compared with 2004
due to less favorable loss development in 2005 as well as a shift in the mix of
business in the Finite Risk segment from finite property to finite casualty
contracts that generally have higher loss ratios.
Acquisition expenses and resulting acquisition expense ratios for the six
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
-------- ------- -------------
Acquisition expenses $197,177 151,615 $ 45,562
Acquisition expense ratios 23.4% 24.0% (0.6) points
The increase in acquisition expenses is due primarily to the increase in
net premiums earned in 2005 as compared with 2004. While the ratios in 2005 and
2004 are comparable, the ratios are affected by profit commissions, including
approximately $215,000 in 2005 and $4,692,000 in 2004 relating to favorable loss
development from prior years primarily in the Finite Risk segment.
Operating expenses for the six months ended June 30, 2005 and 2004 were
$43,488,000 and $38,036,000, respectively. Operating expenses include costs such
as salaries, rent and like items related to reinsurance operations as well as
costs associated with Platinum Holdings. Operating expenses in 2005 increased as
compared with 2004 primarily due to increased salaries and benefits, increased
regulatory compliance costs and an increase in incentive-based compensation in
2005 as compared with 2004 due to increased net income. Regulatory compliance
costs were higher in 2005 than in 2004 as the majority of such costs in 2004
were incurred in the third and fourth quarters of 2004.
Interest expense for the six months ended June 30, 2005 and 2004 was
$6,347,000 and $4,630,000, respectively and includes interest on the ESU's as
well as the Series A Notes. The increase in 2005 as compared with 2004 is due to
interest on the Series A Notes issued in May 2005.
Income tax expense and the effective income tax rate for the six months
ended June 30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
------- ------ -----------
Income tax expense $29,775 18,428 $ 11,347
Effective income tax rates 17.4% 15.0% 2.4 points
-26-
The increase in income tax expense in 2005 as compared with 2004 is due, in
part, to the increase in income before income tax expense. An increasing
percentage of the Company's income before income taxes is generated by Platinum
Bermuda, which is not subject to corporate income tax. However, the Company
incurred approximately $9,150,000 of income taxes associated with the transfer
from Platinum Finance to Platinum Holdings of $183,350,000 of the proceeds from
the Series A Notes. This transaction is deemed to be a taxable distribution
under U.S. tax law and subject to U.S. withholding tax.
SEGMENT INFORMATION
The Company conducts its worldwide reinsurance business through three
operating segments: Property and Marine, Casualty and Finite Risk. In managing
the Company's operating segments, management uses measures such as underwriting
income and underwriting ratios to evaluate segment performance. Management does
not allocate by segment its assets or certain income and expenses such as
investment income, interest expense and certain corporate expenses. Segment
underwriting income is reconciled to income before income tax expense. The
measures used by management in evaluating the Company's operating segments
should not be used as a substitute for measures determined under U.S. GAAP. The
following table summarizes underwriting activity and ratios for the three
operating segments for the three and six months ended June 30, 2005 and 2004 ($
in thousands):
Property
and Marine Casualty Finite Risk Total
---------- -------- ----------- --------
Three months ended June 30, 2005:
Net premiums written $134,953 188,890 99,116 $422,959
-------- ------- ------ --------
Net premiums earned 140,669 198,723 92,078 431,470
Losses and LAE 58,499 127,531 54,822 240,852
Acquisition expenses 29,695 47,963 26,270 103,928
Other underwriting expenses 8,240 8,972 1,333 18,545
-------- ------- ------ --------
Segment underwriting income $ 44,235 14,257 9,653 $ 68,145
-------- ------- ------
Corporate expenses not allocated to segments (4,935)
Net foreign currency exchange losses (160)
Interest expense (4,174)
Other income 588
Net investment income and net realized losses
on investments 28,349
--------
Income before income tax expense $ 87,813
--------
Ratios:
Losses and LAE 41.6% 64.2% 59.5% 55.8%
Acquisition expense 21.1% 24.1% 28.5% 24.1%
Other underwriting expense 5.9% 4.5% 1.4% 4.3%
-------- ------- ------ --------
Combined 68.6% 92.8% 89.4% 84.2%
-------- ------- ------ --------
-27-
Property
and Marine Casualty Finite Risk Total
---------- -------- ----------- --------
Three months ended June 30, 2004:
Net premiums written $101,841 112,761 115,925 $330,527
-------- ------- ------- --------
Net premiums earned 99,928 132,230 78,709 310,867
Losses and LAE 40,974 93,391 55,101 189,466
Acquisition expenses 14,905 31,994 15,795 62,694
Other underwriting expenses 7,174 5,305 2,567 15,046
-------- ------- ------- --------
Segment underwriting income $ 36,875 1,540 5,246 $ 43,661
-------- ------- -------
Corporate expenses not allocated to segments (4,216)
Net foreign currency exchange losses (1,168)
Interest expense (2,324)
Other income 605
Net investment income and net realized losses
on investments 18,098
--------
Income before income tax expense $ 54,656
--------
Ratios:
Losses and LAE 41.0% 70.6% 70.0% 60.9%
Acquisition expense 14.9% 24.2% 20.1% 20.2%
Other underwriting expense 7.2% 4.0% 3.3% 4.8%
-------- ------- ------- --------
Combined 63.1% 98.8% 93.4% 85.9%
-------- ------- ------- --------
Six months ended June 30, 2005:
Net premiums written $320,002 404,559 192,197 $916,758
-------- ------- ------- --------
Net premiums earned 268,866 383,491 190,153 842,510
Losses and LAE 118,539 245,969 114,042 478,550
Acquisition expenses 51,684 93,165 52,328 197,177
Other underwriting expenses 15,963 16,285 2,904 35,152
-------- ------- ------- --------
Segment underwriting income $ 82,680 28,072 20,879 $131,631
-------- ------- -------
Corporate expenses not allocated to segments (8,336)
Net foreign currency exchange losses (1,958)
Interest expense (6,347)
Other income 232
Net investment income and net realized losses
on investments 55,626
--------
Income before income tax expense $170,848
--------
Ratios:
Losses and LAE 44.1% 64.1% 60.0% 56.8%
Acquisition expense 19.2% 24.3% 27.5% 23.4%
Other underwriting expense 5.9% 4.2% 1.5% 4.2%
-------- ------- ------- --------
Combined 69.2% 92.6% 89.0% 84.4%
-------- ------- ------- --------
-28-
Property
and Marine Casualty Finite Risk Total
---------- -------- ----------- --------
Six months ended June 30, 2004:
Net premiums written $273,135 336,726 200,772 $810,633
-------- ------- ------- --------
Net premiums earned 217,993 268,452 145,464 631,909
Losses and LAE 89,552 188,175 73,708 351,435
Acquisition expenses 36,657 66,830 48,128 151,615
Other underwriting expenses 15,324 10,362 5,164 30,850
-------- ------- ------- --------
Segment underwriting income $ 76,460 3,085 18,464 $ 98,009
-------- ------- -------
Corporate expenses not allocated to segments (7,186)
Net foreign currency exchange losses (302)
Interest expense (4,630)
Other income 1,116
Net investment income and net realized
losses on investments 36,034
--------
Income before income tax expense $123,041
--------
Ratios:
Losses and LAE 41.1% 70.1% 50.7% 55.6%
Acquisition expense 16.8% 24.9% 33.1% 24.0%
Other underwriting expense 7.0% 3.9% 3.6% 4.9%
-------- ------- ------- --------
Combined 64.9% 98.9% 87.4% 84.5%
-------- ------- ------- --------
PROPERTY AND MARINE
The Property and Marine operating segment includes principally property and
marine reinsurance coverages that are written in the United States and
international markets. This business includes property per-risk excess-of-loss
treaties, property proportional treaties and catastrophe excess-of-loss
reinsurance treaties. This operating segment generated 31.9% and 30.8% of the
Company's net premiums written for the three months ended June 30, 2005 and
2004, respectively, and 34.9% and 33.7% of the Company's net premiums written
for the six months ended June 30, 2005 and 2004, respectively.
Three Months Ended June 30, 2005 as Compared with the Three Months Ended June
30, 2004
Net premiums written and net premiums earned for the three months ended
June 30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
-------- ------- --------
Net premiums written $134,953 101,841 $33,112
Net premiums earned $140,669 99,928 $40,741
Net premiums written and earned increased in 2005 as compared with 2004
across most property classes. The most significant increase was in the property
pro-rata class where the Company increased its net premiums written in
catastrophe exposed business in Florida. The increases in the property classes
were partially offset by a decrease in the marine class, primarily attributable
to one significant contract that was not renewed.
Losses and LAE and the resulting loss ratios for the three months ended
June 30, 2005 and 2004 were as follows ($ in thousands):
-29-
2005 2004 Increase
------- ------ -----------
Losses and LAE $58,499 40,974 $ 17,525
Loss and LAE ratios 41.6% 41.0% 0.6 points
The increase in losses and LAE and the related loss and LAE ratio in 2005
as compared with 2004 is due to the increase in net premiums earned as well as
the effects of net favorable loss development. Losses and LAE included net
favorable loss development of approximately $5,237,000 representing 3.7% of net
premiums earned in 2005 and approximately $9,056,000 representing 9.1% of net
premiums earned in 2004.
Acquisition expenses and resulting acquisition expense ratios for the three
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
------- ------ -----------
Acquisition expenses $29,695 14,905 $ 14,790
Acquisition expense ratios 21.1% 14.9% 6.2 points
The increase in acquisition expenses in 2005 as compared with 2004 is due
to the growth in business, a shift in the mix of business and increased profit
commissions. The increase in the acquisition expense ratio is primarily due to
profit commissions as a result of favorable loss experience as well as an
increase in pro-rata business that generally has higher commission ratios.
Profit commission increases in 2005 related to prior years were approximately
$2,441,000, representing 1.7% of net premiums earned as compared with no prior
year profit commission adjustments in 2004.
Other underwriting expenses for the three months ended June 30, 2005 and
2004 were $8,240,000 and $7,174,000, respectively. Other underwriting expenses
include costs such as salaries, rent and like items related to property and
marine underwriting operations. Other underwriting expenses for the three months
ended June 30, 2005 and 2004 include fees of $774,000 and $1,242,000,
respectively, relating to the Services and Capacity Reservation Agreement dated
November 1, 2002 with RenaissanceRe (the "RenRe Agreement") that provides for a
periodic review of aggregate property catastrophe exposures by RenaissanceRe.
The decline in the fee in 2005 as compared with 2004 is due to a decline in net
premiums written in the catastrophe classes of business subject to the fee.
Six Months Ended June 30, 2005 as Compared with the Six Months Ended June 30,
2004
Net premiums written and net premiums earned for the six months ended June
30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
-------- ------- --------
Net premiums written $320,002 273,135 $46,867
Net premiums earned $268,866 217,993 $50,873
Net premiums written and earned increased in 2005 as compared with 2004
across most property classes. The most significant increase was in the property
pro-rata class where the Company increased its net premiums written in
catastrophe exposed business in Florida. The increases in the property classes
were partially offset by a decrease in the marine class, primarily attributable
to one significant contract that was not renewed.
-30-
Losses and LAE and the resulting loss ratios for the six months ended June
30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
-------- ------ -----------
Losses and LAE $118,539 89,552 $ 28,987
Loss and LAE ratios 44.1% 41.1% 3.0 points
The increase in losses and LAE in 2005 as compared with 2004 is due
primarily to the increase in net premiums earned. The increase in the loss and
LAE ratio is due primarily to the effects of net favorable loss development.
Losses and LAE included net favorable loss development of approximately
$9,086,000 representing 3.4% of net premiums earned in 2005 and approximately
$23,211,000 representing 10.6% of net premiums earned in 2004.
Acquisition expenses and resulting acquisition expense ratios for the six
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
------- ------ -----------
Acquisition expenses $51,684 36,657 $ 15,027
Acquisition expense ratios 19.2% 16.8% 2.4 points
The increase in acquisition expenses in 2005 as compared with 2004 is due
to the growth in business in the segment, a shift in the mix of business and
increased profit commissions. The acquisition expense ratio increased due to
profit commissions in the marine class and an increase in property pro-rata
business that generally has higher commission ratios. Profit commission
increases in 2005 related to prior years were approximately $2,441,000,
representing 0.9% of net premiums earned as compared with no prior year profit
commission adjustments in 2004.
Other underwriting expenses for the six months ended June 30, 2005 and 2004
were $15,963,000 and $15,324,000, respectively. The increase in other
underwriting expenses is due to increased salaries and benefits, increased
regulatory compliance costs and an increase in incentive-based compensation in
2005 as compared with 2004 due to increased net income. Other underwriting
expenses for the six months ended June 30, 2005 and 2004 include fees of
$3,561,000 and $3,648,000, respectively, relating to the RenRe Agreement. The
decline in the fee in 2005 as compared with 2004 is due to a decline in net
premiums written in the catastrophe classes of business subject to the fee.
CASUALTY
The Casualty operating segment includes principally reinsurance treaties
that cover umbrella liability, general and product liability, professional
liability, directors and officers liability, workers' compensation, casualty
clash, automobile liability, surety and trade credit. This segment also includes
accident and health reinsurance treaties, which are predominantly reinsurance of
health insurance products. This operating segment generated 44.7% and 34.1% of
the Company's net premiums written for the three months ended June 30, 2005 and
2004, respectively, and 44.1% and 41.5% of the Company's net premiums written
for the six months ended June 30, 2005 and 2004, respectively.
Three Months Ended June 30, 2005 as Compared with the Three Months Ended June
30, 2004
Net premiums written and net premiums earned for the three months ended
June 30, 2005 and 2004 were as follows ($ in thousands):
-31-
2005 2004 Increase
-------- ------- --------
Net premiums written $188,890 112,761 $76,129
Net premiums earned $198,723 132,230 $66,493
During the three months ended June 30, 2004, based on audits and
information received from ceding companies, the Company revised its estimates of
Casualty premiums and, consequently, the Company reduced its net premiums
written previously estimated and accrued. The effect of this change in estimate
was a reduction in net premiums written of approximately $27,000,000 and a
reduction in net premiums earned of approximately $15,800,000. Also during the
three months ended March 31, 2004, approximately $17,000,000 of net premiums
written and net premiums earned of approximately $4,400,000 related to a quota
share contract was included in the Casualty segment based on the expected terms
and conditions of the contract. Based on the final terms and conditions, the
contract was reclassified to the Finite Risk segment. Consequently, during the
three months ended June 30, 2004, this reclassification resulted in a reduction
of approximately $17,000,000 of Casualty net premiums written and approximately
$4,400,000 of net premiums earned and an equivalent increase in Finite Risk net
premiums written and earned. The net effect of these items on underwriting
income, after related reductions in losses, LAE and acquisition expenses, was
not material. Exclusive of these items, net premiums written and earned in the
Casualty segment increased by approximately $32,129,000 and $46,293,000,
respectively in 2005 as compared with 2004. This increase in net premiums
written is primarily in prior underwriting years' excess-of-loss classes due to
greater than expected premiums being reported from ceding companies. The
increase in net premium earned is affected by changes in the mix of business and
the structure of the underlying reinsurance contracts.
Losses and LAE and the resulting loss ratios for the three months ended
June 30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
-------- ------ -------------
Losses and LAE $127,531 93,391 $ 34,140
Loss and LAE ratios 64.2% 70.6% (6.4) points
The increase in losses and LAE in 2005 as compared with 2004 is consistent
with the growth in business. The decrease in the loss and LAE ratio in 2005 as
compared with 2004 is due, in part, to favorable loss development in 2005 as
compared to 2004 and, in part, to changes in the mix of business toward classes
with lower loss ratios. Losses and LAE included net favorable loss development
of approximately $4,935,000 representing 2.5% of net premiums earned in 2005 and
approximately $561,000 of unfavorable net loss development representing 0.4% of
net premiums earned in 2004.
Acquisition expenses and resulting acquisition expense ratios for the three
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
------- ------ -------------
Acquisition expenses $47,963 31,994 $ 15,969
Acquisition expense ratios 24.1% 24.2% (0.1) points
The increase in acquisition expenses is due primarily to the increase in
net premiums earned in 2005 as compared with 2004. The resulting acquisition
expense ratios are comparable.
Other underwriting expenses for the three months ended June 30, 2005 and
2004 were $8,972,000 and $5,305,000, respectively, and represent costs such as
salaries, rent and like items. The resulting other
-32-
underwriting expense ratios for the three months ended June 30, 2005 and 2004
were 4.5% and 4.0%, respectively. The increase in operating costs and resulting
other underwriting expense ratios is due to the increase in business as well as
the allocation of a greater percentage of common operating and administrative
costs to the Casualty segment due to a decline in underwriting activity in the
Finite Risk segment.
Six Months Ended June 30, 2005 as Compared with the Six Months Ended June 30,
2004
Net premiums written and net premiums earned for the six months ended June
30, 2005 and 2004 were as follows ($ in thousands):
2005 2004 Increase
-------- ------- --------
Net premiums written $404,559 336,726 $ 67,833
Net premiums earned $383,491 268,452 $115,039
Net premiums in 2004 include revisions of estimates of Casualty premiums
that resulted in reductions of net premiums written of approximately $16,300,000
and a reduction in net premiums earned of approximately $10,800,000. The net
effect of the revisions of estimates on underwriting income, after related
reductions in losses, LAE and acquisitions expenses, was not material. Exclusive
of the reduction of estimates in 2004, casualty net premiums written and earned
increased by approximately $51,533,000 and $104,239,000, respectively in 2005 as
compared with 2004. This increase is due to growth in the casualty business and
increased ultimate premiums from prior underwriting years' excess-of-loss
classes due to greater than expected premiums being reported from ceding
companies. The increase in net premium earned is affected by changes in the mix
of business and the structure of the underlying reinsurance contracts.
Losses and LAE and the resulting loss ratios for the six months ended June
30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
-------- ------- -------------
Losses and LAE $245,969 188,175 $ 57,794
Loss and LAE ratios 64.1% 70.1% (6.0) points
The increase in losses and LAE in 2005 as compared with 2004 is consistent
with the growth in business. Losses and LAE included net favorable loss
development of approximately $11,809,000 representing 3.1% of net premiums
earned in 2005 and approximately $6,006,000 of net unfavorable loss development
representing 2.2% of net premiums earned in 2004. The decrease in the loss and
LAE ratio in 2005 is due to the net favorable loss development in 2005 that
relates primarily to the 2002 and 2003 underwriting years' experience.
Acquisition expenses and resulting acquisition expense ratios for the six
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
------- ------ -------------
Acquisition expenses $93,165 66,830 $ 26,335
Acquisition expense ratios 24.3% 24.9% (0.6) points
The increase in acquisition expenses is due primarily to the increase in
net premiums earned in 2005 as compared with 2004. The resulting acquisition
expense ratios are comparable.
-33-
Other underwriting expenses for the six months ended June 30, 2005 and 2004
were $16,285,000 and $10,362,000, respectively. Other underwriting expenses
include costs such as salaries, rent and like items related to casualty
underwriting operations. The resulting other underwriting expense ratios for the
six months ended June 30, 2005 and 2004 were 4.2% and 3.9%, respectively. The
increases in operating costs and resulting other underwriting expense ratios are
due to the increase in business as well as the allocation of a greater
percentage of common operating and administrative costs to the Casualty segment
due to a decline in the underwriting activity in the Finite Risk segment.
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 classes of risks
underwritten through finite risk contracts are fundamentally the same as the
classes covered by traditional products. Typically, the potential amount of
losses paid is finite or capped. In return for this limit on losses, there is
typically a cap on the potential profit margin specified in the treaty. Profits
above this margin are returned to the ceding company. The three main categories
of finite risk contracts are quota share, multi-year excess-of-loss and whole
account aggregate stop loss. The ongoing investigations by the SEC, the office
of the Attorney General for the State of New York and the U.S. Attorney for the
Southern District of New York and non-U.S. regulatory authorities such as the
Bermuda Monetary Authority and the U.K. Financial Services Authority has
significantly diminished demand for finite risk products. This operating segment
generated 23.4% and 35.1% of the Company's net premiums written for the three
months ended June 30, 2005 and 2004, respectively, and 21.0% and 24.8% of the
Company's net premiums written for the six months ended June 30, 2005 and 2004,
respectively. For this segment, because of the inter-relationship between losses
and expenses, the Company believes it is more meaningful to evaluate the overall
combined ratio, rather than its component parts of loss and acquisition expense
ratios.
Three Months Ended June 30, 2005 as Compared with the Three Months Ended June
30, 2004
Net premiums written and net premiums earned for the three months ended
June 30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
------- ------- ----------
Net premiums written $99,116 115,925 $(16,809)
Net premiums earned $92,078 78,709 $ 13,369
The Finite Risk portfolio consists of a small number of contracts that can
be large in premium size and, consequently, overall premium volume may vary
significantly from year to year. While net premiums written in 2005 decreased as
compared with 2004, net premiums written were impacted by the reclassification
of premiums written relating to the quota share reinsurance contract referred to
in the discussion of the results of the Casualty segment. During the three
months ended March 31, 2004, approximately $17,000,000 of premiums written and
approximately $4,400,000 of net premiums earned related to this contract was
included in the Casualty segment based on the expected terms and conditions of
the contract. After the final terms and conditions were established, the
contract was subsequently reclassified to the Finite Risk segment. The net
effect of this item on underwriting income, after related reductions in losses,
LAE and acquisition expenses, was not material. Exclusive of this quota share
reinsurance contract, net premiums written in the Finite Risk segment in 2005
are comparable with 2004. The mix of finite business has shifted significantly
toward casualty which now represents nearly all of the net premiums written in
the segment. Net premiums written and earned in 2005 are derived primarily from
several casualty capped quota share contracts underwritten in 2004 and January
2005.
-34-
Losses and LAE, acquisition expenses and the resulting ratios for the three
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
------- ------ --------------
Losses and LAE $54,822 55,101 $ (279)
Loss and LAE ratios 59.5% 70.0% (10.5) points
Acquisition expenses $26,270 15,795 $ 10,475
Acquisition expense ratios 28.5% 20.1% 8.4 points
Losses, LAE and acquisition expenses $81,092 70,896 $ 10,196
Loss, LAE and acquisition expense ratios 88.0% 90.1% (2.1) points
The increase in losses, LAE and acquisition expenses in 2005 as compared
with 2004 is due to the increase in net premiums earned. The decrease in the
loss, LAE and acquisition expense ratio is due to net favorable development
which was $6,279,000 or 6.8% of net premiums earned in 2005 as compared to
insignificant net favorable development in 2004. The net favorable development
was partially offset by a shift of business to finite casualty, which generally
has a higher loss, LAE and acquisition expense ratio than finite property.
Other underwriting expenses for the three months ended June 30, 2005 and
2004 were $1,333,000 and $2,567,000, respectively, and represent costs such as
salaries, rent and like items. The decrease in other underwriting expenses is
due to cost reductions in the segment as a result of the decline in underwriting
activity in the segment. In addition, due to the decline in the volume of
underwriting activity in the segment, the percentage of common operating and
administrative costs that are allocated to the segment has also declined.
Six Months Ended June 30, 2005 as Compared with the Six Months Ended June 30,
2004
Net premiums written and net premiums earned for the six months ended June
30, 2005 and 2004 were as follows ($ in thousands):
Increase
2005 2004 (decrease)
-------- ------- ----------
Net premiums written $192,197 200,772 $(8,575)
Net premiums earned $190,153 145,464 $44,689
The decrease in net premiums written is primarily attributable to reduced
finite accident and health and property business, substantially offset by an
increase in finite casualty business. Net premium earned is related to current
and prior periods' net premiums written and is affected by changes in the mix of
business and the structure of the underlying reinsurance contracts. The increase
in net premiums earned in 2005 as compared with 2004 is due primarily to growth
in net premiums written in prior years.
Losses and LAE, acquisition expenses and the resulting ratios for the six
months ended June 30, 2005 and 2004 were as follows ($ in thousands):
-35-
Increase
2005 2004 (decrease)
-------- ------- -------------
Losses and LAE $114,042 73,708 $ 40,334
Loss and LAE ratios 60.0% 50.7% 9.3 points
Acquisition expenses $ 52,328 48,128 $ 4,200
Acquisition expense ratios 27.5% 33.1% (5.6) points
Losses, LAE and acquisition expenses $166,370 121,836 $ 44,534
Loss, LAE and acquisition expense ratios 87.5% 83.8% 3.7 points
The increase in losses, LAE and acquisition expenses in 2005 as compared
with 2004 is due to the increase in net premiums earned. Net favorable
development impacted losses, LAE and acquisition expenses and the related ratios
in both 2005 and 2004. Net favorable development amounted to $14,496,000
representing 7.6% of net premiums earned in 2005 and $6,466,000 representing
4.4% of net premiums earned in 2004. Exclusive of net favorable development, the
overall loss, LAE and acquisition expense ratio increased in 2005 as compared
with 2004 due to the shift toward casualty business that generally has a higher
combined ratio.
Other underwriting expenses for the six months ended June 30, 2005 and 2004
were $2,904,000 and $5,164,000, respectively, and represent costs such as
salaries, rent and like items. The decrease in other underwriting expenses is
due to cost reductions in the segment as a result of the decline in underwriting
activity in the segment. In addition, due to the decline in underwriting
activity in the segment, the percentage of common operating and administrative
costs that are allocated to the Finite Risk segment has also declined.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
Cash and cash equivalents were $409,539,000 and $209,897,000 as of June 30,
2005 and December 31, 2004, respectively. Fixed maturities were $2,722,692,000
and $2,240,202,000 as of June 30, 2005 and December 31, 2004, respectively. Cash
and cash equivalents and the investment portfolio increased due to positive cash
flow from operations, excluding trading securities activities. The Company's
fixed maturity available-for-sale and trading portfolios are comprised entirely
of publicly traded fixed maturity investments. The investment portfolio,
including cash and cash equivalents, had a weighted average duration of 3.2
years as of June 30, 2005. Management monitors the composition of the investment
portfolio and cash flows from the portfolio to maintain the 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.
Certain assets and liabilities associated with underwriting include
significant estimates. Premiums receivable as of June 30, 2005 of $576,457,000
include $492,826,000 that is based upon estimates. Premiums receivable as of
December 31, 2004 of $580,048,000 include $530,066,000 that is based upon
estimates. Unpaid losses and LAE as of June 30, 2005 of $1,559,092,000 includes
$1,281,922,000 of estimates of claims that were incurred but not reported
("IBNR"). Unpaid losses and LAE as of December 31, 2004 of $1,380,955,000
includes $1,151,500,000 of IBNR. Commissions payable as of June 30, 2005 of
$216,459,000 include $187,944,000 that is based upon estimates. Commissions
payable as of December 31, 2004 of $181,925,000 include $165,050,000 that is
based upon estimates. Deferred acquisition costs and unearned premiums are also
based upon estimates.
-36-
SOURCES OF LIQUIDITY
The consolidated sources of funds of the Company consist primarily of
premiums written, investment income, proceeds from sales and redemption of
investments, losses recovered from retrocessionaires, and cash and cash
equivalents held by the Company. Net cash flow provided by operations, excluding
trading securities activities, for the six months ended June 30, 2005 was
$372,073,000 and was used primarily to acquire additional investments.
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 Bermuda, Platinum US and
Platinum UK. 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 ESU's and the payment of any dividends to its shareholders.
The Company has filed an allocated 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
common shares, preferred shares and various types of debt securities. Common
shares held by St. Paul and RenaissanceRe and common shares issuable upon
exercise of options owned by St. Paul and RenaissanceRe accounts for
$586,381,900 of the $750,000,000 of securities registered under the registration
statement with the remaining $163,618,100 available for securities offerings by
the Company. On June 25, 2004, the Company announced St. Paul's intent to sell
6,000,000 of the Company's common shares in an underwritten public offering,
which was effected pursuant to a prospectus supplement to the shelf registration
statement dated June 28, 2004 and completed on June 30, 2004. The 6,000,000
common shares sold by St. Paul amounted to $177,330,000 of the $750,000,000
securities registered under the shelf registration statement. The Company did
not sell any common shares in the offering and did not receive any proceeds from
the sale of the common shares by St Paul.
The Company issued the ESU's in November 2002, each of which consists of a
contract to purchase common shares from the Company in 2005 (collectively, the
"Purchase Contracts") and an ownership interest in a senior note due 2007 issued
by Platinum Finance (collectively, the "Senior Notes"). During the third quarter
of 2005, the Company expects to remarket the Senior Notes with a reset interest
rate, which will generate no proceeds for the Company. During the fourth quarter
of 2005, the Company expects to issue common shares pursuant to the Purchase
Contracts, which is expected to generate cash proceeds to the Company of
approximately $137,500,000, less fees and expenses associated with the
remarketing.
In May 2005, Platinum Finance issued $250,000,000 aggregate principal
amount of Series A Notes, unconditionally guaranteed by Platinum Holdings. The
Series A Notes were issued in a transaction exempt from the registration
requirements under the Securities Act of 1933, as amended. The proceeds of the
Series A Notes were used primarily to increase the capital of Platinum Bermuda
and Platinum US. Interest at a per annum rate of 7.5% is payable on the Series A
Notes on each June 1 and December 1 commencing on December 1, 2005. Platinum
Finance may redeem the Series A Notes, at its option, at any time in whole, or
from time to time in part, prior to maturity. The redemption price will be equal
to the greater of: (i) 100 percent of the principal amount of the Notes and (ii)
the sum of the present values of the remaining scheduled payments of principal
and interest, discounted to the redemption date on a semiannual basis at a
comparable treasury rate plus 50 basis points, plus in each case, interest
accrued but not paid to the date of redemption.
-37-
Pursuant to the registration rights agreement executed in connection with
the offering of the Series A Notes, Platinum Holdings and Platinum Finance have
filed with the SEC a registration statement on Form S-4 to enable holders to
exchange the Series A Notes for publicly registered notes. Platinum Holdings and
Platinum Finance have agreed to (i) use reasonable best efforts to cause the
registration statement to become or be declared effective within 180 days after
the issue date of the Series A Notes; (ii) use reasonable best efforts to
commence and complete the exchange offer within 45 days after the effective date
of the registration statement and keep the exchange offer open for a period of
not less than 30 days after notice is mailed to holders; and (iii) file a shelf
registration statement for the resale of the Series A Notes if, under the
circumstances specified in the registration rights agreement, Platinum Holdings
and Platinum Finance are unable to effect the exchange offer. If Platinum
Holdings and Platinum Finance do not comply with certain obligations under the
registration rights agreement, additional interest shall accrue at a per annum
rate of 0.25% of the aggregate principal amount of the outstanding Series A
Notes during the first 90-day period following the occurrence of such
registration default and at a per annum rate of 0.50% thereafter for any
remaining period during which a registration default continues. The Company
intends to establish a committed credit facility with a group of banks that will
provide up to $200 million of aggregate borrowing capacity.
LIQUIDITY REQUIREMENTS
The principal 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 Series A Notes and contract adjustment payments on the Purchase
Contracts included in the Company's ESU's), the acquisition of and investment in
businesses, capital expenditures, premiums retroceded and taxes. The contract
adjustment payments will cease upon issuance of the common shares in accordance
with the Purchase Contracts during 2005.
It is increasingly common for our reinsurance contracts to contain terms
that allow ceding companies to cancel the contract or require collateral to be
posted for a portion of our obligations if the Company's reinsurance
subsidiaries are downgraded below a certain rating level. Whether a client would
exercise this cancellation right would depend, among other factors, on the
reason for such downgrade, the extent of the downgrade, the prevailing market
conditions and the pricing and availability of replacement reinsurance coverage.
Therefore, we cannot predict in advance the extent to which this cancellation
right would be exercised, if at all, or what effect such cancellations would
have on our financial condition or future operations, but such effect
potentially could be material.
We may from time to time secure our obligations under our various
reinsurance contracts using trusts and letters of credit. We have entered into
agreements with several ceding companies that require us to provide collateral
for our obligations under certain reinsurance contracts with these ceding
companies under various circumstances, including where our obligations to these
ceding companies exceed negotiated thresholds. These thresholds may vary
depending on our rating from A.M. Best or other rating agencies and a downgrade
of our ratings or a failure to achieve a certain rating may increase the amount
of collateral we are required to provide. We may provide the collateral by
delivering letters of credit to the ceding company, depositing assets into
trusts for the benefit of the ceding companies or permitting the ceding
companies to withhold funds that would otherwise be delivered to us under the
reinsurance contract. The amount of collateral we are required to provide
typically represents a portion of the obligations we may owe the ceding company,
often including estimates of IBNR made by the ceding company. Since we may be
required to provide collateral based on the ceding company's estimate, we may be
obligated to provide collateral that exceeds our estimates of the ultimate
liability to the ceding company.
-38-
A.M. Best is generally considered to be a significant rating agency with
respect to the evaluation of insurance and reinsurance companies. Ratings are
used by ceding companies and reinsurance intermediaries as an important means of
assessing the financial strength and quality of reinsurers. In addition, the
rating of a ceding company may be adversely affected by a downgrade in the
rating of its reinsurer. Therefore, a downgrade of our rating may dissuade a
ceding company from reinsuring with us and may influence a ceding company to
reinsure with a competitor of ours that has a higher insurance rating.
On March 31, 2005 A.M. Best Company ("A. M. Best ") issued a press release
announcing that it had placed under review with negative implications the
financial strength ratings of "A" (Excellent) of Platinum Bermuda, Platinum US
and Platinum UK, that it had downgraded and placed under review with negative
implications the debt rating of the equity security units issued by Platinum
Finance to "bbb" from "bbb+" and that it had downgraded and placed under review
with negative implications the indicative ratings assigned to securities
available under our shelf registration statement to "bbb" from "bbb+" on senior
unsecured debt, to "bbb-" from "bbb" on subordinated debt and to "bb+" from
"bbb-" on preferred shares. After completing a plan to increase the capital of
the Company's reinsurance subsidiaries, including the issuance of the Series A
Notes, A.M. Best issued a press release on May 26, 2005, affirming the financial
strength ratings of "A" (Excellent) of Platinum Bermuda, Platinum US and
Platinum UK.
The Company does not have a financial strength rating issued by any rating
agency other than A.M. Best. In the future we may obtain financial strength
ratings from other rating agencies, though we are unable to predict the impact
of any such ratings at this time. The Company has a senior unsecured debt rating
of BBB from Standard & Poors.
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 2005 without prior regulatory approval is estimated to be
$238,338,000. While the Company's reinsurance subsidiaries could legally pay
such an aggregate amount, management believes that dividends in such an amount
would reduce the capital of its reinsurance subsidiaries to a level that would
result in a downgrade of its various ratings. Management also believes that
Platinum Holdings can receive dividends from its reinsurance subsidiaries in
sufficient amounts necessary to meet the obligations of Platinum Holdings
without risk of a downgrade.
On August 4, 2004, the board of directors of the Company approved a plan to
purchase up to $50,000,000 of its common shares, of which $40,015,000 remains
available under the plan.
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 expected 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 economic conditions in general and in the
insurance and reinsurance markets, legal and regulatory changes as well as
fluctuations from year to year in claims experience and the presence or absence
of large catastrophic events. If the Company's liquidity needs accelerate beyond
our ability to fund such obligations from current operating cash flows, the
Company may need to liquidate a portion of its investment portfolio. The
Company's ability to meet its liquidity needs by selling investments is subject
to the timing and pricing risks inherent in the capital markets.
-39-
ECONOMIC CONDITIONS
Periods of moderate economic recession or inflation tend not to have a
significant direct effect on the Company's underwriting operations. Significant
unexpected inflationary or recessionary periods can, however, impact the
Company's underwriting operations and investment portfolio. Management considers
the potential impact of economic trends in the estimation process for
establishing unpaid losses and LAE.
CURRENT OUTLOOK
We expect that terms and conditions on most reinsurance treaties will
remain acceptable to reinsurers, while rate level adequacy will decline thereby
reducing expected profitability. Given our strategy of underwriting for
profitability, not market share, a decline in expected treaty profitability may
eventually result in lower net premiums written. We anticipate that our total
net premiums written in 2005 will be approximately the same as for 2004. If
rates deteriorate more quickly than we anticipate, then our 2005 net premiums
written will likely be lower than the 2004 level.
For the Property and Marine segment, underlying primary rates are declining
at a rapid pace for large commercial properties in the U.S. and abroad,
rendering some proportional business unattractive in light of the catastrophe
risks assumed. The most notable exception is the Florida property market. Rate
increases in Florida property business as a result of the 2004 hurricanes were
significant. In addition, terms and conditions on reinsurance contracts have
improved making the premium for Florida property business sufficient for the
risk assumed. Consequently, proportional business written in Florida and the
related exposures to smaller Florida hurricanes and overall U.S. windstorm
losses have increased. We anticipate premium volume for 2005 that is
substantially similar to 2004.
For the Casualty segment, we believe that differences of opinion between
primary insurers and reinsurers regarding the profitability of casualty business
will persist. Accordingly, we anticipate that well-capitalized primary carriers
will retain more of their business. Although the overall quantity of casualty
reinsurance ceded may decrease in 2005 versus 2004, we believe that our
capitalization and reputation as a lead casualty reinsurer will allow us to
write approximately the same level of premium for 2005 as for 2004 at acceptable
levels of expected profitability, provided that rate levels do not deteriorate
more rapidly than we anticipate.
In the Finite Risk segment, we expect that the ongoing investigations by
the SEC, the office of the Attorney General for the State of New York and the
U.S. Attorney for the Southern District of New York and non-U.S. regulatory
authorities such as the Bermuda Monetary Authority and the U.K. Financial
Services Authority will significantly diminish demand for limited risk transfer
products in the short term. Although we cannot predict the ultimate outcome of
these investigations, we believe that if the buyers and sellers of these
products perceive that the accounting, headline and regulatory risk has receded,
demand will return. Accordingly, we expect to write less new finite business in
2005 than 2004. During the three months ended June 30, 2005 we did not write any
new or renewal contracts in our Finite Risk segment. However, our existing
portfolio of finite risk contracts is expected to generate net premiums earned
volume for 2005 that is substantially the same as for 2004.
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,
-40-
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 tax expense and share-based compensation. The critical
accounting policies presented 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, 2004.
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 on 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 estimates of premiums that are written but not reported
("WBNR"). In addition to estimating WBNR, the Company estimates the portion of
premium earned but not reported ("EBNR"). The Company also estimates the
expenses associated with these premiums in the form of losses, LAE and
commissions. The time lag involved in the process of reporting premiums is
shorter than the lag in reporting losses. Premiums are generally reported within
two years. The net impact on the results of operations of changes in estimated
premiums is reduced by the losses and acquisition expenses related to such
premiums. When estimating premiums written and earned, each of the Company's
reinsurance subsidiaries segregates business into classes by type of coverage
and type of contract (approximately 80 classes). Within each class, business is
further segregated by the year in which the contract incepted (the "underwriting
year"), starting with 2002. Estimates of WBNR and EBNR are made for each class
and underwriting year. Premiums are estimated based on ceding company estimates
and the Company's own judgment after considering factors such as the ceding
company's historical premium versus projected premium, the ceding company's
history of providing accurate estimates, anticipated changes in the marketplace
and the ceding company's competitive position therein, reported premiums to date
and the anticipated impact of proposed underwriting changes. The appropriateness
of the premium estimates is evaluated in light of the actual premium reported by
the ceding companies and any adjustments to these estimates are accounted for as
changes in estimates and are reflected in results of operations in the period in
which they are made. The initial estimates of premiums derived by the Company's
underwriting function in respect of the six months ending June 30, 2005 were
reviewed based upon the foregoing considerations. The cumulative impact of this
review was to reduce the estimate by approximately $49 million or 8.5% of
reinsurance premiums receivable at June 30, 2005. At June 30, 2005, the Company
recorded reinsurance premiums receivable of $576,457,000. As an illustration,
the Company had one contract that, at June 30, 2005, represented approximately
$43 million of its total reinsurance premiums receivable. With respect to that
contract, the Company reduced reinsurance premiums receivable by approximately
$5 million because it did not expect the ceding company to meet its production
estimates or to achieve its estimated rate increases. The Company believes that
it reasonably could have made an adjustment of between $0 and $5 million with
respect to that contract at June 30, 2005. Had it made a $0 adjustment, the
reinsurance premiums receivable for that contract at June 30, 2005 would have
been $48 million. It made the $5 million adjustment, resulting in reinsurance
premiums receivable for that contract of $43 million. While an adjustment of
greater than $5 million is possible with respect to that contract, the Company
does not consider such circumstance to be reasonably likely. Reinsurance
premiums receivable under a particular contract can vary significantly from
estimates derived from the Company's underwriting function depending upon its
assessment of the production and rate changes likely to be achieved by the
ceding
-41-
company. Due to the time lag inherent in the reporting of premiums by ceding
companies, a significant portion of amounts included as premiums written and
premiums earned represents estimated premiums and are not currently due based on
the terms of the underlying contracts. Earned premiums, including EBNR, are a
measure of exposure to losses, LAE and acquisition expenses. Consequently, when
previous estimates of premiums earned are increased or decreased, the related
provisions for losses and LAE and acquisition costs previously recorded are also
increased or decreased.
Certain of our reinsurance contracts include provisions that adjust
premiums or acquisition expenses based upon the loss experience under the
contracts. Reinstatement premiums and additional premiums are recognized in
accordance with the provisions of assumed reinsurance contracts, based on loss
experience 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 for 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.
As of June 30, 2005, no such allowances was made based on the Company's
historical experience, the general profile of its ceding companies and its
ability in most cases to contractually affect those premium receivables with
losses and loss adjustment expense or other amounts payable to the same parties.
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, also referred
to as "loss reserves." These liabilities are balance sheet estimates of future
amounts required to pay losses and LAE for reinsured claims that 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. The Company's management reviews these
estimates and determines its best estimate of the liabilities to record in the
Company's financial statements.
Unpaid losses and LAE include estimates of the cost of claims that were
reported but not yet paid ("case reserves") and the cost of claims that were
incurred but not reported ("IBNR"). Case reserves are usually based upon claim
reports received from ceding companies. The information the Company receives
varies by ceding company and may include paid losses, estimated case reserves,
and an estimated provision for IBNR reserves. Case reserves may be increased or
reduced by the Company's claims personnel based on receipt of additional
information, including information received from ceding companies. 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 and may include
the use of catastrophe modeling software.
When estimating unpaid losses and LAE, each of the Company's reinsurance
subsidiaries segregates business into classes by type of coverage and type of
contract (approximately 80 classes). Within each class the business is further
segregated by the year in which the contract incepted ("underwriting year"),
starting with 2002.
The gross liabilities recorded on the Company's balance sheet as of June
30, 2005 for unpaid losses and LAE were $1,559,092,000. The following table sets
forth a breakdown between case reserves and IBNR by segment at June 30, 2005 ($
in thousands):
-42-
Property Finite
and Marine Casualty Risk Total
---------- -------- ------- ----------
Case reserves .................... $ 26,449 120,536 130,185 $ 277,170
IBNR ............................. 258,725 794,253 228,944 1,281,922
-------- ------- ------- ----------
Total unpaid losses and LAE ... $285,174 914,789 359,129 $1,559,092
-------- ------- ------- ----------
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 of the reinsurance
underwriting segment of St. Paul ("St. Paul Re") prior to the Initial Public
Offering 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 an 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 an 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. Multiple point estimates using a variety of
actuarial techniques are calculated for many, but not all, of the Company's 80
classes of coverage for each underwriting year. The Company does not believe
that these multiple point estimates are or should be considered a range. The
Company's actuaries look at each class and determine the most appropriate point
estimate based on the characteristics of the particular class and other relevant
factors such as historical ultimate loss ratios, the presence of individual
large losses, and known occurrences that have not yet resulted in reported
losses. For some classes of business the Company's actuaries believe that a
review of individual contract information improves the loss reserve estimate.
For example, individual contract review is particularly important for the Finite
Risk segment and the Accident and Health class within the Casualty segment. Once
the actuaries make their determinations of the most appropriate point estimate
for each class, this information is aggregated and presented to executive
management for review and approval. At June 30, 2005 the liability for unpaid
losses and LAE that the Company recorded reflected the point estimates of IBNR
prepared by the Company's actuaries.
Generally, North American casualty excess business has the longest pattern
of reported losses and therefore the greatest uncertainty. IBNR for these
classes at June 30, 2005 was $575 million which was 45% of the total IBNR for
the Company at that date. Because North American casualty excess business has
the greatest uncertainty, the Company would not consider a variance of five
percentage points from the initial expected loss ratio to be unusual. As an
example, a change in the initial expected loss ratio from 65% to 70% would
result in an increase of the IBNR for these classes by $48 million. This equates
to approximately 7% of the liability for total unpaid losses and LAE for these
classes at June 30, 2005. As another example, if the estimated pattern of
reported losses was accelerated by 5% the IBNR for these classes would decrease
by $3 million which is less than 1%. Because the Company believes the two most
important inputs to the reserve estimation methodologies described above are the
initial expected loss
-43-
ratio and the estimated pattern of reported losses, the Company has selected
these two inputs as the basis for the sensitivity analyses in this paragraph.
The pattern of reported losses is determined utilizing actuarial analysis,
including management's 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 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.
The Company does not establish liabilities until the occurrence of an event
that may give rise to a loss. When an event of sufficient magnitude occurs, the
Company may establish a specific IBNR reserve. Generally, this involves a
catastrophe occurrence that affects many ceding companies. Ultimate losses and
LAE are based on management's judgment that reflects estimates gathered from
ceding companies, 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 due to the fact that, among
other things, they are based on predictions of future developments and estimates
of future trends in claim severity and frequency and other factors. Because of
the degree of reliance that the Company necessarily places on ceding companies
for claims reporting, the associated time lag, the low frequency/high severity
nature of some of the business that the Company underwrites and the varying
reserving practices among ceding companies, the Company's reserve estimates are
highly dependent on management judgment and are therefore uncertain.
In property classes, there can be additional uncertainty in loss estimation
related to large catastrophe events. With wind events, such as hurricanes, the
damage assessment process may take more than a year. The cost of rebuilding is
subject to increase due to supply shortages for construction materials and
labor. In the case of earthquakes, the damage assessment process may take
several years as buildings are discovered to have structural weaknesses not
initially detected. 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.
Loss reserve calculations for direct insurance business are not precise in
that they deal with the inherent uncertainty of future developments. Primary
insurers must estimate their own losses, often based
-44-
on incomplete and changing information. Reserving for reinsurance business
introduces further uncertainties compared with reserving for direct insurance
business. The uncertainty in the reserving process for reinsurers is due, in
part, to the time lags inherent in reporting from the original claimant to the
primary insurer to the reinsurer. As predominantly a broker market reinsurer for
both excess-of-loss and proportional contracts, the Company is subject to a
potential additional time lag in the receipt of information as the primary
insurer reports to the broker who in turn reports to the Company.
Since the Company relies on information regarding paid losses, case
reserves, and IBNR reserves provided by ceding companies in order to assist the
Company in estimating its own liability for unpaid losses and LAE, the Company
maintains certain procedures in order to help determine the completeness and
accuracy of such information. Periodically, management assesses the reporting
activities of these companies on the basis of qualitative and quantitative
criteria. In addition to managing reported claims and conferring with ceding
companies on claims matters, the Company's claims personnel conduct periodic
audits of specific claims and the overall claims procedures of its ceding
companies at their offices. The Company relies on its ability to effectively
monitor the claims handling and claims reserving practices of ceding companies
in order to establish the proper reinsurance premium for reinsurance agreements
and to establish proper loss reserves. Disputes with ceding companies have been
rare and generally have been resolved through negotiation.
Estimates of unpaid losses and LAE are periodically re-estimated 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.
As of June 30, 2005, the Company did not have any significant back-log
related to its processing of assumed reinsurance information.
REINSURANCE
Premiums written, premiums earned and 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 denominated in foreign currencies and are intended to
match foreign net liabilities denominated in foreign currencies 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. Investment income is recorded when earned and
includes the amortization of premiums and discounts on investments.
-45-
The Company believes it has the ability to hold any specific security to
maturity. This is based on current and anticipated future positive cash flow
from operations that generates sufficient liquidity in order to meet our
obligations. However, in the course of managing investment credit risk, asset
liability duration or other aspects of the investment portfolio, the Company may
decide to sell any specific security. The Company routinely reviews its
available-for-sale investments to determine whether unrealized losses represent
temporary changes in fair value or are the result of "other than temporary
impairments." The process of determining whether a security is other than
temporarily impaired is subjective and involves analyzing many factors. These
factors include, but are not limited to, the length and magnitude of an
unrealized loss, specific credit events, the overall financial condition of the
issuer, and the Company's intent to hold a security for a sufficient period of
time for the value to recover the unrealized loss. If the Company has determined
that an unrealized loss on a security is other than temporary, the Company
writes down the carrying value of the security to its current fair value and
records a realized loss in the statement of income.
INCOME TAX EXPENSE
Platinum Holdings and Platinum Bermuda are incorporated in Bermuda. Under
current Bermuda law, they are not taxed on any Bermuda income or capital gains
and they have received an assurance that if any legislation is enacted in
Bermuda that would impose tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax will not be applicable to
Platinum holdings or Platinum Bermuda or any of their respective operations,
shares, debentures or other obligations until March 28, 2016. 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.
SHARE-BASED COMPENSATION
Effective January 1, 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
is determined through the use of an option-pricing model. SFAS 148 amends SFAS
123 and provides transition guidance for a voluntary adoption of FAS 123 as well
as amends the disclosure requirements of SFAS 123. For the period from November
1, 2002 through December 31, 2002, the Company used 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"). 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.
For share options granted in 2002, the Company continues to use APB 25.
-46-
In December 2004, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 123R "Share-Based Payment"
("SFAS 123R"). SFAS 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services and for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R requires that, prospectively,
compensation costs be recognized for the fair value of all share options over
the remaining vesting period, including the cost related to the unvested portion
of all outstanding share options as of December 31, 2004. The share-based
compensation expense for share options currently outstanding are to be based on
the same cost model used to calculate the pro forma disclosures under SFAS 123.
On April 14, 2005, the SEC adopted a new rule that allows SEC registrants
to implement SFAS 123R as of January 1, 2006. The SEC's new rule does not change
the accounting required by SFAS 123R; it delays the date for compliance with the
standard. Previously under SFAS 123R, the Company would have been required to
implement the standard as of July 1, 2005. Consequently, the Company's
consolidated financial statements filed with the SEC do not need to comply with
SFAS 123R until January 1, 2006. The Company plans to adopt the provisions of
the SFAS 123R in the first quarter of 2006.
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
for its portfolio of A2 as defined by Moody's Investor Service. As of June 30,
2005, the portfolio has a dollar weighted average rating of Aa2.
The Company has other receivable amounts subject to credit risk. The most
significant of these are reinsurance premiums receivable from ceding companies.
To mitigate credit risk related to premium receivables, we have established
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. While management does not consider credit risk related to amounts
recoverable from retrocessionaires to be material as of June 30, 2005, we
consider the financial strength of retrocessionaires when determining whether to
purchase coverage from them. Retrocessional coverage is generally obtained from
companies rated "A" or better by A. M. Best unless the retrocessionaires'
obligations are fully collateralized. For exposures where losses become known
and are paid in a relatively short period of time, we may obtain retrocessional
coverage from companies rated "A-" or better by A. M. Best. The financial
performance and rating status of all material retrocessionaires is routinely
monitored.
In accordance with industry practice, the Company frequently pays amounts
in respect of claims under contracts to reinsurance brokers, for payment over to
the ceding companies. In the event that a broker fails to make such a payment,
depending on the jurisdiction, the Company may remain liable to the ceding
company for the payment. Further, in certain jurisdictions, when premiums for
such contracts are paid to reinsurance brokers for payment over to the Company,
such premiums will be deemed to have been paid and the ceding company will no
longer be liable to the Company for those amounts whether or not actually
received by the Company. Consequently, the Company assumes a degree of credit
risk
-47-
associated with its brokers during the payment process. To mitigate credit risk
related to reinsurance brokers, the Company has established guidelines for
brokers and intermediaries.
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 receipt of 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 June 30, 2005 is approximately as follows ($ in thousands):
Interest Rate Shift in Basis Points
------------------------------------------------------------
- 100 bp - 50 bp Current + 50 bp + 100 bp
---------- --------- --------- --------- ----------
Total market value $2,819,694 2,771,576 2,722,692 2,673,066 $2,623,055
Percent change in market value 3.6% 1.8% -- (1.8%) (3.7%)
Resulting unrealized appreciation /
(depreciation) $ 107,332 59,214 10,330 (39,296) $ (89,307)
FOREIGN CURRENCY RISK
The Company writes business on a worldwide basis. Consequently, the
Company's principal exposure to foreign currency risk is its transaction of
business 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. The Company measures its liabilities, including those denominated in
foreign currencies, on a quarterly basis. The timing of the evaluation and
determination of foreign currency denominated liabilities and the investment of
assets in the same foreign currency also presents an element of foreign currency
risk.
SOURCES OF FAIR VALUE
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments as of June 30, 2005 ($ in thousands):
Carrying
Amount Fair Value
---------- ----------
Financial assets:
Fixed maturities $2,722,692 $2,722,692
Other invested asset 6,000 6,000
Financial liabilities:
Debt obligations $ 387,500 $ 412,855
The fair value of fixed maturities is 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
-48-
invested asset represents a strategic investment in a non-public reinsurance
company and is carried at estimated fair value.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief Financial
Officer, carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act") as of the end of the period covered by this report. Based on
that evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and timely reported as specified in the SEC's
rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes occurred during the quarter ended June 30, 2005 in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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 Exchange Act.
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 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
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 also contains 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 forward-looking statements, including the
following:
(1) conducting operations in a competitive environment;
(2) our ability to maintain our A.M. Best Company rating;
(3) significant weather-related or other natural or man-made disasters
over which the Company has no control;
(4) the effectiveness of our loss limitation methods and pricing models;
-49-
(5) the adequacy of the Company's liability for unpaid losses and loss
adjustment expenses;
(6) the availability of retrocessional reinsurance on acceptable terms;
(7) our ability to maintain our business relationships with reinsurance
brokers;
(8) general political and economic conditions, including the effects of
civil unrest, war or a prolonged U.S. or global economic downturn or
recession;
(9) the cyclicality of the property and casualty reinsurance business;
(10) market volatility and interest rate and currency exchange rate
fluctuation;
(11) tax, regulatory or legal restrictions or limitations applicable to the
Company or the property and casualty reinsurance business generally;
and
(12) 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, which are
discussed in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, in November and December 2004, the Company
received subpoenas from the SEC and the Office of the Attorney General for the
State of New York for documents and information relating to certain
non-traditional, or loss mitigation, insurance products. The Company is fully
cooperating in responding to all such requests. Other reinsurance companies have
reported receiving similar subpoenas and requests. This investigation appears to
be at a very preliminary stage and, accordingly, it is not possible to predict
the direction the investigation will take and the impact, if any, it may have on
the Company's business. In view of the ongoing industry investigations, the
Company retained the law firm of Dewey Ballantine LLP to conduct a review of its
finite reinsurance practices. They recently informed the Company that their
review was complete and that they have identified no evidence of improprieties.
On June 14, 2005, we received a grand jury subpoena from the United States
Attorney for the Southern District of New York requesting documents relating to
our finite reinsurance products. We have been informed that other companies in
the industry have received similar subpoenas. We intend to fully cooperate in
responding to this request.
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.
-50-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual general meeting of shareholders (the "Annual Meeting") of the
Company was held on April 26, 2005. Proxies for the Annual Meeting were
solicited pursuant to Regulation 14A under the Exchange Act. There was no
solicitation in opposition to management's nominees as listed in the Company's
proxy statement, dated March 22, 2005. The Company's shareholders (1) elected
eight directors to the Company's Board of Directors to serve until the 2006
annual general meeting of shareholders and (2) ratified the selection of KPMG
LLP as the Company's independent registered public accounting firm for the 2005
fiscal year. Set forth below are the voting results for these proposals:
ELECTION OF DIRECTORS OF THE COMPANY
For Withheld
---------- --------
H. Furlong Baldwin 40,115,148 100,610
Jonathan F. Bank 40,117,673 98,085
Dan R. Carmichael 39,275,422 940,336
Neill A. Currie 39,279,086 936,672
Robert V. Deutsch 39,267,164 948,594
Gregory E.A. Morrison 39,725,185 490,573
Steven H. Newman 39,275,422 940,336
Peter T. Pruitt 39,272,897 942,861
RATIFICATION OF SELECTION OF KPMG LLP AS INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE 2005 FISCAL YEAR
For Against Abstain Broker Non-Votes
---------- ------- ------- ----------------
40,188,565 23,430 3,763 0
ITEM 6. EXHIBITS
Exhibit
Number Description
------- -----------
10.1 First Amendment dated July 14, 2005 to the Platinum Underwriters
Holdings, Ltd. Guaranty dated December 31, 2003 between Platinum
Holdings, as Guarantor, and Platinum US. (1)
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
Exchange Act.
31.2 Certification of Joseph F. Fisher, Chief Financial Officer of Platinum
Holdings, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange
Act.
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 Joseph F. Fisher, 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.
(1) Incorporated by reference from Platinum Holdings' Quarterly Report on Form
10-Q, filed with the Commission on August 5, 2005.
-51-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
PLATINUM UNDERWRITERS HOLDINGS, LTD
Date: September 21, 2005 /s/ GREGORY E.A. MORRISON
----------------------------------------
By: Gregory E.A. Morrison
President and Chief Executive Officer
Date: September 21, 2005 /s/ JOSEPH F. FISHER
----------------------------------------
By: Joseph F. Fisher
Executive Vice President and
Chief Financial Officer
-52-