Being a reinsurer in 2006 was like being a mutual fund manager in 2003 -- it was hard not to post fabulous results. (Even yours truly had a great investing year in 2003.) Thanks to an absence of major catastrophes, Platinum Underwriters
Platinum's fourth-quarter net premiums earned dropped 29% from a year ago, partly because of lower reinstatement premiums (premiums to reinstate coverage after a loss exhausts existing coverage), and the non-renewal of two large finite risk contracts (the transfer of already incurred losses in exchange for premiums and use of float).
However, results benefited greatly from the lack of large catastrophe events. For the quarter, the loss ratio dropped to 55.4% (partly helped by favorable reserve development) from 104.4% last year (because of hurricanes), and the overall combined ratio dropped to 81.3% from 131.9%. Last year's loss events also increased the company's float, and net investment income increased 36.6%, which pushed net income up to $86 million for the quarter versus a loss of $103 million last year (see our Fool by Numbers).
Looking ahead to 2007, management noted in the earnings call that pricing deteriorated slightly, but it was still able to write new business. For example, of the company's $88 million in U.S. catastrophe excess-of-loss business expiring Jan. 1 (the date when the majority of property reinsurance renews), the company was able to write $100 million in new business. The international catastrophe segment also wrote $82 million in policies versus $70 million in expirations -- although the company remarked that pricing was more competitive internationally.
Management noted that property and marine reinsurance rates were under pressure from increasing capacity -- hedge funds and private equity players are getting into the game - as well as a trend toward primary insurers retaining more risk and ceding less to reinsurers.
The company also slightly increased its estimated catastrophe exposure. Currently, the company estimates a once-in-250-years catastrophe event would result in a probable maximum loss (PML) of $374 million, or 18% of capital, versus a PML of 17% last year.
Book value per share ended the year at $28.33, meaning shares now trade at a 1.1 price-to-book multiple. One analyst noted that now would be a good time for the company to buy back shares, indicating that the company's earning power and ability to grow book value should eventually be reflected in a higher stock price.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.