In an announcement that received slightly less notice than the downgrading of the U.S.’ ratings from ‘AAA’ to ‘AA+’, Standard & Poor’s also announced that it has revised its outlook on Platinum Underwriters Reinsurance Inc. and Platinum Underwriters Bermuda Ltd. (collectively referred to as Platinum) and Platinum Underwriters Holdings Ltd. (PTP) to negative from stable. S&P also affirmed its ‘A’ counterparty credit and financial strength ratings on Platinum and its ‘BBB+’ counterparty credit rating PTP.
“The revised outlook reflects our view of the higher–than-expected catastrophe losses Platinum reported during the first six months of 2011, which resulted in a combined ratio of 164 percent and a net loss of $178 million for the first half of the year,” explained credit analyst Jason Porter.
S&P noted that “although the losses from catastrophes that occurred during the second quarter of 2011 were within our prior expectations, Platinum is unlikely to meet our revised expectations for 2011, which we outlined in our June 1, 2011, article, because of the $46 million in adverse loss reserve development the group reported in the second quarter related to catastrophe events that occurred during the first quarter. The revised outlook also reflects our view that Platinum’s full-year 2011 operating results will likely compare unfavorably relative to its peers’.”
S&P added that “Platinum incurred higher-than-expected catastrophe losses during the first half of 2011, in part due to an overweight position in February 2011 New Zealand earthquake exposure. So far, Platinum has incurred catastrophe losses related to the February 2011 earthquake totaling $170 million, or 8 percent of its year-end 2010 total capital base. For the first half of 2011, the group reported total catastrophe losses of $326 million, representing 15 percent of its year-end 2010 total capital.”
Porter stated: “We believe that these losses may indicate some weaknesses in the group’s catastrophe risk management capabilities. As a result, we lowered Platinum’s enterprise risk management overall score to adequate from strong to reflect our updated view of Platinum’s catastrophe risk controls.”
S&P’s analysis further indicated that “Management has been reducing its catastrophe exposures in order to mitigate the potential impact of future catastrophe events on its earnings and balance sheet. But the recent enhancements to the group’s catastrophe risk management processes, including the implementation of enhanced risk metrics will, in our opinion, require further seasoning before we can fully measure their effectiveness.
“The negative outlook reflects our expectation that Platinum’s 2011 combined ratio will be below 130 percent, with a net loss of less than $100 million–assuming a normalized 17 percent catastrophe load for the remainder of the year. We expect that the group’s operating results will improve in 2012, with a combined ratio in the low 90 percent range and return on revenue in the high teens–assuming a normalized catastrophe load of 17 percent for full-year 2011.
“We also expect that Platinum’s capitalization will remain a strength to the ratings at the ‘AA’ level for the remainder of the year and into 2012. We believe that Platinum will maintain its underwriting discipline, despite competitive market conditions. Accordingly, the group likely will report an approximately 15 percent-20 percent decline in premiums during 2011, largely reflecting the softness in casualty rates, the group’s conservative underwriting appetite, and the more recent reductions in property writings and exposures.
“Platinum’s debt-plus-preferred-to-total capital likely will remain conservative over the next one year to two years, in the 10 percent-15 percent range, and its fixed-charge coverage likely will average above 6x for the second half of 2011, assuming the normalized catastrophe load discussed above. We believe that declining premium writings and catastrophe losses will constrain Platinum’s operating cash flows for 2011.
“But we also expect that the group’s balance sheet liquidity will remain strong, supported by a very significant amount of cash and other liquid assets and a large proportion of liquid assets relative to technical loss reserve provisions.”
In conclusion S&P said it could “revise the outlook to stable over the next 12 months if, among other factors, the group meets the expectations outlined above and if it demonstrates improved risk controls for catastrophe exposures.
“Conversely, we could lower the ratings over the next 12 months if the group’s operating performance or capital adequacy is significantly lower than expected, if material adverse loss reserve development occurs, if the group’s liquidity position deteriorates significantly, if there is material deterioration in the group’s risk management controls, or if any outsized future catastrophe losses occur that could place Platinum as a significant negative outlier among its peers.”
Source: Standard & Poor’s
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