-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BKBvjj8GrcbwK9wGgsIr8KQn4pHzUXPPoN7paTdYQwFJ5cXuaMIEzX52fToyQX2l XrmBofmh/x33M1u6yGDRAg== 0000950123-05-011316.txt : 20050920 0000950123-05-011316.hdr.sgml : 20050920 20050920173004 ACCESSION NUMBER: 0000950123-05-011316 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050920 DATE AS OF CHANGE: 20050920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLATINUM UNDERWRITERS HOLDINGS LTD CENTRAL INDEX KEY: 0001171500 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-31341 FILM NUMBER: 051094273 BUSINESS ADDRESS: STREET 1: 2 CHURCH STREET CITY: BERMUDA STATE: D0 ZIP: HM 11 BUSINESS PHONE: 4412951422 MAIL ADDRESS: STREET 1: 69 PITTS BAY ROAD STREET 2: 2ND FLOOR, PEMBROKE CITY: BERMUDA STATE: D0 ZIP: HM 08 10-K/A 1 y12928e10vkza.txt AMENDMENT NO. 1 TO FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 [ ] 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 (I.R.S. Employer incorporation or organization) Identification No.) THE BELVEDERE BUILDING 69 PITTS BAY ROAD PEMBROKE, BERMUDA HM 08 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (441) 295-7195 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON SHARES, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE (Title of each class) (Name of each exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ ] The aggregate market value of common shares held by non-affiliates of the registrant as of June 30, 2004, the last business day of our most recently completed second fiscal quarter, was $1,191,311,069 based on the closing sale price of $30.43 per common share on the New York Stock Exchange on that date. For purposes of this computation only, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. As of February 15, 2005, there were outstanding 43,109,407 common shares, par value $0.01 per share, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for the 2005 Annual General Meeting of Shareholders are incorporated by reference into Part III of this report. This Amendment No. 1 on Form 10-K/A amends Platinum Underwriters Holdings, Ltd.'s Report on Form 10-K for the year ended December 31, 2004, (the "2004 Form 10-K") as initially filed with the Securities and Exchange Commission ("SEC") on March 16, 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 the 2004 Form 10-K 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 "Business -- Operating Segments -- Finite Risk" regarding the economic benefit and nature of the protection provided by finite risk contracts, additional disclosure under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Policies" 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 17 to the consolidated financial statements. This amendment presents the 2004 Form 10-K, as amended, in its entirety, but does not modify or update the disclosure in the 2004 Form 10-K 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 2004 Form 10-K on March 16, 2005. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business ................................................................................ 2 Item 2. Properties .............................................................................. 32 Item 3. Legal Proceedings ....................................................................... 32 Item 4. Submission of Matters to a Vote of Security Holders ..................................... 32 PART II Item 5. Market For Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities .................................................................. 33 Item 6. Selected Financial Data ................................................................. 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................. 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 68 Item 8. Financial Statements and Supplementary Data ............................................. 70 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .... 70 Item 9A. Controls and Procedures ................................................................. 70 Item 9B. Other Information ....................................................................... 74 PART III Item 10. Directors and Executive Officers of the Registrant ...................................... 74 Item 11. Executive Compensation .................................................................. 74 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ............................................................................... 74 Item 13. Certain Relationships and Related Transactions .......................................... 74 Item 14. Principal Accountant Fees and Services .................................................. 75 PART IV Item 15. Exhibits and Financial Statement Schedules .............................................. 75 Signatures ......................................................................................... 84 Platinum Underwriters Holdings, Ltd. and Subsidiaries Financial Statements ......................... F-1 Platinum Underwriters Holdings, Ltd. and Subsidiaries Financial Statement Schedules ................ S-1 The Predecessor Business Combined Financial Statements ............................................. P-1 Exhibits
- i - PART I The "Company," "Platinum," "we," "us," and "our" refer to Platinum Underwriters Holdings, Ltd. and its consolidated subsidiaries, unless the context otherwise indicates. "Platinum Holdings" refers to Platinum Underwriters Holdings, Ltd., a Bermuda holding company. "Platinum Bermuda" refers to Platinum Underwriters Bermuda, Ltd., a Bermuda reinsurance company and wholly owned subsidiary of Platinum Holdings. "Platinum Ireland" refers to Platinum Regency Holdings, an intermediate holding company domiciled in Ireland and a wholly owned subsidiary of Platinum Holdings. "Platinum UK" refers to Platinum Re (UK) Limited, a reinsurance company domiciled in the U.K. and a wholly owned subsidiary of Platinum Ireland. "Platinum Finance" refers to Platinum Underwriters Finance, Inc., a finance company in the U.S. and a wholly owned subsidiary of Platinum Ireland. "Platinum US" refers to Platinum Underwriters Reinsurance, Inc., a reinsurance company based in the U.S. and a wholly owned subsidiary of Platinum Finance. "Platinum Services" refers to Platinum Administrative Services, Inc., a U.S. company and a wholly owned subsidiary of Platinum Finance that provides administrative services to the Company. The "Initial Public Offering" refers to our initial public offering of common shares, which was completed on November 1, 2002. The "ESU Offering" refers to our offering of equity security units, consisting of a contract to purchase common shares in 2005 and an ownership interest in a senior note of Platinum Finance due 2007, which was completed concurrently with the Initial Public Offering. "St. Paul" refers to The St. Paul Travelers Companies, Inc. (formerly The St. Paul Companies, Inc.). "St. Paul Re" refers to the reinsurance underwriting segment of St. Paul prior to the Initial Public Offering. "St. Paul Investment" refers to our issuance to St. Paul of common shares and an option to purchase additional common shares. "RenaissanceRe" refers to RenaissanceRe Holdings Ltd., and "RenaissanceRe Investment" refers to our issuance to RenaissanceRe of common shares and an option to purchase additional common shares. The St. Paul Investment and the RenaissanceRe Investment each occurred concurrently with the Initial Public Offering. NOTE ON FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (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-K 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-K 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 - (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; (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," 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. ITEM 1. BUSINESS INDUSTRY OVERVIEW GENERAL Reinsurance is an arrangement in which an insurance company, referred to as the reinsurer, agrees to assume from another insurance company, referred to as the ceding company, all or a portion of the insurance risks that the ceding company has underwritten under one or more insurance policies. In return, the reinsurer receives a premium for the risks that it assumes from the ceding company. Reinsurance, however, does not discharge the ceding company from its liabilities to policyholders. Reinsurance can provide ceding companies with three principal benefits: a reduction in net liability on individual risks, catastrophe protection from large or multiple losses and assistance in maintaining acceptable financial ratios. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks or write more business than would be possible without an accompanying increase in capital. - 2 - TYPES OF REINSURANCE Reinsurance is typically classified into two categories based on the underlying insurance coverage: property and casualty reinsurance, and life and annuity reinsurance. PROPERTY AND CASUALTY REINSURANCE We write 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 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 general and automobile liability, professional liability, workers' compensation, accident and health, surety and trade credit coverages. Although property reinsurance involves a high degree of volatility, property reinsurance claims are generally reported soon after the event giving rise to the claim and tend to be assessed and paid relatively expeditiously. In comparison, there tends to be a greater time lag between the occurrence, reporting and payment of casualty reinsurance claims. LIFE AND ANNUITY REINSURANCE We do not currently write any life or annuity reinsurance although we may do so in the future. Life reinsurance provides coverage with respect to individual and group life risks to primary life insurers. Annuity reinsurance provides coverage to insurers who issue annuity contracts to consumers who seek to accumulate personal wealth or as protection against outliving their financial resources. We may write this business through treaty arrangements. EXCESS-OF-LOSS AND PROPORTIONAL REINSURANCE Reinsurance can be written on either an excess-of-loss basis or a pro rata, or proportional, basis. In the case of excess-of-loss reinsurance, the reinsurer assumes all or a specified portion of the ceding company's risks in excess of a specified claim amount, referred to as the ceding company's retention or the reinsurer's attachment point, subject to a negotiated reinsurance contract limit. For example, property catastrophe excess-of-loss reinsurance provides coverage to a ceding company when its aggregate claims, arising from a single occurrence during a covered period, such as a hurricane or an earthquake, exceed the attachment point specified in the reinsurance contract. Other forms of excess-of-loss reinsurance respond when each single claim exceeds the ceding company's retention. Premiums for excess-of-loss reinsurance may be either a specified dollar amount or a percentage of the premium charged by the ceding company. Excess-of-loss contracts can help reinsurers manage their underwriting risk by increasing their ability to determine reinsurance premiums at specific retention levels, independent of the premiums charged by primary insurers, and based upon their own underwriting assumptions. Also, because primary insurers typically retain a larger loss exposure under excess-of-loss contracts, we believe that they have a greater incentive to underwrite risks and adjust losses in a prudent manner. - 3 - In the case of proportional reinsurance, the reinsurer assumes a predetermined portion of the ceding company's risks under the covered primary insurance contract or contracts. The frequency of claims under a proportional contract is usually greater than under an excess-of-loss contract, since the reinsurer shares proportionally in all losses. Premiums for proportional reinsurance are typically a predetermined portion of the premiums the ceding company receives from its insureds. TREATY AND FACULTATIVE REINSURANCE Reinsurance can be written either through treaty or facultative reinsurance arrangements. In treaty reinsurance, the ceding company cedes, and the reinsurer assumes, a specified portion of a type or category of risks insured by the ceding company. In facultative reinsurance, the ceding company cedes, and the reinsurer assumes, all or part of a specific risk or risks. Substantially all of the reinsurance that we underwrite is on a treaty basis. We underwrite facultative reinsurance in limited and opportunistic circumstances. Generally, treaty reinsurers do not separately evaluate each of the individual risks assumed under their treaties and are largely dependent on the original risk underwriting decisions made by the ceding company's underwriters. Accordingly, reinsurers will carefully evaluate the ceding company's risk management and underwriting practices, as well as claims settlement practices and procedures, in deciding whether to provide treaty reinsurance and in appropriately pricing the treaty. Generally, reinsurers who provide facultative reinsurance do so separately from their treaty operations. Facultative reinsurance is normally purchased by ceding companies for risks not covered by their reinsurance treaties, for amounts in excess of the claims limits of their reinsurance treaties and for unusual and complex risks. In addition, facultative reinsurance often provides coverages for relatively large exposures, which may result in greater potential claims volatility. Facultative reinsurance typically has higher underwriting and other expenses than treaty reinsurance because each risk is individually underwritten and administered. FINITE REINSURANCE Finite reinsurance, often referred to as non-traditional reinsurance, involves structured reinsurance contracts designed to meet an individual ceding company's strategic objectives. The same types of risks that are reinsured on a traditional basis can be reinsured on a finite basis and usually involve an excess-of-loss or proportional treaty. Typically, the amount of claims we might pay is finite or capped. In return for this limit on claims, we often accept a cap on our potential profit margin specified in the treaty and return profits above this margin to the ceding company. BROKER AND DIRECT REINSURANCE Reinsurance can be written through reinsurance brokers or directly with ceding companies. We believe that a ceding company's decision to select either the broker market or the direct market is influenced by various factors including, among others, market capacity, market competition, the value of the broker's advocacy on the ceding company's behalf, the spread of risk, flexibility in the terms and conditions, the ability to efficiently compare the analysis and quotes of several reinsurers, the speed of a reinsurance placement, the historical relationship with the reinsurer and the efficiency of claims settlement with respect to a coverage. We underwrite substantially all of our reinsurance through brokers, as we believe that the use of reinsurance brokers enables us to operate on a more cost-effective basis and to maintain the flexibility to - 4 - enter and exit reinsurance lines in a quick and efficient manner. We believe that brokers are particularly useful in assisting with placements of excess-of-loss reinsurance programs. RETROCESSION Reinsurers typically purchase reinsurance to reduce their own risk exposure. Reinsurance of a reinsurer's risks is called retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons that include reducing liability on individual risks, protecting against catastrophic losses, stabilizing financial ratios and obtaining additional underwriting capacity. We purchase and issue retrocessional contracts. OUR BUSINESS GENERAL Platinum Holdings is a Bermuda holding company organized in 2002. We provide 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. We operate through three licensed reinsurance subsidiaries: Platinum US, Platinum Bermuda and Platinum UK. Platinum UK and Platinum Bermuda were formed in 2002 and have no prior operating history or loss reserves subject to development prior to January 1, 2002. Platinum US had been an inactive licensed insurance company with no underwriting activity prior to January 1, 2002. Platinum Ireland has no business operations other than activity necessary to maintain its corporate existence and its ownership of Platinum Finance and Platinum UK. Platinum Finance's activities have generally been limited to raising funds for Platinum US through the issuance of the senior note component of the ESU Offering. Platinum Services' activities are limited to providing administrative services to the Company, including legal, finance, actuarial, information technology and human resources services. The following chart summarizes our corporate structure: - 5 - [FLOW CHART] OUR STRATEGY Our goal is to achieve attractive long-term returns for our shareholders, while establishing Platinum as a disciplined risk manager and market leader in selected classes of property and casualty reinsurance, through the following strategies: - Operate as a Multi-Class Reinsurer. We seek to offer a broad range of reinsurance coverage to our ceding companies. We believe that this approach enables us to more effectively serve our clients, diversify our risk and leverage our capital. - Focus on profitability, not market share. Our management team pursues a strategy that emphasizes profitability rather than market share. Key elements of this strategy are prudent risk selection, appropriate pricing and adjustment of our business mix to respond to changing market conditions. - 6 - - Exercise disciplined underwriting and risk management. We exercise underwriting and risk management discipline by (i) maintaining a diverse spread of risk in our book of business across product lines and geographic zones, (ii) emphasizing excess-of-loss contracts over proportional contracts, (iii) managing our aggregate catastrophe exposure through the application of sophisticated property catastrophe modeling tools and (iv) monitoring our accumulating exposures on our non-property catastrophe exposed coverages. - Operate from a position of financial strength. As of December 31, 2004, we had a total capitalization of $1,270,503,000. Our capital position is unencumbered by any potential adverse development of unpaid losses for business written prior to January 1, 2002. Our investment strategy focuses on security and stability in our investment portfolio by maintaining a diversified portfolio that consists primarily of investment grade fixed-income securities. We believe these factors, combined with our strict underwriting discipline, allow us to maintain our strong financial position and to be opportunistic when market conditions are most attractive. OPERATING SEGMENTS We have organized our worldwide reinsurance business around the following three operating segments: Property and Marine, Casualty and Finite Risk. In each of our operating segments, we offer our reinsurance products to providers of commercial and personal lines of insurance. The following table sets forth the net premiums written by the Company for the years ended December 31, 2004 and 2003 and the two-month period ended December 31, 2002 by operating segment and by type of reinsurance ($ in thousands):
Years Ended December 31, ------------------------------------- Period Ended 2004 2003 December 31, 2002 ------------------ ---------------- ----------------- Property and Marine Excess-of-loss .................. $ 366,184 22% 224,715 19% $ 56,549 19% Proportional .................... 138,255 8% 128,193 11% 32,792 11% ----------- --- --------- --- --------- --- Total Property and Marine ..... 504,439 30% 352,908 30% 89,341 30% ----------- --- --------- --- --------- --- Casualty Excess-of-loss .................. 593,752 37% 389,992 33% 155,377 52% Proportional .................... 83,647 5% 84,008 7% 9,552 3% ----------- --- --------- --- --------- --- Total Casualty ................ 677,399 42% 474,000 40% 164,929 55% ----------- --- --------- --- --------- --- Finite Risk Excess-of-loss .................. 270,629 16% 250,634 22% 43,844 15% Proportional .................... 193,546 12% 94,600 8% - 0% ----------- --- --------- --- --------- --- Total Finite Risk ............. 464,175 28% 345,234 30% 43,844 15% ----------- --- --------- --- --------- --- Total Excess-of-loss .................. 1,230,565 75% 865,341 74% 255,770 86% Proportional .................... 415,448 25% 306,801 26% 42,344 14% ----------- --- --------- --- --------- --- Total ......................... $ 1,646,013 100% 1,172,142 100% $ 298,114 100% ----------- --- --------- --- --------- ---
The following table sets forth the net premiums written by the Company for years ended December 31, 2004 and 2003 and the two-month period ended December 31, 2002 by operating segment and by geographic location of the ceding company ($ in thousands): - 7 -
Years Ended December 31, ------------------------------------- Period Ended 2004 2003 December 31, 2002 ------------------ ---------------- ----------------- Property and Marine United States ................... $ 320,506 19% 211,324 18% $ 37,523 13% International ................... 183,933 11% 141,584 12% 51,818 17% ----------- --- --------- --- --------- --- Total Property and Marine ..... 504,439 30% 352,908 30% 89,341 30% ----------- --- --------- --- --------- --- Casualty United States ................... 601,878 37% 436,789 37% 87,412 29% International ................... 75,521 5% 37,211 3% 77,517 26% ----------- --- --------- --- --------- --- Total Casualty ................ 677,399 42% 474,000 40% 164,929 55% ----------- --- --------- --- --------- --- Finite Risk United States ................... 428,024 26% 264,473 23% 28,937 10% International ................... 36,151 2% 80,761 7% 14,907 5% ----------- --- --------- --- --------- --- Total Finite Risk ............. 464,175 28% 345,234 30% 43,844 15% ----------- --- --------- --- --------- --- Total United States ................... 1,350,408 82% 912,586 78% 153,872 52% International ................... 295,605 18% 259,556 22% 144,242 48% ----------- --- --------- --- --------- --- Total ......................... $ 1,646,013 100% 1,172,142 100% $ 298,114 100% ----------- --- --------- --- --------- ---
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 catastrophe excess-of-loss reinsurance treaties, per-risk excess-of-loss treaties and proportional treaties. We write a limited amount of other types of reinsurance on an opportunistic basis. We employ underwriters and actuaries with expertise in each of the following areas: - Property. We provide reinsurance coverage for damage to property and crops. Our catastrophe excess-of-loss reinsurance contracts provide a defined limit of liability, permitting us to quantify our aggregate maximum loss exposure for various catastrophe events. Quantification of loss exposure is fundamental to our ability to manage our loss exposure through geographical zone limits and program limits. In addition, when our pricing standards are met, we write other property coverages, including per-risk excess-of-loss or proportional treaties. We have also entered into an agreement with an underwriting manager to underwrite property facultative and program reinsurance risks. - Marine. We provide reinsurance coverage for marine and offshore energy insurance programs. Coverages reinsured include hull damage, protection and indemnity, cargo damage, satellite damage and general marine liability. Within Marine, we also write commercial and general aviation reinsurance. Marine reinsurance treaties include excess-of-loss as well as proportional treaties. We emphasize excess-of-loss treaties that allow our evaluation using experience and exposure pricing models. CASUALTY The Casualty operating segment includes principally reinsurance treaties that cover umbrella liability, general and product liability, professional liability, workers' compensation, casualty clash, automobile liability, surety and trade credit. This segment also includes accident and health reinsurance - 8 - treaties, which are predominantly reinsurance of health insurance products. We generally write casualty reinsurance on an excess-of-loss basis. Most frequently, we respond to claims on an individual risk basis, providing coverage when a claim for a single, original insured reaches our attachment point. We write some excess-of-loss treaties on an occurrence basis that respond when all of a ceding company's claims from multiple original insureds arising from a single claims event exceed our attachment point. On an opportunistic basis, we may write proportional treaties. We seek reinsurance treaties covering established books of insurance products where we believe that past experience permits a reasonable estimation of the reinsurance premium adequacy. We underwrite new exposures selectively and only after a comprehensive evaluation of the risk being reinsured and the capabilities of the ceding company. We employ underwriters and pricing actuaries with expertise in each of the following areas: - Umbrella Liability. An umbrella policy is an excess insurance policy that provides coverage, typically for general liability or automobile liability, when claims, individually or in the aggregate, exceed the limit of the original policy underlying the excess policy. A claim must exceed the limit of some underlying policy for the claim to be considered under an umbrella policy. We primarily reinsure commercial umbrella liability policies. - General and Product Liability. We provide reinsurance of third party liability coverages for commercial and personal insureds. We provide, predominantly on an excess-of-loss basis, various coverages of both small and large companies, including commercial, farmowners and homeowners policies as well as third party liability coverages such as product liability. - Professional Liability. We write reinsurance treaties for professional liability programs, including directors and officers, employment practices liability, and errors and omissions for professionals such as lawyers, medical professionals, architects, engineers and other professionals. In most circumstances, the underlying insurance products for these lines of business are written on a claims made basis, which requires claims related to the liabilities insured under the policy to be submitted to the insurer during a specified coverage period. - Accident and Health. We provide accident and health reinsurance, often in the form of quota share reinsurance of a ceding company writing aggregate and per-person stop loss coverage of self-insured employer medical plans. We also write reinsurance of first dollar health insurance, student health insurance, Medicare and Medicare supplement, and other forms of accident and health insurance. - Workers' Compensation. We reinsure workers' compensation on a catastrophic basis as well as on a per-claimant basis. We may provide full statutory coverage or coverage that is subject to specific carve-outs. Our predominant exposure to workers' compensation would generally arise from a single claims occurrence, such as a factory explosion, involving more than one claimant. - Casualty Clash. Casualty clash reinsurance responds to claims arising from a single set of circumstances covered by more than one insurance policy or multiple claimants on one policy. This type of reinsurance is analogous to property catastrophe reinsurance, but written for casualty lines of business. Our casualty clash treaties are generally excess-of-loss contracts with both occurrence limits and aggregate limits. - Automobile Liability. Automobile insurance policies provide first party coverage for damage to the insured's vehicle and third party coverage for the insured's liability to other parties for injuries and for damage to their property due to the use of the insured vehicle. These insurance - 9 - policies may also provide coverage for uninsured motorists and medical payments. We generally reinsure automobile liability on an excess-of-loss basis, generally for claims greater than $100,000. Our predominant exposure arises from third party liability claims and the related legal defense costs. - Surety. Our surety business relates to the reinsurance of risks associated with commercial and contract surety bonds issued to third parties to guarantee the performance of an obligation by the principal under the bond. Commercial bonds guarantee the performance of compliance obligations arising out of regulatory or statutory requirements. Contract bonds guarantee the performance of contractual obligations between two parties and include payment and performance bonds. The majority of our surety treaties are written on an excess-of-loss basis with an aggregate limit. - Trade Credit. Trade credit insurance is purchased by companies to ensure that invoices for goods and services provided to their customers are paid on time. Our trade credit coverages provide reinsurance for financial losses sustained through the failure of an insured's customers to pay for goods or services supplied to them. We reinsure trade credit both on a proportional and an excess-of-loss basis. 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. Thus, this type of coverage typically is less expensive to the ceding company. The finite risk contracts that we underwrite generally provide prospective protection, meaning coverage is provided for losses that are incurred after inception of the contract, as contrasted with retrospective coverage which covers losses that are incurred prior to inception of the contract. The three main categories of finite risk contracts are quota share, multi-year excess-of-loss and whole account aggregate stop loss: - Finite quota share. Under finite quota share reinsurance contracts, the reinsurer agrees to indemnify a ceding company for a percentage of its losses up to an aggregate maximum or cap in return for a percentage of the ceding company's premium, less a ceding commission. The expected benefit to the ceding company provided by finite quota share reinsurance is a sharing of losses with the reinsurer and increased underwriting capacity of the ceding company. These contracts often provide broad protection and may cover multiple classes of a ceding company's business. Unlike a typical traditional quota share reinsurance agreement, these contracts often provide for profit commissions which take into account investment income for purposes of calculating the reinsurer's profit on business ceded. Unlike traditional quota share reinsurance agreements, finite quota share contracts are often written on a funds withheld basis, meaning the parties agree that funds that would normally be remitted to a reinsurer are withheld by the ceding company. - Multi-year excess-of-loss. These reinsurance contracts often complement ceding companies' traditional excess-of-loss reinsurance programs. This type of contract often carries an up-front premium plus additional premiums which are dependent on the magnitude of losses claimed by the ceding company under the contract. The expected benefit to the ceding company on multi-year excess-of-loss reinsurance is that the ceding company has the ability to negotiate specific terms and conditions that remain applicable over multiple years of coverage. These contracts - 10 - may cover multiple classes of a ceding company's business and typically provide the benefit of reducing the impact of large losses on a ceding company's underwriting results. In general, these contracts are designed so that the ceding company funds the expected level of loss activity over the multi-year period. The reinsurer incorporates a profit margin to cover its costs and the risk that losses are worse than expected. The payment of premiums based on the magnitude of losses claimed is intended to benefit the ceding company by linking its own loss experience to the actual cost of reinsurance over time. The multiple year term and premium structure of multi-year excess-of-loss reinsurance contracts are not typically found in traditional reinsurance contracts. - Whole account aggregate stop loss. Aggregate stop loss reinsurance contracts provide broad protection against a wide range of contingencies that are difficult to address with traditional reinsurance, including inadequate pricing by a ceding company or higher frequency of claims than the ceding company expected. The reinsurer on a whole account aggregate stop loss contract agrees to indemnify a ceding company for aggregate losses in excess of a deductible specified in the contract. These contracts can be offered on a single or multi-year basis, and may provide catastrophic and attritional loss protection. The benefit of whole account aggregate stop loss contracts to ceding companies is that such contracts provide the broadest possible protection of a ceding company's underwriting results which is not generally available in the traditional reinsurance market. Unlike traditional reinsurance contracts, these contracts often contain sub-limits of coverage for losses on certain classes of business or exposures. These contracts are often written on a funds withheld basis. In addition, these contracts often include provisions for profit commissions which take into account investment income for purposes of calculating the reinsurer's profit on business ceded. MARKETING We market our reinsurance products worldwide through our underwriting offices and non-exclusive relationships with the leading reinsurance brokers active in the U.S. and non-U.S. markets. Based on in-force premiums written by the Company at December 31, 2004, the five brokers from which we derived the largest portions of our business (with the approximate percentage of business derived from such brokers and their affiliates) are Benfield Blanch Inc. (28%), Marsh & McLennan Companies (25%), Aon Corporation (16%), Willis Group Holdings (8%) and Towers Perrin (7%). The loss of business relationships with any of these top five brokers could have a material adverse effect on our business. In addition to their role as intermediaries in placing risk, brokers perform data collection, contract preparation and other administrative tasks. We believe that by relying largely on reinsurance brokers we are able to avoid the expense and regulatory complications of a worldwide network of offices, thereby minimizing fixed costs associated with marketing activities. We believe that by maintaining close relationships with brokers we are able to obtain access to a broad range of potential ceding companies. UNDERWRITING AND RISK MANAGEMENT Our disciplined approach to underwriting and risk management emphasizes profitability rather than premium volume or market share. We seek to limit our overall exposure to risk by limiting the amount of reinsurance we write by geographic zone, by peril and by type of program or contract. Our risk management uses a variety of means, including the use of contract terms, diversification criteria, probability analysis and analysis of comparable historical loss experience. We estimate the impact of certain catastrophic events using - 11 - catastrophe modeling software and contract information to evaluate our exposure to losses from individual contracts and in the aggregate. For catastrophe coverages exposed to natural perils, we measure our exposure to aggregate catastrophe claims using a catastrophe computer model that analyzes the effect of wind speed and earthquakes on the property values within our portfolio. We seek to limit the amount of capital that we can potentially lose from a severe catastrophe event, however there can be no assurance that we will successfully limit actual losses from such a catastrophe event. We also monitor our exposures from non-natural peril catastrophe exposed accumulating risks, including surety, umbrella liability, directors and officers liability, trade credit and terrorism reinsurance. Many of our reinsurance contracts do not contain an aggregate loss limit or a loss ratio limit, which means that there is no contractual limit to the number of claims that we may be required to pay pursuant to such reinsurance contracts. However, substantially all of our property reinsurance contracts with natural catastrophe exposure have occurrence limits that limit our exposure. In addition, substantially all of our high layer property, casualty and marine excess-of-loss contracts contain aggregate loss limits. Our actuaries and underwriters work together to establish appropriate pricing models for these purposes. In connection with the review of any program proposal, we consider the quality of the ceding company, including the experience and reputation of its management, its capital and its risk management strategy. In addition, we seek to obtain information on the nature of the perils to be included and, in the case of natural peril catastrophe exposures, aggregate information as to the location or locations of the risks covered under the reinsurance contract. We request information on the ceding company's loss history for the perils proposed to be reinsured, together with relevant underwriting considerations, which would impact exposures to reinsurers. If the program meets all these initial underwriting criteria, we then evaluate the proposal in terms of its risk/reward profile to assess the adequacy of the proposed pricing and its potential impact on our overall return on capital. We use sophisticated modeling techniques to measure and estimate loss exposure under both simulated and actual loss scenarios and in comparing exposure portfolios to both single and multiple events. We take an active role in the evaluation of commercial catastrophe exposure models, which form the basis for our own proprietary pricing models. These computer-based loss modeling systems primarily utilize direct exposure information obtained from our clients in addition to independent external data, including data compiled by A.M. Best Company ("Best's"), to assess each client's potential for catastrophe losses. We believe that modeling is an important part of the underwriting process for catastrophe exposure pricing. Our client base may also use one or more of the various modeling consulting firms in their exposure management analysis. We also have access to the historical loss experience of St. Paul Re to assist us in pricing individual treaties and overall lines of business. In 2002, we entered into a five-year Services and Capacity Reservation Agreement with RenaissanceRe, pursuant to which RenaissanceRe provides consulting services to us in connection with our property catastrophe book of business. No more than twice per year, at our request, RenaissanceRe analyzes our property catastrophe treaties and contracts and assists us in measuring risk and managing our aggregate catastrophe exposures. RISK DIVERSIFICATION In addition to the strategies described above to manage our risks, we seek to diversify our property catastrophe exposure across geographic zones around the world in order to obtain a favorable spread of risk. We attempt to limit our coverage for risks located in a particular zone to a predetermined - 12 - level. Currently, our greatest property exposures are in states on the west and gulf coasts and in the southeastern part of the United States, as well as in the Caribbean, Japan and northern Europe. We maintain a database of our exposures in each geographic zone and estimate our probable maximum loss for each zone and for each peril (e.g., earthquakes, hurricanes and floods) to which that zone is subject based on catastrophe models and underwriting assessments. We also use catastrophe modeling to review exposures on events that cross country borders such as wind events that may affect the Caribbean and Florida or the United Kingdom and continental Europe. The largest exposures are in the United States for earthquake and hurricane, in Europe for flood and wind, and in Japan for earthquake and typhoons. We seek to diversify our casualty exposure by writing casualty business throughout the United States and internationally. In addition, we seek to diversify our casualty exposure by writing casualty reinsurance across a broad range of product lines. RETROCESSIONAL REINSURANCE We may obtain retrocessional reinsurance to reduce liability on individual risks, protect against catastrophic losses and obtain additional underwriting capacity. The major types of retrocessional coverage that we purchase or may purchase include specific coverage for certain property, marine and casualty exposures and catastrophe coverage for property exposures. We may purchase other retrocessional coverage on a selective basis. Our decisions with respect to purchasing retrocessional coverage take into account both the potential coverage and market conditions with respect to the pricing, terms, conditions and availability of such coverage, with the aim of securing cost-effective protection. We expect that the type and level of retrocessional coverage will vary over time, reflecting our view of the changing dynamics of both the underlying exposure and the reinsurance markets. There can be no assurance that retrocessional coverage will be available on terms acceptable to us. We consider the financial strength of retrocessionaires when determining whether to purchase retrocessional coverage from them. Retrocessional coverage is generally derived from companies rated "A" or better by Best's unless the retrocessionaire's 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 Best's. The financial performance and rating status of all material retrocessionaires is routinely monitored. Retrocessional agreements do not relieve us from our obligations to the insurers and reinsurers from whom we assume business. Consequently, the failure of retrocessionaires to honor their obligations would result in losses to us. For the year ended December 31, 2004, Platinum Bermuda reinsured in the aggregate approximately 70% of Platinum US' reinsurance business and 55% of Platinum UK's reinsurance business. Platinum Bermuda established and funded trusts to collateralize its retrocessional obligations to Platinum US and Platinum UK. Platinum US and Platinum UK also obtained from third party retrocessionaires excess-of-loss per occurrence coverage of $21.25 million in excess of $10 million with respect to marine business and aggregate excess-of-loss coverage of $5 million with respect to crop business. In addition, Platinum US reinsured Platinum UK for $60 million per occurrence on an excess-of-loss basis in excess of $50 million with respect to international property business. Pursuant to the Services and Capacity Reservation Agreement with Renaissance Re described above, at our request RenaissanceRe will provide us with quotations for non-marine property catastrophe retrocessional coverage with aggregate limits up to $100 million annually, either on an excess-of-loss or - 13 - proportional basis. These quotations, which are in RenaissanceRe's sole discretion, reflect, among other things, an analysis of exposure, limit, retention, exclusions and other treaty terms. The annual fee that we pay to RenaissanceRe for this coverage commitment and the consulting services is the greater of (i) $4 million or (ii) 3.5% of our aggregate gross written non-marine non-finite property catastrophe premium (including reinstatements), adjusted annually 30 days after each anniversary. This annual fee is in addition to any retrocessional premium otherwise payable to RenaissanceRe for retrocessional coverage purchased by us from RenaissanceRe. The fees under this agreement were approximately $6.1 million for the contract period from October 1, 2003 through September 30, 2004. CLAIMS ADMINISTRATION Our claims personnel administer claims arising from our reinsurance contracts. The responsibilities of our claims personnel include reviewing loss reports, monitoring claims, handling activities of clients, requesting additional information where appropriate, posting case reserves and approving payment of individual claims. Authority for payment and establishing reserves is based upon the level and experience of claims personnel. In addition to managing reported claims and conferring with ceding companies on claims matters, our claims personnel conduct periodic audits of specific claims and the overall claims procedures of our ceding companies at their offices. We rely on our 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. Moreover, prior to accepting certain risks, our underwriters will often request that our claims personnel conduct pre-underwriting claims audits of prospective ceding companies. Through these audits, we attempt to evaluate the ceding company's claims-handling practices, including the organization of their claims department, their fact-finding and investigation techniques, their loss notifications, the adequacy of their reserves, their negotiation and settlement practices and their adherence to claims-handling guidelines. Following these audits, our claims personnel provide feedback to the ceding company, including an assessment of the claims operation and, if appropriate, recommendations regarding procedures, processing and personnel. With respect to the reinsurance contracts that we assumed from St. Paul Re, claims are managed by St. Paul Re's claims department, subject to our supervision and management, pursuant to the quota share retrocession agreements that we entered into with St. Paul. Under those agreements, St. Paul's subsidiaries transferred to us the liabilities, related assets and rights and risks under substantially all of the reinsurance contracts entered into by St. Paul's subsidiaries on or after January 1, 2002 (except for certain liabilities relating to the flooding in Europe in August 2002 and reinsurance underwritten in London covering exposures arising from financial institutions). We reimburse St. Paul for its costs of managing these claims. We may, at our discretion and expense, take over administration of any specific claims. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Under applicable insurance laws and regulations and accounting principles generally accepted in the United States of America ("U.S. GAAP"), we establish liabilities for payment of losses and loss adjustment expenses ("LAE") that will arise from our reinsurance products. These liabilities are balance sheet estimates of future amounts required to pay losses and LAE for reinsured claims that have occurred on or before the balance sheet date. Unpaid losses and LAE fall into two categories: estimates of liabilities for losses and LAE incurred but not reported ("IBNR") and case basis estimates for reported losses and LAE. Estimates of IBNR are balance sheet liabilities established to provide for losses for claims arising from occurrences or events that have given rise to a loss before any claims are reported. Significant periods of time can elapse between the occurrence of a reinsured claim, its reporting by the - 14 - insured to the primary insurer and from the primary insurer to the reinsurer. Under U.S. GAAP, we do not establish liabilities until the occurrence of an event that may give rise to a loss. Upon receipt of a notice of claim from a ceding company, we establish an estimate of the case basis liability for our portion of the ultimate settlement. Case basis liabilities are usually based upon the liability estimate and other information reported by the ceding company and may be increased or reduced as deemed necessary by our claims personnel. We establish liabilities for losses and LAE based on past experience (including the historical loss experience of St. Paul Re, current developments and likely trends). Because estimation of unpaid losses and LAE is an inherently uncertain process, we believe that quantitative techniques are enhanced by professional and managerial judgment. The establishment of liabilities for losses and LAE, and adjustments to liabilities resulting from changes in our estimates, are reflected in current income. Unpaid losses and LAE represent our best estimates, at a given point in time, of the ultimate settlement and administration costs of claims incurred, and it is possible that the ultimate liability may materially differ from such estimates. Such estimates are not precise because, among other things, they are based on predictions of future developments and estimates of future trends in claim severity and frequency and other factors. During the claim settlement period, it often becomes necessary to refine and adjust the case basis estimates of liability, and thus the estimates may be adjusted either upward or downward, based on periodic reviews of developments. Even after such adjustments, ultimate liability may materially differ from the revised estimates. The uncertainty inherent in loss estimation is particularly pronounced for casualty coverages, such as umbrella, general and product liability, professional liability and automobile liability, where information, such as required medical treatment and costs for bodily injury claims, only emerges over time. In the overall reserve setting process, provisions for economic inflation and changes in the social and legal environment are considered. The uncertainty inherent in the reserving process for primary insurers is even greater for the reinsurer. This is because of, but not limited to, the time lag inherent in reporting information from the primary insurer to the reinsurer and differing reserving practices among ceding companies. Development of liability for unpaid losses and LAE for the years ended December 31, 2004 and 2003 and the two-month period ended December 31, 2002 is summarized as follows ($ in thousands): - 15 -
2002 2004 2003 Period ----------- ------- ---------- Net unpaid losses and LAE as of the beginning of period ............................................. $ 731,918 281,659 $ - ----------- ------- ---------- Net incurred related to: Current year .......................................... 1,101,820 648,137 60,356 Prior years ........................................... (82,016) (63,966) - ----------- ------- ---------- Total net incurred losses and LAE ............... 1,019,804 584,171 60,356 ----------- ------- ---------- Unpaid losses and LAE assumed from St. Paul ............. - - 221,303 ----------- ------- ---------- Net paid losses and LAE: Current year .......................................... 174,870 102,669 - Prior years ........................................... 205,889 41,709 - ----------- ------- ---------- Total net paid losses and LAE ................... 380,759 144,378 - Effects of foreign currency exchange rate changes ....... 8,264 10,466 - ----------- ------- ---------- Net unpaid losses and LAE as of the end of period ....... 1,379,227 731,918 281,659 Reinsurance recoverable ................................. 1,728 5,016 - ----------- ------- ---------- Gross unpaid losses and LAE at end of period ............ $ 1,380,955 736,934 $ 281,659 ----------- ------- ----------
The favorable development in 2004 related to the prior year of $82,016,000 includes approximately $57,151,000 of net favorable development on property and certain other lines of business with relatively short patterns of reported losses, including approximately $7,700,000 attributable to prior years' catastrophe losses. In addition, the favorable development in 2004 includes approximately $24,865,000 of reductions in unpaid losses and LAE associated with changes in 2004 of estimates of premiums and the patterns of their earnings across current and prior accident years. Such changes did not have a significant net effect on the current year's results of operations. The lines experiencing favorable development are principally property coverages provided in both the Property and Marine and Finite Risk segments. During 2004 and 2003, actual reported losses were significantly less than expected for these short-tailed property lines resulting in reductions in estimated ultimate losses. The favorable development in 2003 related to the prior year of $63,966,000 includes approximately $50,866,000 of net favorable development on property and certain other lines of business with relatively short patterns of reported losses. The favorable development also includes approximately $13,100,000 of reductions in unpaid losses and LAE associated with the reduction in 2003 of casualty premiums originally estimated and earned in 2002. The following table shows the development of liability for net unpaid losses and LAE for the years ended December 31, 2004 and 2003 and the two-month period ended December 31, 2002. The re-estimated liabilities reflect additional information regarding claims incurred prior to the end of the preceding financial year. A redundancy or deficiency will result from changes in estimates of liabilities recorded at the end of the prior year. The cumulative redundancy reflects the cumulative differences between the original estimate and the currently re-estimated liability. Annual changes in the estimates are reflected in the statement of income for each year as the liabilities are revalued. Unpaid losses and LAE denominated in foreign currencies are restated at the foreign exchange rates in effect at December 31, 2004 and the resulting cumulative foreign exchange effect is shown as an adjustment to the cumulative redundancy. Each amount in the tables includes the effects of all changes in amounts for the prior year. The table does not present accident year or underwriting year development data. Conditions and trends - 16 - that have affected the development of liabilities in the past may not necessarily occur in the future. Therefore, it would not be appropriate to extrapolate future deficiencies or redundancies based on the following table ($ in thousands):
2002 2003 2004 ---------- ------- ---------- Net unpaid losses and LAE $ 281,659 731,918 $1,379,227 Net unpaid losses and LAE re-estimated as of: One year later 224,693 680,173 Two years later 194,422 Net cumulative redundancy 87,237 51,745 Less deficiency due to foreign currency exchange 8,986 7,000 ---------- ------- Cumulative redundancy excluding foreign currency exchange 96,223 58,745 ---------- ------- Net cumulative paid losses and LAE paid as of: One year later 41,709 287,663 Two years later 62,604 Gross liability-end of year 281,659 736,934 1,380,955 Reinsurance recoverable - 5,016 1,728 ---------- ------- ---------- Net liability-end of year 281,659 731,918 $1,379,227 ---------- ------- ---------- Gross liability- re-estimated 194,422 685,189 Gross cumulative redundancy $ 87,237 51,745
INVESTMENTS Reinsurance company investments must comply with applicable laws and regulations, which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to some qualifications, in federal, state and municipal obligations, corporate bonds, mortgage and asset backed securities, preferred and common equity securities, sovereign and supranational securities, mortgage loans, real estate and some other investments. INVESTMENT MANAGEMENT AGREEMENT We have entered into an investment management agreement with Alliance Capital Management L.P. ("Alliance"), which provides investment advisory services to us. The agreement may be terminated by either party by giving 30 days' notice of termination. We pay Alliance a fee based on the amount of assets managed. We intend to consider alternative investment management firms during 2005. GENERAL GUIDELINES We have developed investment guidelines for the management of our investment portfolio by Alliance. Although these guidelines stress diversification of risk, preservation of capital and market liquidity, investments are subject to market risks and fluctuations, as well as risks inherent in particular securities. Interest rates and levels of inflation also affect investment returns. The primary objective of the portfolio, set forth in the guidelines, is to maximize investment returns consistent with appropriate - 17 - safety, diversification, tax and regulatory considerations and to provide sufficient liquidity to enable us to meet our obligations on a timely basis. Our investment strategy takes into consideration the risks inherent in our business. For this reason, our investment policy is conservative with a strong emphasis on high quality, fixed maturity investments. Consistent with this policy, the duration of our portfolio takes into account the estimated duration of our reinsurance liabilities and other contractual liabilities. Within our fixed maturity portfolio we invest only in investment grade securities. We currently do not intend to invest in real estate, common equity securities or other classes of alternative investments, although from time to time we make equity investments of a strategic nature. Our investment guidelines contain restrictions on the portion of the portfolio that may be invested in the securities of any single issue or issuer, with the exception of governments or government agencies with prescribed minimum ratings. Our investment managers may be instructed to invest some of the investment portfolio in currencies other than U.S. dollars based upon the business we anticipate writing, the exposures and unpaid losses and LAE on our books, or regulatory requirements. Our investment guidelines provide that financial futures and options and foreign exchange contracts may not be used in a speculative manner but may be used only as part of a defensive hedging strategy. From time to time, we expect to reevaluate our investment guidelines to reflect any changes in our assumptions about liability duration, market conditions, prevailing interest rates and other factors discussed above. Any change in our guidelines will be subject to the ongoing oversight and approval of the Board of Directors. CLASSIFICATION We classify our investments as available-for-sale, trading or other invested assets. Our available-for-sale and trading portfolios are comprised entirely of investment grade fixed maturity investments. Other invested assets currently represent a strategic equity investment in a privately held reinsurance company. VALUATION All of our fixed maturity securities are carried at their estimated fair value. For our available-for-sale securities, the difference between amortized cost and the fair value, net of any deferred tax, (commonly referred to as net unrealized gain or loss) is charged or credited directly to our shareholders' equity. For our trading securities, the difference is charged or credited to our statement of income. We calculate the fair value based on quoted market prices, as reported by reputable market data providers. If quoted market prices are not available, fair values are estimated either based on values obtained from independent pricing services or based on cash flow estimates. Realized gains and losses on disposal of our fixed maturity investments are determined based upon specific identification of the cost of investments sold and are recorded in our statement of income. We routinely review our 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, including the duration 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. The Company believes it has the ability to hold any specific security to its stated maturity. This is based on current and anticipated future positive cash flow from operations that generates sufficient liquidity in order to meet our obligations. If we determine that an unrealized loss on a - 18 - security is other than temporary, we write down the carrying value of the security and record a realized loss in our statement of income. Other invested assets, which do not have a quoted market price, are carried at estimated fair value. Cash equivalents and short-term investments are carried at cost, which approximates fair value. The following table shows, in the aggregate, the fair value of our portfolio of invested assets (except for other invested assets) at December 31, 2004 ($ in thousands): U.S. Government and U.S. Government agencies ...... $ 4,203 Corporate bonds ................................. 1,158,797 Mortgage and asset-backed securities .............. 511,069 Municipal bonds ................................... 215,251 Foreign governments, states and foreign corporate ....................................... 347,206 ---------- Total bonds ............................... 2,236,526 Redeemable preferred stocks ....................... 3,676 ---------- Total fixed maturities .................... $2,240,202 ----------
QUALITY Our current investment guidelines call for our invested asset portfolio to have at least an average A2 rating as measured by Moody's Investors Service ("Moody's"). At December 31, 2004, our fixed maturity portfolio had a dollar weighted average rating of Aa3. The average yield of our portfolio for the year ended December 31, 2004 was 4.3%. The following table summarizes the composition of the fair value of the fixed maturity portfolio at December 31, 2004 by rating as assigned by Moody's:
Fair Value % of Total ---------- ---------- Aaa.................. $ 764,002 34.1% Aa - Aa3............. 447,071 20.0% A - A3............... 909,403 40.6% Baa.................. 119,726 5.3% ---------- ----- Total............ $2,240,202 100.0% ---------- -----
DURATION At December 31, 2004, our fixed maturity portfolio had an average weighted duration of 3.9 years. The following table summarizes the fair value of our available-for-sale fixed maturity portfolio by contractual maturities at December 31, 2004; actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties ($ in thousands): - 19 -
Amortized Cost Fair Value ---------- ---------- Due in one year or less ......................... $ 54,567 $ 54,390 Due from one to five years ...................... 929,647 932,655 Due from five to ten years ...................... 411,388 415,697 Due in ten or more years ........................ 236,181 240,042 Mortgage and asset backed securities ............ 508,757 511,069 ---------- ---------- Total bonds ............................. 2,140,540 2,153,853 Redeemable preferred stocks ..................... 3,750 3,676 ---------- ---------- Total available-for-sale fixed maturities .......................... $2,144,290 $2,157,529 ---------- ----------
COMPETITION The property and casualty reinsurance industry is highly competitive. We compete with reinsurers worldwide, some of which have greater financial, marketing and management resources than ours. Some of our competitors are large financial institutions that have reinsurance segments, while others are specialty reinsurance companies. Financial institutions have also created alternative capital market products that compete with reinsurance products, such as reinsurance securitization. Our principal competitors vary by type of business. Bermuda-based reinsurers are significant competitors on property catastrophe business. Lloyd's of London syndicates are significant competitors on marine business. On international business, the large European reinsurers are significant competitors. Large U.S. direct reinsurers, as well as lead U.S.-based broker market reinsurers, are significant competitors on U.S. casualty business. On an overall basis, we expect that our most significant competitors include ACE Limited, Arch Capital Group Ltd., Axis Capital Holdings, The Chubb Corporation, White Mountains Insurance Group, Ltd., Endurance Specialty Holdings, Everest Re Group, General Re Corporation, IPC Holdings Ltd., Lloyd's of London, Montpelier Re Holdings Ltd., Munich Re Group, Odyssey Re Holdings Corp., Partner Re Limited, RenaissanceRe, Swiss Reinsurance Company, Transatlantic Holdings and XL Capital Limited. Following the September 11, 2001 terrorist attack, a number of individuals and companies in the reinsurance industry established new, well-capitalized, Bermuda-based reinsurers to benefit from improved market conditions, and a number of existing competitors raised additional capital. Many of the reinsurers that entered the reinsurance markets have more capital than we have. In addition, there may be established companies or new companies of which we are not aware that may be planning to commit capital to this market. The full effect of this additional capital on the reinsurance market and on the terms and conditions of the reinsurance contracts of the types we expect to underwrite may not be known for some time. Competition in the types of reinsurance business that we underwrite is based on many factors, including premium charges and other terms and conditions offered, services provided, ratings assigned by independent rating agencies, speed of claims payment, claims handling experience, perceived financial strength and experience and reputation of the reinsurer in the line of reinsurance to be underwritten. Traditional as well as new capital market participants from time to time produce alternative products (such as reinsurance securitizations, catastrophe bonds and various derivatives such as swaps) that may compete with certain types of reinsurance, such as property catastrophe. Over time, these numerous initiatives could significantly affect supply, pricing and competition in our industry. RATINGS AND COLLATERAL Best's is generally considered to be a significant rating agency for the evaluation of insurance and reinsurance companies. Best's ratings are based on a quantitative evaluation of performance with respect - 20 - to profitability, capital adequacy and liquidity and a qualitative evaluation of spread of risk, reinsurance programs, investments, unpaid losses and management. Best's has assigned a financial strength rating of "A" (Excellent) to our operating subsidiaries. This rating is the third highest of sixteen rating levels. According to Best's, a rating of "A" indicates Best's opinion that a company has an excellent ability to meet its ongoing obligations to policyholders. Ratings are used by ceding companies and reinsurance intermediaries as an important means of assessing the financial strength and quality of reinsurers. In addition, a ceding company's own rating 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 rating. Furthermore, it is increasingly common for our reinsurance contracts to contain terms that would allow the ceding companies to cancel the contract or require us to provide collateral if we 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 the extent to which this cancellation right would be exercised, if at all, or what effect any 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 Best's 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 trust for the benefit of the ceding company or permitting the ceding company 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. EMPLOYEES At December 31, 2004, we employed 159 people. None of our employees is subject to collective bargaining agreements. We are not aware of any efforts to implement such agreements at any of our subsidiaries. Certain of the Bermuda-based employees of Platinum Holdings, including our Chief Executive Officer, Chief Financial Officer and General Counsel, are employed pursuant to work permits granted by Bermuda authorities. These permits expire at various times during the next few years. We have no reason to believe that these permits would not be extended at expiration upon request, although no assurance can be given in this regard. - 21 - REGULATION GENERAL The business of reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. Reinsurers are generally subject to less direct regulation than primary insurers. In Bermuda, we operate under relatively less intensive regulatory requirements. However, in the United States and in the United Kingdom, licensed reinsurers must comply with financial supervision standards comparable to those governing primary insurers. Accordingly, Platinum US and Platinum UK are subject to extensive regulation under applicable statutes. In the United States, those statutes delegate regulatory, supervisory and administrative powers to state insurance commissioners. BERMUDA REGULATION Platinum Holdings and Platinum Bermuda are organized and domiciled in Bermuda. As a holding company, Platinum Holdings is not subject to Bermuda insurance regulations. The Insurance Act 1978 (the "Insurance Act"), which regulates the insurance business of Platinum Bermuda, provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Bermuda Monetary Authority (the "Authority"), which is responsible for the day-to-day supervision of insurers. Under the Insurance Act, insurance business includes reinsurance business. An insurer's registration may be canceled by the Authority on certain grounds specified in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act or if, in the opinion of the Authority, the insurer has not been carrying on business in accordance with sound insurance principles. The Insurance Act also imposes solvency and liquidity standards and auditing and reporting requirements on Bermuda insurance companies and grants to the Authority powers to supervise, investigate and intervene in the affairs of insurance companies. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below. The Insurance Act distinguishes between insurers carrying on long-term business and insurers carrying on general business. There are four classifications of insurers carrying on general business, with Class 4 insurers being the largest and, consequently, subject to the strictest regulation. Platinum Bermuda is registered as a Class 4 and long-term insurer and is regulated as such under the Insurance Act. Principal Representative. An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. For the purpose of the Insurance Act, the principal office of Platinum Bermuda is at our principal executive offices in Bermuda, and Platinum Bermuda's principal representative is Barton W. Hedges, the President and Chief Operating Officer of Platinum Bermuda. Without a reason acceptable to the Authority, an insurer may not terminate the appointment of its principal representative, and the principal representative may not cease to act as such, unless 30 days' notice in writing to the Authority is given of the intention to do so. It is the duty of the principal representative, within 14 days of reaching the view that there is a likelihood of the insurer for which the principal representative acts becoming insolvent or that a reportable "event" has, to the principal representative's knowledge, occurred or is believed to have occurred, to make a report in writing to the Authority setting out all the particulars of the case that are available to the principal representative. Examples of such a reportable "event" include failure by the insurer to comply substantially with a condition imposed upon the insurer by the Authority relating to a solvency margin or liquidity or other ratio. - 22 - Independent Approved Auditor. Every registered insurer must appoint an independent auditor who will annually audit and report on the statutory financial statements and the statutory financial return of the insurer, both of which, in the case of Platinum Bermuda, are required to be filed annually with the Authority. The independent auditor of Platinum Bermuda must be approved by the Authority and may be the same person or firm that audits Platinum Bermuda's financial statements and reports for presentation to its shareholders. Platinum Bermuda's independent auditor is KPMG Bermuda. Loss Reserve Specialist. As a registered Class 4 insurer, Platinum Bermuda is required to submit an opinion of its approved loss reserve specialist with its statutory financial return in respect of its loss and LAE provisions. The loss reserve specialist, who will normally be a qualified casualty actuary, must be approved by the Authority. Platinum Bermuda's loss reserve specialist is Neal J. Schmidt, our Chief Actuary. Mr. Schmidt is a fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries. Approved Actuary. Platinum Bermuda, as a registered long-term insurer, is required to submit an annual actuary's certificate when filing its statutory financial return. The actuary's certificate shall state whether or not (in the opinion of the insurer's approved actuary) the aggregate amount of the liabilities of the insurer in relation to long-term business as at the end of the relevant year, exceeds the aggregate amount of those liabilities as shown in the insurer's statutory balance sheet. The actuary must be approved by the Authority and will normally be a qualified life actuary. Platinum Bermuda's approved actuary is William Hines. Mr. Hines is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. Statutory Financial Statements. Platinum Bermuda, as a general business insurer, will be required to submit its annual statutory financial statements as part of its annual statutory financial return. The Insurance Act prescribes rules for the preparation and substance of such statutory financial statements (which include, in statutory form, a balance sheet, an income statement, a statement of capital and surplus and notes thereto). The statutory financial statements are not prepared in accordance with U.S. GAAP and are distinct from the financial statements prepared for presentation to the insurer's shareholders under the Bermuda Companies Act 1981 (the "Companies Act"), which financial statements will be prepared in accordance with U.S. GAAP. Annual Statutory Financial Return. Platinum Bermuda is required to file with the Authority a statutory financial return no later than four months after its financial year-end (unless specifically extended). The statutory financial return for an insurer registered as a Class 4 general business and long-term insurer includes, among other matters, a report of the approved independent auditor on the statutory financial statements of such insurer, a general business solvency certificate, a long-term business solvency certificate, the statutory financial statements themselves, the opinion of the loss reserve specialist, an actuary's certificate and a schedule of reinsurance ceded. The solvency certificates must be signed by the principal representative and at least two directors of the insurer who are required to certify, among other matters, whether the minimum solvency margin has been met and whether the insurer complied with the conditions attached to its certificate of registration. The independent approved auditor is required to state whether in its opinion it was reasonable for the directors to so certify. Minimum Solvency Margin and Restrictions on Dividends and Distributions. Under the Insurance Act, the value of its long-term business assets must exceed the amount of its long-term liabilities by at least $250,000. The Insurance Act also provides that the general business assets of a Class 4 insurer, such as Platinum Bermuda, must exceed the amount of an insurer's general business liabilities by an amount greater than the prescribed minimum solvency margin. Platinum Bermuda: - 23 - (1) is required, with respect to its general business, to maintain a minimum solvency margin equal to the greatest of: (A) $100,000,000; (B) 50% of net premiums written (being gross premiums written less any premiums ceded by Platinum Bermuda, but Platinum Bermuda may not deduct more than 25% of gross premiums when computing net premiums written); and (C) 15% of loss and other insurance reserves; (2) is prohibited from declaring or paying any dividends during any financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio (and if it has failed to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, Platinum Bermuda is prohibited, without the approval of the Authority, from declaring or paying any dividends during the next financial year); (3) is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year's statutory balance sheet) unless it files with the Authority (at least seven days before payment of such dividends) an affidavit stating that it will continue to meet the required margins; (4) is prohibited, without the approval of the Authority, from reducing by 15% or more its total statutory capital as set out in its previous year's financial statements, and any application for such approval must include an affidavit stating that it will continue to meet the required margins; and (5) is required, at any time it fails to meet its solvency margin, within 30 days (45 days where total statutory capital and surplus falls to $75 million or less) after becoming aware of that failure or having reason to believe that such failure has occurred, to file with the Authority a written report containing certain information. Additionally, under the Companies Act, Platinum Holdings and Platinum Bermuda may not declare or pay a dividend if Platinum Holdings or Platinum Bermuda, as the case may be, has reasonable grounds for believing that it is, or after the payment would be, unable to pay its liabilities as they become due, or that the realizable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity ratio for general business insurers. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable and reinsurance balances receivable. There are certain categories of assets which, unless specifically permitted by the Authority, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined). Long-term Business Fund. An insurer carrying on long-term business is required to keep its accounts in respect of its long-term business separate from any accounts kept in respect of any other business. All receipts of its long-term business form part of its long-term business fund. No payment may be made directly or indirectly from an insurer's long-term business fund for any purpose other than a purpose related to the insurer's long-term business, unless such payment can be made out of any surplus - 24 - (certified by the insurer's approved actuary) to be available for distribution otherwise than to policyholders. Platinum Bermuda may not declare or pay a dividend to any person other than a policyholder unless the value of the assets in its long-term business fund (as certified by its approved actuary) exceeds the liabilities of the insurer's long-term business (as certified by the insurer's approved actuary) by the amount of the dividend and at least the $250,000 minimum solvency margin prescribed by the Insurance Act, and the amount of any such dividend may not exceed the aggregate of that excess (excluding the said $250,000) and any other funds properly available for payment of dividends, such as funds arising out of business of the insurer other than long-term business. Restrictions on Transfer of Business and Winding-Up. As a long-term insurer, Platinum Bermuda is subject to the following provisions of the Insurance Act: (1) all or any part of the long-term business, other than long-term business that is reinsurance business, may be transferred only with and in accordance with the sanction of the applicable Bermuda court; and (2) an insurer or reinsurer carrying on long-term business may only be wound-up or liquidated by order of the applicable Bermuda court, and this may increase the length of time and costs incurred in the winding-up of Platinum Bermuda when compared with a voluntary winding-up or liquidation. Supervision and Intervention. If it appears to the Authority that there is a risk of the insurer becoming insolvent, or that it is in breach of the Insurance Act or any conditions imposed upon its registration, the Authority may, among other things, direct the insurer (i) not to take on any new insurance business, (ii) not to vary any insurance contract if the effect would be to increase the insurer's liabilities, (iii) not to make certain investments, (iv) to realize certain investments, (v) to maintain in, or transfer to the custody of, a specified bank, certain assets, (vi) not to declare or pay any dividends or other distributions or to restrict the making of such payments, and/or (vii) to limit its premium income. Although Platinum Bermuda is organized in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the Authority. Pursuant to its non-resident status, Platinum Bermuda may hold any currency other than Bermuda dollars and convert that currency into any other currency (other than Bermuda dollars) without restriction. Platinum Bermuda is permitted to hold Bermuda dollars to the extent necessary to pay its expenses in Bermuda. As "exempted" companies, Platinum Holdings and Platinum Bermuda may not, without the express authorization of the Bermuda legislature or under a license granted by the Minister of Finance, participate in certain business transactions. Platinum Bermuda is a licensed reinsurer in Bermuda and so may carry on activities in Bermuda that are related to and in support of its reinsurance business. The Bermuda government actively encourages foreign investment in "exempted" entities like Platinum Holdings that are based in Bermuda, but do not operate in competition with local businesses. As well as having no restrictions on the degree of foreign ownership, Platinum Holdings and Platinum Bermuda are not currently subject to taxes on income or dividends or to any foreign exchange controls in Bermuda. In addition, currently there is no capital gains tax in Bermuda. Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not engage in any gainful occupation in Bermuda without the specific permission of the appropriate governmental authority. None of our executive officers is a Bermudian, and all such officers will be working in Bermuda under work permits. The Bermuda government recently announced a new policy that places a six-year term limit on individuals with work permits, subject to certain exceptions for key employees. - 25 - U.S. REGULATION Platinum US is organized and domiciled in the State of Maryland, is licensed in Maryland as a property and casualty insurer, and is licensed, authorized or accredited to write reinsurance in all 50 states of the United States and the District of Columbia. Although Platinum US is regulated by state insurance departments and applicable state insurance laws in each state where it is licensed, authorized or accredited, Platinum US' principal insurance regulatory authority is the Maryland Insurance Administration. In connection with the acquisition of Platinum US by Platinum Holdings, the Maryland Insurance Administration issued a consent order relating to Platinum US pursuant to which, among other things, we have agreed to comply with the notice and approval requirements with respect to certain transactions with RenaissanceRe and its affiliates. U.S. Insurance Holding Company Regulation of Platinum Holdings, Platinum Ireland and Platinum Finance. Platinum Holdings and Platinum Ireland as the indirect parent companies of Platinum US, and Platinum Finance as the direct parent company of Platinum US, are subject to the insurance holding company laws of Maryland, where Platinum US is organized and domiciled. These laws generally require an authorized insurer that is a member of a holding company system to register with the insurance department of the State of Maryland and to furnish annually financial and other information about the operations of companies within the holding company system. Generally, all transactions among companies in the holding company system affecting Platinum US, including sales, loans, reinsurance agreements, service agreements and dividend payments, must be fair and, if material or of a specified category, require prior notice and approval or non-disapproval by the Maryland Insurance Commissioner (the "Commissioner"). The insurance laws of Maryland prohibit any person from acquiring control of Platinum Holdings, Platinum Ireland, Platinum Finance or Platinum US unless that person has filed a notification with specified information with the Commissioner and has obtained the Commissioner's prior approval. Under the Maryland statutes, acquiring 10% or more of the voting stock of an insurance company or its parent company is presumptively considered a change of control, although such presumption may be rebutted. Accordingly, any person or entity who acquires, directly or indirectly, 10% or more of the voting securities of Platinum Holdings without the prior approval of the Commissioner will be in violation of these laws and may be subject to injunctive action requiring the disposition or seizure of those securities by the Commissioner or prohibiting the voting of those securities, or to other actions that may be taken by the Commissioner. In addition, many U.S. state insurance laws require prior notification to state insurance departments of a change in control of a nondomiciliary insurance company doing business in that state. While these pre-notification statutes do not authorize the state insurance departments to disapprove the change in control, they authorize regulatory action in the affected state if particular conditions exist, such as undue market concentration. In addition, any transactions that would constitute a change in control of Platinum Holdings, Platinum Ireland or Platinum Finance may require prior notification in those states that have adopted pre-acquisition notification laws. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Platinum Holdings, including through transactions, and in particular unsolicited transactions, that some or all of the shareholders of Platinum Holdings might consider to be desirable. U.S. Insurance Regulation of Platinum US. The terms and conditions of reinsurance agreements generally are not subject to regulation by any state insurance department in the U.S. with respect to rates or policy terms. This contrasts with primary insurance agreements, the rates and policy terms of which are generally closely regulated by state insurance departments. As a practical matter, however, the rates charged by primary insurers do have an effect on the rates that can be charged by reinsurers. - 26 - State insurance authorities have broad administrative powers with respect to various aspects of the reinsurance business, including licensing to transact business, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, and regulating investments and dividends. State insurance laws and regulations require Platinum US to file financial statements with insurance departments in each state where it is licensed, authorized or accredited to do business, and the operations of Platinum US are subject to examination by those departments at any time. Platinum US prepares statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these departments. State insurance departments conduct periodic examinations of the books and records and financial reporting of insurance companies domiciled in their states and of policy filing and market conduct of insurance companies doing business in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the National Association of Insurance Commissioners ("NAIC"). Under Maryland insurance law, Platinum US must give ten days' prior notice to the Commissioner of its intention to pay any dividend or make any distribution other than an extraordinary dividend or extraordinary distribution. The Commissioner has the right to prevent payment of such a dividend or such a distribution if the Commissioner determines, in the Commissioner's discretion, that after the payment thereof, Platinum US' policyholders' surplus would be inadequate or could cause Platinum US to be in a hazardous financial condition. In addition, Platinum US must give at least 30 days prior notice to the Commissioner before paying an "extraordinary dividend" or making an "extraordinary distribution" out of earned surplus. Extraordinary dividends and extraordinary distributions are dividends or distributions which, together with any other dividends and distributions paid during the immediately preceding twelve-month period, would exceed the lesser of: (1) 10% of Platinum US' statutory policyholders' surplus (as determined under statutory accounting principles) as of December 31 of the prior year; or (2) Platinum US' net investment income excluding realized capital gains (as determined under statutory accounting principles) for the twelve-month period ending on December 31 of the prior year and pro rata distribution of any class of Platinum US' own securities, plus any amounts of net investment income (excluding realized capital gains) in the three calendar years prior to the preceding year which have not been distributed. In order to enhance the regulation of insurers' solvency, the NAIC adopted a model law to implement risk-based capital ("RBC") requirements for life, health, and property and casualty insurance companies. Maryland has adopted the NAIC's model law. The RBC calculation, which regulators use to assess the sufficiency of an insurer's capital, measures the risk characteristics of a company's assets, liabilities and certain off-balance sheet items. RBC is calculated by applying factors to various asset, premium and liability items. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. Insurers that have less statutory capital than the RBC calculation requires are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy. The RBC ratios of Platinum US are above the ranges that would require any regulatory or corrective action. The NAIC assists state insurance departments in achieving insurance regulatory objectives, including the maintenance and improvement of state regulation. From time to time various regulatory and legislative changes have been proposed in the insurance industry, some of which could have an effect on reinsurers. The NAIC has instituted its Financial Regulatory Accreditation Standards Program - 27 - ("FRASP") in response to federal initiatives to regulate the business of insurance. FRASP provides a set of standards designed to establish effective state regulation of the financial condition of insurance companies. Under FRASP, a state must adopt certain laws and regulations, institute required regulatory practices and procedures, and have adequate insurance department personnel for enforcement thereof in order to become an "accredited" state. The NAIC determines whether individual states should be accredited, and each state's accreditation is determined by the NAIC periodically. If a state is not accredited or loses its accreditation, accredited states are not able to accept certain financial examination reports of insurers prepared solely by the regulatory agency in such unaccredited state. The State of Maryland is currently accredited under FRASP. Platinum Holdings has entered into a guaranty pursuant to which it has agreed to guarantee Platinum US' payment obligations under reinsurance contracts written by Platinum US on or after December 31, 2003 to the extent such payment obligations are not disputed or contested by Platinum US. In addition, Platinum Holdings has entered into a capital support agreement with Platinum US pursuant to which Platinum Holdings may be required from time to time to contribute capital to Platinum US in such amounts as shall be necessary to ensure that Platinum US will have adequate capital and surplus. The ability of a primary insurer to take credit for the reinsurance purchased from reinsurance companies is a significant component of reinsurance regulation. Typically, a primary insurer will only enter into a reinsurance agreement if it can obtain credit to statutory reserves on its statutory financial statements for the reinsurance ceded to the reinsurer. With respect to U.S. domiciled reinsurers that reinsure U.S. insurers, credit is usually granted when the reinsurer is licensed or accredited in a state where the primary insurer is domiciled. Platinum UK and Platinum Bermuda. Platinum UK and Platinum Bermuda are not licensed, accredited or approved in any state in the U.S. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable collateral arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited. Platinum UK or Platinum Bermuda may be subject to reinsurance premium excise taxes in the United States (1%) and certain other jurisdictions. U.K. REGULATION The framework for supervision of insurance companies in the U.K. is largely formed by European Union Directives ("Directives"), which are required to be implemented in member states through national legislation. Directives aim to harmonize insurance regulation and supervision throughout the European Union by establishing minimum standards in key areas, and requiring member states to give mutual recognition to each other's standards of prudential supervision. On December 1, 2001, the Financial Services Authority (the "FSA") assumed its full powers and responsibilities under the Financial Services and Markets Act 2000 ("FSMA"). The FSA is now the single statutory regulator responsible for regulating deposit-taking, insurance, investment and most other financial services business. It is a criminal offense for any person to carry on a regulated activity in the U.K. unless that person is authorized by the FSA or falls under an exemption. Insurance business (which includes reinsurance business) is authorized and supervised by the FSA. On December 4, 2002, Platinum UK received approval from the FSA to write the business formerly conducted by St. Paul Re in the U.K. - 28 - Supervision. In its role as supervisor of insurance companies, the primary objective of the FSA is to fulfill its responsibilities under the FSMA regime relating to the safety and soundness of insurance companies with the aim of strengthening, but not guaranteeing, the protection of insureds. The FSA has adopted a risk-based approach to the supervision of insurance companies. Under this approach, the FSA performs a formal risk assessment of every insurance company or group carrying on business in the U.K. during each supervisory period, which varies in length according to the risk profile of the insurer. After each risk assessment, the FSA will inform the insurer of its views on the insurer's risk profile. This report will include details of any remedial action which the FSA requires and the likely consequences if this action is not taken. Solvency Requirements. Insurance companies are required to maintain a margin of solvency at all times in respect of any general insurance undertaken by the insurance company, the calculation of which in any particular case depends on the type and amount of insurance business a company writes. The method of calculation of the solvency margin is set out in the FSA rules, and for these purposes, an insurer's assets and its liabilities are subject to specific valuation rules. Failure to maintain the required solvency margin is one of the grounds on which wide powers of intervention conferred upon the FSA may be exercised. Platinum Holdings has entered into a guaranty pursuant to which it has agreed to guarantee Platinum UK's undisputed payment obligations under reinsurance contracts written by Platinum UK on or after December 31, 2003. In addition, Platinum Holdings has entered into a capital support agreement with Platinum UK pursuant to which Platinum Holdings may be required from time to time to contribute capital to Platinum UK by way of interest-free, subordinated debt in such amounts as shall be necessary to ensure that Platinum UK will have adequate capital and surplus. Restrictions on Dividend Payments. English law prohibits Platinum UK from declaring a dividend to its shareholders unless it has "profits available for distribution." The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no statutory restrictions on a general insurer's ability to declare a dividend, the FSA strictly controls the maintenance of each insurance company's solvency margin within its jurisdiction and may restrict Platinum UK from declaring a dividend at a level that the FSA determines would adversely affect Platinum UK's solvency requirements. It is common practice in the U.K. to notify the FSA in advance of any significant dividend payment. Reporting Requirements. Insurance companies incorporated in England or Wales must prepare their financial statements under the Companies Act 1985 (as amended), which requires the filing with Companies House of audited financial statements and related reports. Equalization Reserves. Each insurance company writing property, aviation, marine, business interruption or nuclear insurance or reinsurance business is required to maintain an equalization reserve in respect of business written in the financial years ending on or after December 23, 1996. Insurance companies writing credit insurance business must maintain equalization reserves calculated in accordance with certain provisions related specifically to credit insurance business. Supervision of Management. The FSA closely supervises the management of insurance companies through the approved persons regime, by which any appointment of a person to a position of significant influence within an insurance company must be approved by the FSA. The FSA also has the authority to require there to be one or more independent directors on the board of directors of an insurance company. - 29 - Change of Control. FSMA regulates changes in "control" of any insurance company authorized under FSMA. Any company or individual that (together with the associates thereof) directly or indirectly holds 10% or more of the shares in the parent company of a U.K. authorized insurance company, or is entitled to exercise or control the exercise of 10% or more of the voting power in such a parent company, would be considered to be a "controller" for the purposes of the relevant legislation, as would a person who had significant influence over the management of such parent company by virtue of his shareholding in it. A purchaser of more than 10% of the common shares of Platinum Holdings would therefore be considered to have acquired "control" of Platinum UK. Under FSMA, any person proposing to acquire "control" over an authorized insurance company must give prior notification to the FSA of his intention to do so. In addition, if an existing controller proposed to increase its control in excess of certain thresholds set out in FSMA, that person must also notify the FSA in advance. The FSA then has three months to consider that person's application to acquire or increase "control". In considering whether to approve such application, the FSA must be satisfied both that the person is a fit and proper person to have such "control" and that the interests of consumers would not be threatened by such acquisition of or increase in "control". Failure to make the relevant prior application would constitute a criminal offense. Intervention and Enforcement. The FSA has extensive powers to intervene in the affairs of an authorized person. FSMA imposes on the FSA statutory obligations to monitor compliance with the requirements imposed by FSMA, and to enforce the provisions of FSMA and its related secondary legislation and take disciplinary measures. The FSA has a general power on giving notice to require information and documents from authorized persons that the FSA reasonably requires in connection with the exercise of its functions under the regulatory regime. The FSA also has distinct statutory powers to appoint investigators under FSMA. Proposed Regulatory Developments in the U.K. and at the European Union Level. The legal and regulatory framework under which financial institutions (including insurance and reinsurance companies) conduct regulated business in the U.K. has been subject to significant reform over the past few years and further reforms are both imminent and contemplated. Recent reforms include the production by the FSA of the final form of those Rules in the Integrated Prudential Sourcebook ("PSB") (the single prudential regulatory framework for all financial institutions in the U.K.) that govern the calculation of capital resources requirements for insurers (which includes pure reinsurers). These Rules came into force on December 31, 2004, replacing the majority of the provisions in the FSA's Interim Prudential Sourcebook for insurers. These Rules implement the FSA's proposals for the calculation by companies of a Minimum Capital Requirement ("MCR"), and the obligation on companies to maintain capital resources equal to this capital requirement. The Rules also require Platinum UK to calculate an Enhanced Capital Requirement ("ECR"), and to report this calculation privately to the FSA. The ECR is intended to provide a risk-responsive, but standardized, method for benchmarking a company's capital requirements. Platinum UK is required to make an individual assessment of its capital needs, which, together with the result of the ECR calculation, is used as a starting point in the FSA's discussions with Platinum UK concerning its individual capital assessment and when the FSA gives individual capital guidance ("ICG"). The FSA has stated that it intends to give authorized companies ICG reflecting its views as to what level of capital would be adequate for their particular businesses. The view of the FSA is that a decrease in a company's capital below the level of its ICG would represent a regulatory intervention point. - 30 - The FSA has also announced that it will review by 2006 whether to implement the ECR as a `hard' test, requiring that companies maintain capital resources at least equal to their ECR. This aspect of the new regime may mean that Platinum UK is required to increase the level of capital held, and it will therefore be necessary for Platinum UK to monitor developments in this area. The PSB also contains provisions aimed at ensuring adequate diversification of an insurer's or reinsurer's exposures to reinsurers (whether intra- or extra-group). In particular, in each financial year, a company will need to restrict the gross earned premiums which it pays to a reinsurer or group of closely related reinsurers to the higher of (a) 20% of the firm's projected gross earned premiums for that financial year; or (b) (pound)4 million. Where a company exceeds, or anticipates exceeding, this limit, it will need to notify the FSA and explain how, despite the excess reinsurance concentration, the credit risk is being safely managed. The PSB requires a company to notify the FSA as soon as it first becomes aware that a reinsurance exposure to a reinsurer or group of closely related reinsurers is reasonably likely to exceed or has exceeded 100% of the capital resources of the reinsurer or group. This notification must demonstrate that prudent provision has been made for the reinsurance exposure in excess of the 100% limit (or detail why in the opinion of the firm no provision is required) and explain how the reinsurance exposure is being safely managed. Significant current regulatory developments at the European Union level include the proposed adoption of a Directive creating a single market within the European Union in reinsurance (the "Reinsurance Directive"). The Reinsurance Directive is currently in draft form, but is likely to include rules on the establishment of technical provisions (the amount that a reinsurance undertaking must set aside in order to enable it to pay its contractual commitments) and on the investment of assets covering those technical provisions. It is also likely to contain rules on required solvency margins and minimum capital requirements as well as rules on measures to be adopted by regulators if reinsurance undertakings are in financial difficulty. Although the Reinsurance Directive is currently in draft form, it may, once implemented, affect the level of capital that Platinum UK is required to hold, and it will therefore be necessary for Platinum UK to monitor developments in this area. In the longer term, the European Union is running the "Solvency II" project, which, on the basis of a review of all aspects of the insurance industry, is intended to establish a solvency system that is better matched to the risks incurred by insurance undertakings than the framework imposed under current European legislation. It contains a fundamental and wide-ranging review of the current solvency regime for European insurers in light of current developments in insurance, risk management, finance techniques and financial reporting. However, the Solvency II project is not expected to be implemented for several years, and it is not currently possible to point to legislative developments with any certainty. It will therefore also be necessary for Platinum UK to monitor developments in this area. IRELAND REGULATION Platinum Ireland is organized and domiciled in Ireland. As a holding company, Platinum Ireland is not subject to Irish insurance regulation. Irish law prohibits Platinum Ireland from declaring a dividend to its shareholders unless it has "profits available for distribution." The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. - 31 - AVAILABLE INFORMATION Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, are available free of charge on our Internet website at www.platinumre.com as soon as reasonably practicable after such reports are electronically filed with the SEC. We also post on our website the charters of our Audit, Compensation, Governance and Executive Committees, our Corporate Governance Guidelines, our Code of Business Conduct and Ethics and Compliance Procedures, and any amendments or waivers thereto, and any other corporate governance materials required to be posted by SEC or New York Stock Exchange ("NYSE") regulations. These documents are also available in print to any shareholder requesting a copy from our corporate secretary at our principal executive offices. Information contained on Platinum Holdings' website is not part of this report. On May 7, 2004, our Chief Executive Officer submitted to the NYSE his Section 303A.12(a) Annual CEO Certification in which he stated that he is not aware of any violations by the Company of the NYSE's Corporate Governance listing standards. ITEM 2. PROPERTIES Platinum Holdings' principal executive offices are located in approximately 3,837 square feet of office space subleased from Platinum Bermuda at The Belvedere Building, 69 Pitts Bay Road, Pembroke, Bermuda. Platinum Bermuda leases a total of 7,674 square feet of office space, using approximately 3,837 square feet for its principal offices. The term of this lease ends on December 31, 2006. The principal offices of Platinum US are located at Two World Financial Center, New York, New York, where Platinum US leases approximately 49,600 square feet of office space. The term of this lease ends on September 29, 2013. Platinum US has also entered into assignments of leases with St. Paul with respect to approximately 4,000 square feet of office space in Chicago, 6,300 square feet of office space in Miami and 540 square feet of office space in Tokyo. The terms of these leases will end in 2005, 2006 and 2006, respectively. The principal offices of Platinum UK are located at Fitzwilliam House, 10 St. Mary Axe, London, where Platinum UK leases approximately 7,265 square feet of office space. The term of this lease ends on February 15, 2006. ITEM 3. LEGAL PROCEEDINGS In November and December 2004, we 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. We are 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, we are unable to predict the direction the investigation will take and the impact, if any, it may have on our business. In the normal course of business, the Company may become involved in various claims and legal proceedings. We are not currently aware of any pending or threatened material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Platinum Holdings shareholders during the fourth quarter of 2004. - 32 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common shares are listed on the NYSE under the symbol "PTP." The following table shows the high and low per share sale prices of our common shares, as reported on the NYSE for the periods indicated:
Price Range of Common Shares ---------------------------- Period High Low - ---------------- ------ ------ 2003: First Quarter $26.45 $21.29 Second Quarter 28.70 24.00 Third Quarter 28.55 25.66 Fourth Quarter 32.05 26.80 2004: First Quarter 34.20 29.00 Second Quarter 34.00 30.00 Third Quarter 31.13 27.49 Fourth Quarter $31.13 $27.30
On February 15, 2005, the last reported sale price for our common shares on the NYSE was $30.46 per share. At February 15, 2005, there were approximately 29 holders of record and approximately 2,800 beneficial holders of our common shares. During the years ended December 31, 2004 and 2003, we paid quarterly dividends of $0.08 per common share. The Board has declared a dividend for the first quarter of 2005 of $0.08 per common share, payable on March 31, 2005 to shareholders of record at the close of business on March 1, 2005. The declaration and payment of dividends is at the discretion of the Board of Directors and depend upon our results of operations and cash flows, the financial positions and capital requirements of Platinum US, Platinum UK and Platinum Bermuda, general business conditions, legal, tax and regulatory restrictions on the payment of dividends and other factors the Board of Directors deems relevant; however, the declaration and payment of dividends will be prohibited if certain contract adjustment payments in respect of the Company's equity security units are deferred. Additionally, under the Bermuda Companies Act 1981, Platinum Holdings may declare or pay a dividend only if, among other things, it has reasonable grounds for believing that it is, or after the payment would be, able to pay its liabilities as they become due. Accordingly, there is no assurance that dividends will be declared or paid in the future. Currently, there is no Bermuda withholding tax on dividends paid by Platinum Holdings. Platinum US is subject to regulatory constraints imposed by Maryland insurance law, Platinum UK is subject to regulatory constraints imposed by U.K. insurance law, Platinum Ireland is subject to constraints imposed by Irish law, and Platinum Bermuda is subject to regulatory constraints imposed by Bermuda insurance law, which constraints affect the ability of each to pay dividends to Platinum Holdings. See "Business - Regulation." We have agreed to adjust the exercise price of the options granted to St. Paul and RenaissanceRe as part of the St. Paul Investment and RenaissanceRe Investment, respectively, to the extent dividend - 33 - increases exceed 10% per year; however, we do not expect that dividend increases, if any, will exceed such rate. We did not issue any common shares that were not registered under the Securities Act of 1933 during the quarter ended December 31, 2004. 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. During the year ended December 31, 2004 the Company purchased 349,700 of its common shares in the open market at an aggregate amount of $9,985,000 at a weighted average price of $28.55 per share. The shares purchased by the Company were canceled. No repurchases of the Company's common shares were made during the quarter ended December 31, 2004. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected financial data of the Company as of and for the years ended December 31, 2004 and 2003 and as of and for the period ended December 31, 2002, and of St. Paul Re for the period from January 1, 2002 through November 1, 2002 and for the years ended December 31, 2001 and 2000. The data for the Company as of and for the years ended December 31, 2004 and 2003 and as of and for the period ended December 31, 2002 were derived from the Company's consolidated financial statements beginning on page F-1 of this Form 10-K. The data for St. Paul Re for the period ended November 1, 2002 were derived from the audited combined financial statements of St. Paul Re prior to the Initial Public Offering (the Predecessor Business) beginning on page P-1 of this Form 10-K. The data for the years ended December 31, 2001 and 2000 were derived from the selected historical combined financial statements of St. Paul Re not included in this Form 10-K. You should read the selected financial data in conjunction with the Company's consolidated financial statements as of and for the years ended December 31, 2004 and 2003 and the period ended December 31, 2002 beginning on page F-1 of this Form 10-K, and the related "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 35 of this Form 10-K. You should also read the selected financial data in conjunction with the Predecessor financial information beginning on page P-1 of this Form 10-K. THE UNDERWRITING RESULTS AND THE AUDITED HISTORICAL COMBINED FINANCIAL STATEMENTS OF ST. PAUL RE PRIOR TO THE INITIAL PUBLIC OFFERING (THE PREDECESSOR BUSINESS) ARE NOT INDICATIVE OF THE ACTUAL RESULTS OF THE COMPANY SUBSEQUENT TO THE INITIAL PUBLIC OFFERING. - 34 - FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA ($ in millions, except per share amounts)
Platinum Underwriters Holdings, Ltd. St. Paul Re (Predecessor) ---------------------------------------- -------------------------------- As of and for the period Period from from January 1, November 1, 2002 Years ended Years ended December 31, 2002 through through December 31, ------------------------ December 31, November ----------------- 2004 2003 2002 1, 2002 2001 2000 ---------- ---------- ------------- ----------- ----- -------- Statement of Income Data: Net premiums written .................. $ 1,646.0 1,172.1 $ 298.1 $ 1,007 1,677 $ 1,073 Net premiums earned ................... 1,447.9 1,067.5 107.1 1,102 1,593 1,121 Net investment income ................. 84.5 57.6 5.2 Losses and LAE ........................ 1,019.8 584.2 60.4 791 1,922 811 Underwriting expenses ................. $ 381.0 320.7 $ 37.6 319 397 424 Underwriting gain (loss) .............. $ (8) (726) $ (114) Net income ............................ 84.8 144.8 6.4 Basic earnings per share .............. 1.96 3.37 0.15 Diluted earnings per share ............ 1.81 3.09 0.15 Dividends declared per share .......... $ 0.32 0.32 $ - Balance Sheet Data: Total investments and cash ............ $ 2,456.9 1,790.5 $ 1,346.7 Premiums receivable ................... 580.0 487.4 5.6 Total assets .......................... 3,422.0 2,485.6 1,644.9 Net unpaid losses and LAE ............. 1,379.2 731.9 281.7 Net unearned premiums ................. 499.5 299.9 191.0 Debt obligations ...................... 137.5 137.5 137.5 Shareholders' equity .................. 1,133.0 1,067.2 921.2 Book value per share .................. $ 26.30 24.79 $ 21.42
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the related notes included on pages F-1 through F-40 of this Form 10-K. 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"). OVERVIEW Platinum Underwriters Holdings, Ltd. ("Platinum Holdings") is a Bermuda holding company organized in 2002. Platinum Holdings and its subsidiaries (the "Company") operate through three licensed reinsurance subsidiaries: Platinum Underwriters Reinsurance, Inc. ("Platinum US"), Platinum Re (UK) Limited ("Platinum UK") and Platinum Underwriters Bermuda, Ltd. ("Platinum Bermuda"). The Company provides property and marine, casualty and finite risk reinsurance coverages, through reinsurance intermediaries, to a diverse clientele of insurers and select reinsurers on a worldwide basis. In November 2002, Platinum Holdings completed the Initial Public Offering. Concurrent with the Initial Public Offering, Platinum Holdings sold 6,000,000 common shares to The St. Paul Travelers - 35 - Companies, Inc., formerly The St. Paul Companies, Inc., ("St. Paul"), and 3,960,000 common shares to RenaissanceRe Holdings Ltd. ("RenaissanceRe") in private placements. As part of the 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. St. Paul subsequently sold its 6,000,000 common shares in June 2004. 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 in 2005 and an ownership interest in a senior note due 2007. CRITICAL ACCOUNTING POLICIES It is important to understand the Company's accounting policies in order to understand its financial position and results of operations. Management considers certain of these policies to be critical to the presentation of the financial results since they require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the financial reporting date and throughout the relevant periods. Certain of the estimates and assumptions result from judgments that can be subjective and complex, and consequently actual results may differ from these estimates. The Company's most critical accounting policies involve written and unearned premium, unpaid losses and LAE, reinsurance, investments, income taxes and stock-based compensation. 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 premiums 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 - 36 - 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 2004 year-end were reviewed based upon the foregoing considerations. The cumulative impact of this review was to reduce the estimate by approximately $56 million or 10% of reinsurance premiums receivable at December 31, 2004. At December 31, 2004, the Company recorded reinsurance premiums receivable of $580,048,000. As an illustration, the Company had one contract that, at December 31, 2004, represented approximately $88 million of its total reinsurance premiums receivable. With respect to that contract, the Company reduced reinsurance premiums receivable by approximately $20 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 $20 million with respect to that contract at December 31, 2004. Had it made a $0 adjustment, the reinsurance premiums receivable for that contract at December 31, 2004 would have been $108 million. It made the $20 million adjustment, resulting in reinsurance premiums receivable for that contract of $88 million. While an adjustment of greater than $20 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 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 the Company's 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. At year-end 2004, no such allowance 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 which have occurred at or before the balance sheet date. Every quarter, the Company's actuaries prepare estimates of the loss reserves based on established actuarial techniques. Because the ultimate amount of unpaid losses and LAE is uncertain, we believe that quantitative techniques to estimate these amounts are enhanced by professional and managerial judgment. Company management reviews these estimates and determines its best estimate of the liabilities to record in the Company's financial statements. - 37 - 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 December 31, 2004 for unpaid losses and LAE were $1,380,955,000. The following table sets forth a breakdown between case reserves and IBNR by segment at December 31, 2004 ($ in thousands):
Property and Marine Casualty Finite Risk Total ----------- -------- ----------- ------------ Case reserves ............................................ $ 9,221 87,993 132,240 $ 229,454 IBNR ..................................................... 223,740 647,926 279,835 1,151,501 ----------- ------- ------- ------------ Total unpaid losses and LAE.......................... $ 232,961 735,919 412,075 $ 1,380,955 ----------- ------- ------- ------------
Generally, initial actuarial estimates of IBNR not related to a specific event are based on the loss ratio method applied to each underwriting year for each class of business. Actual paid losses and case reserves ("reported losses") are subtracted from expected ultimate losses to determine IBNR. The initial expected ultimate losses involve management judgment and are based on: (i) contract by contract expected loss ratios derived from the Company's pricing process, and (ii) historical loss ratios of the Company and St. Paul Re 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 - 38 - 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 December 31, 2004 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 December 31, 2004 was $447 million which was 39% 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 $37 million. This equates to approximately 7% of the liability for total unpaid losses and LAE for these classes at December 31, 2004. As another example, if the estimated pattern of reported losses was accelerated by 5% the IBNR for these classes would decrease by $2 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 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 - 39 - 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 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 December 31, 2004, 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 - 40 - 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 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. 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. During 2004 and as of December 31, 2004, the Company's investment portfolio does not contain any securities that were determined to have other than temporary impairments. INCOME TAXES Platinum Holdings and Platinum Bermuda are domiciled in Bermuda. Under current Bermuda law, they are not taxed on any Bermuda income or capital gains and they have received an assurance from the Bermuda Minister of Finance 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 - 41 - rates is recognized in income in the period the change is enacted. A valuation allowance is established for deferred tax assets where it is more likely than not that future tax benefits will not be realized. STOCK-BASED COMPENSATION During 2003, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Awards of Stock Based Compensation to Employees" ("SFAS 123") and Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 123 requires that the fair value of shares granted under the Company's share option plan subsequent to adoption of SFAS 148 be amortized in earnings over the vesting periods. The fair value of the share options granted is determined through the use of an option-pricing model. SFAS 148 amends SFAS 123 and provides transitioning guidance for a voluntary adoption of FAS 123 as well as amends the disclosure requirements of SFAS 123. 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 APB25. In December 2004, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 123R "Share Based Payment" ("SFAS 123R"). SFAS 123R requires that, prospectively, compensation costs be recognized for the fair value of all share options, including the costs 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 as disclosed in the consolidated financial statements are the same as if the Company had adopted SFAS 123R in 2004. REINSURANCE INDUSTRY CONDITIONS AND TRENDS 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. To the extent that actual claim liabilities are higher than anticipated, 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 fluctuations in interest rates, inflation and other changes in the economic environment that affect market prices of investments. As a result of favorable loss development and strong investment returns beginning in the mid-1990's, the reinsurance industry entered a cycle of increased competition and industry capacity that pushed property and casualty premium rates down. In 1999, there were several significant worldwide catastrophic events that resulted in industry insured losses of approximately $31 billion. These losses, and the subsequent contraction of reinsurance capacity in the market, resulted in improvements in rates, terms and conditions beginning with January 2000 renewals. These improvements continued in 2001 as capacity continued to contract due to a number of catastrophe events, particularly the terrorist attack of September 11, 2001. With insured losses currently estimated to be in excess of $30 billion, the terrorist - 42 - attack resulted in the largest insured loss ever experienced by the industry. By comparison, the largest industry insured catastrophic event prior to the attack was Hurricane Andrew in 1992 with $16 billion in estimated losses. Shortly after the property catastrophe events of 1999 and 2001, many reinsurance companies began to recognize poor results in their casualty business stemming from business underwritten from 1997 to 2000. The result was substantial loss reserve charges summing to tens of billions of dollars and a further decrease in industry capacity. In addition, the capital of a number of large companies was further reduced by poor investment results. In late 2001 and through 2002 several new companies were started. Some existing companies raised new capital and others exited the business. The new capital invested in the industry was substantially less than the capital reductions caused by losses, exiting companies and poor investment results. As a result, rate increases in 2002 were significantly higher than 2001. Rates on most lines of business still increased in 2003 though at a lower rate of increase than in 2002. Recent competition has led to lower rate increases and/or rate reductions in certain property and casualty classes in 2004. Despite the Florida and Caribbean catastrophe claims in the third quarter of 2004, property rate reductions still occurred. Nonetheless, we believe rates should provide adequate returns. RESULTS OF OPERATIONS Platinum Holdings was incorporated on April 19, 2002 under the laws of Bermuda to hold subsidiaries that provide property and casualty reinsurance to insurers and reinsurers on a worldwide basis and, in November 2002, completed the Initial Public Offering and assumed certain rights and obligations of the reinsurance business from St. Paul. Consequently, the 2002 consolidated statements of income and comprehensive income, shareholders' equity and cash flows include all activity from incorporation on April 19, 2002 through December 31, 2002. The underwriting operations, as well as substantially all other operations of the Company commenced in November 2002. Generally, the 2002 results of operations reflect the period from November 1, 2002 through December 31, 2002 (the "2002 Period") and are not comparable to the results of operations for the years ended December 31, 2004 and 2003. Year Ended December 31, 2004 as Compared with the Year Ended December 31, 2003 Net income for the years ended December 31, 2004 and 2003 was as follows ($ in thousands):
2004 2003 Decrease ----------- -------- ------------ Net income ................................................. $ 84,783 144,823 $ (60,040)
The decrease in net income in 2004 as compared with 2003 is attributable to a decline in underwriting income of $115,429,000. The decline in underwriting income was due primarily to the combination of four significant named hurricanes, Charley, Frances, Ivan and Jeanne (the "Hurricanes"), causing severe damage in the Caribbean and the southeast United States in August and September of 2004, partially offset by growth of profitable business in all segments and favorable loss development. Net income in 2004 as compared with 2003 was also favorably impacted by an increase in investment income of $26,887,000 and reductions in corporate expenses of $9,871,000 and income tax expense of $18,526,000. The aggregate adverse impact on net income of the Company in 2004 from the Hurricanes is summarized as follows ($ in thousands): - 43 - Losses ...................................................................... $ 230,475 Less: Additional premiums earned ............................................... (29,265) Profit commissions ....................................................... (10,243) ---------- Net adverse impact before income tax benefit ...................... 190,967 Income tax benefit .......................................................... (14,537) ---------- Net adverse impact after income tax benefit ....................... $ 176,430 ----------
The impact of the Hurricanes was consistent with our expectations for storms of this magnitude and location. Net premiums written and net premiums earned for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ------------ --------- ---------- Net premiums written ....................................... $ 1,646,013 1,172,142 $ 473,871 Net premiums earned ........................................ $ 1,447,935 1,067,527 $ 380,408
The increase in net premiums written and earned in 2004 as compared with 2003 is attributable to growth in all segments, and includes approximately $29,265,000 of additional premiums related to losses arising from the Hurricanes. 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 years ended December 31, 2004 and 2003 was $84,532,000 and $57,645,000, respectively. Net investment income increased during 2004 primarily due to increased invested assets attributable to positive cash flow from operations, excluding trading securities activities, which was $698,223,000 and $469,168,000 in 2004 and 2003, respectively. Fixed maturities were $2,240,202,000 and $1,678,138,000 at December 31, 2004 and 2003, respectively. The book basis yields on fixed maturities were 4.3% and 4.1% at December 31, 2004 and 2003, respectively. Net investment income included $2,651,000 and $776,000 of interest earned on funds held for the years ended December 31, 2004 and 2003, respectively. Net investment income for the year ended December 31, 2003 included $1,357,000 of interest received from St. Paul on balances due relating to the Quota Share Retrocession Agreements. Net realized gains on investments of $1,955,000 and $2,781,000 for the years ended December 31, 2004 and 2003, respectively, were the result of investment sale activity to manage the quality, diversity, currency exposure, duration and tax profile of the investment portfolio. Other income for the years ended December 31, 2004 and 2003 was $3,211,000 and $3,343,000, respectively. Other income in 2004 includes $1,036,000 of net unrealized gains relating to changes in fair value of fixed maturities classified as trading, $758,000 of earnings on reinsurance contracts accounted for as deposits and a gain of $1,000,000 on the sale of assets. Other income in 2003 includes $1,282,000 of net unrealized losses relating to changes in fair value of fixed maturities classified as trading and, $4,625,000 of earnings on reinsurance contracts accounted for as deposits. Earnings on reinsurance contracts accounted for as deposits decreased in 2004 from 2003 due to a fewer number of such contracts. Net foreign currency exchange gains (losses) for the years ended December 31, 2004 and 2003 were $725,000 and ($114,000), respectively. The Company routinely does business in various foreign currencies. The decrease in net foreign currency exchange losses is due to efforts to better manage exposures to foreign currency exchange rate fluctuations by holding invested assets denominated in the foreign currencies in which the related net insurance liabilities are denominated. The Company - 44 - periodically reviews its largest foreign currency exposures and purchases or sells foreign currency denominated invested assets to match these exposures. Losses and LAE and the resulting loss and LAE ratios for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ------------ --------- ------------- Losses and LAE ............................................. $ 1,019,804 584,171 $ 435,633 Losses and LAE ratios ...................................... 70.4% 54.7% 15.7 points
The increase in losses and LAE in 2004 from 2003 is due primarily to losses of approximately $230,475,000 from the Hurricanes and the growth in business in all segments. The increase in the loss ratio in 2004 from 2003 is due primarily to losses from the Hurricanes that contributed 15.9% to the loss and LAE ratio in 2004. Net favorable development of $57,151,000 reduced the loss and LAE ratio by 3.9% in 2004 as compared with favorable development of $50,866,000 that reduced the loss and LAE ratio by 4.8% in 2003. Acquisition expenses and resulting acquisition expense ratios for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
Increase 2004 2003 (decrease) ------------ --------- -------------- Acquisition expenses ....................................... $ 327,821 251,226 $ 76,595 Acquisition expense ratios ................................. 22.6% 23.5% (0.9) points
The increase in acquisition expenses in 2004 from 2003 is consistent with the growth in business in all segments, partially offset by reductions of profit commissions under reinsurance contracts that incurred losses from the Hurricanes. The decrease in the acquisition expense ratio in 2004 from 2003 is primarily due to changes in the mix of business as well as reductions of profit commissions related to losses from the Hurricanes. Operating expenses for the years ended December 31, 2004 and 2003 were $66,333,000 and $92,595,000, respectively. Operating expenses include costs such as salaries, rent and like items related to reinsurance operations as well as costs associated with Platinum Holdings. The decline of $26,262,000 in operating expenses in 2004 as compared with 2003 was attributable to a reduction of $11,408,000 in incentive-based compensation in 2004 as compared with 2003 due to the decline in the Company's net income, a charge of $9,289,000 in 2003 related to the separation and consulting agreement with the Company's former chief executive officer, as well as various non-recurring start-up costs of approximately $9,239,000 incurred in 2003. Interest expense for the years ended December 31, 2004 and 2003 was $9,268,000 and $9,492,000, respectively, and relates to the Company's ESU's, which are classified as debt obligations on the Company's balance sheet. - 45 - Income taxes and the effective income tax rate for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
Increase 2004 2003 (decrease) ------------ --------- -------------- Income taxes ............................................... $ 30,349 48,875 $ (18,526) Effective income tax rate .................................. 26.4% 25.2% 1.2 points
Income taxes decreased in 2004 from 2003 due to the decline in income before income taxes. The effective tax rate in any given year is based on income before taxes of the Company's subsidiaries that operate in several jurisdictions with varying corporate income tax rates. Platinum Holdings and Platinum Bermuda are not subject to corporate income tax. While the effective income tax rates in 2004 and 2003 are comparable, both years include events that increased the effective income tax rate. In 2004 approximately 80% of the losses from the Hurricanes were incurred by Platinum Bermuda without tax benefit and in 2003 expenses related to the severance payment to and share option expense of the Company's former chief executive officer were incurred by Platinum Holdings without tax benefit. Year Ended December 31, 2003 as Compared with the Period Ended December 31, 2002 Net income for the year ended December 31, 2003 and the 2002 Period was as follows ($ in thousands):
2003 2002 Period Increase ------------ ----------- ---------- Net income ................................................. $ 144,823 6,438 $ 138,385
The Company's first complete year of operations was 2003 and, consequently, net income increased significantly as compared with the 2002 Period which represents a two-month period during which the Company had minimal underwriting activity. Additional factors affecting the comparison include the growth in the business underwritten in 2003 over 2002, favorable development in 2003 of unpaid losses and LAE of approximately $50,866,000, improved profitability relating to net premiums earned in 2003, and increased investment income resulting from growth in invested assets in 2003. The United States insurance industry incurred some significant catastrophe losses in 2003; however, catastrophe losses in the Company's portfolio were relatively low as most catastrophe claims remained at the primary or ceding company level. Operating expenses for the year ended December 31, 2003 include a charge of $9,289,000 for expenses related to the separation and consulting agreement with the Company's former chief executive officer. Net premiums written and earned for the year ended December 31, 2003 and the 2002 Period was as follows ($ in thousands):
2003 2002 Period Increase ------------ ----------- ---------- Net premiums written ....................................... $ 1,172,142 298,114 $ 874,028 Net premiums earned ........................................ $ 1,067,527 107,098 $ 960,429
The Company's first complete year of operations was 2003 and, as a result, net premiums written and earned increased significantly as compared with the 2002 Period which represents a two-month period during which the Company had minimal underwriting activity. Generally, the last two months of a year have a relatively small amount of net premiums written. However, net premiums written in the 2002 - 46 - Period include $244,000,000 of unearned premiums assumed from St. Paul under the Quota Share Retrocession Agreements representing the remaining unearned premiums related to contracts written by St. Paul Re during the first ten months of 2002. Premiums written are based partially on estimates of ultimate premiums from reinsurance contracts and the estimates are updated quarterly. Reductions in premiums estimated for the 2002 underwriting year in the Casualty segment, a portion of which was written and earned by St. Paul Re, reduced the Company's net premiums written in 2003 by approximately $35,300,000. Similar to net premiums written, net premiums earned in 2003 represents twelve months of underwriting activity whereas the 2002 Period represents two months. Net premiums earned are recognized subsequent to net premiums written. Net premiums earned in the 2002 Period are relatively low due to the commencement of operations during 2002. Net premiums earned for 2003 reflect business underwritten in 2003 and 2002 while net premiums earned in the 2002 Period reflect only business underwritten in 2002. The reduction in 2003 of net premiums written in the Casualty segment resulted in a reduction of net premiums earned of approximately $16,100,000. Net investment income was $57,645,000 and $5,211,000 for the year ended December 31, 2003 and the 2002 Period, respectively. The increase is primarily due to the comparison of 2003 with twelve months of investment income to the 2002 Period. Net investment income increased during 2003 as the Company's invested assets increased as a result of positive cash flow from operations. Net realized gains on investments were $2,781,000 and $25,300 in 2003 and the 2002 Period, respectively, and are the result of investment sale activity to manage the quality, diversity, currency exposure, duration and tax profile of the investment portfolio. Other income was $3,343,000 and $167,000 for the year ended December 31, 2003 and the 2002 Period, respectively, and represents earnings on a small number of reinsurance contracts in the Finite Risk segment accounted for as deposits. Other income in 2003 also includes $1,282,000 of net unrealized losses relating to changes in fair value of fixed maturities classified as trading. Net foreign currency exchange gains (losses) for the year ended December 31, 2003 and the 2002 Period, were ($114,000) and $2,017,000, respectively. Foreign currency exchange gains and losses arise from the valuation in U.S. dollars of assets and liabilities denominated in foreign currencies. During 2003, the Company established procedures to manage exposure to foreign currency exchange rates by matching foreign currency denominated assets and liabilities. Losses and LAE for the years ended December 31, 2003 and the 2002 Period, respectively were as follows ($ in thousands):
Increase 2003 2002 Period (decrease) ------------ ----------- --------------- Losses and LAE ............................................. $ 584,171 60,356 $ 523,815 Losses and LAE ratio ....................................... 54.7% 56.4% (1.7) points
The increase in losses and LAE is primarily due to the comparison of 2003 with twelve months of underwriting operations to the 2002 Period. Losses and LAE in 2003 were favorably impacted by improved profitability relating to net premiums earned in 2003 on business underwritten in 2002. While losses and LAE in 2003 include provisions for various catastrophe losses, the 2002 Period had no catastrophe losses. The United States insurance industry incurred some significant catastrophe losses in 2003. However, catastrophe losses in the Company's portfolio were relatively low as most catastrophe claims remained at the primary or ceding company level. Losses and LAE in 2003 included a reduction in the estimated liability as of December 31, 2002 of $63,966,000 of which $13,100,000 relates to the - 47 - reduction in 2003 of premiums originally estimated and earned in 2002 in the Casualty segment. The remaining $50,866,000 represents net favorable development. Unpaid losses and LAE at December 31, 2002 were based largely on initial expected ultimate loss ratios. Throughout 2003 actual reported losses were monitored against expected patterns of reported loss. As actual reported losses continued to be less than expected reported losses, estimates of expected ultimate losses were reduced. This principally affected property coverages in the Property and Marine and Finite Risk segments where a substantial portion of the ultimate losses is expected to be reported to the Company within two years. Acquisition expenses, including brokerage, commissions and other direct underwriting expenses associated with underwriting activities, and resulting acquisition expense ratios for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
Increase 2003 2002 Period (decrease) ------------ ----------- --------------- Acquisition expenses ....................................... $ 251,226 25,474 $ 225,752 Acquisition expense ratio .................................. 23.5% 23.8% (0.3) points
The increase in acquisition expenses is primarily due to the comparison of 2003 with twelve months of underwriting operations to the 2002 Period. Although acquisition ratios in 2003 varied by operating segment and by type of business, the resulting ratios of acquisition expenses to net premiums earned for 2003 and the 2002 Period were comparable at 23.5% and 23.8%, respectively. Operating expenses include other underwriting expenses related to the reinsurance operations as well as costs associated with the holding company operations of Platinum Holdings and were $92,595,000 and $16,334,000 for the year ended December 31, 2003 and the 2002 Period, respectively. The increase in operating expenses is due to the comparison of 2003 with twelve months of operations to the 2002 Period. Additionally there were increases in staff, fees 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 and office relocation expenses in 2003. Operating expenses in 2003 include a charge of $9,289,000 for the expenses related to the separation and consulting agreement with the Company's former chief executive officer. Operating expenses in the 2002 Period include one-time expenses of $5,353,000 incurred in connection with the completion of the Initial Public Offering, the formation of the Company and the assumption of business from St. Paul. Interest expense for the year ended December 31, 2003 and the 2002 Period was $9,492,000, and $1,261,000, respectively, and relates to amounts payable under the Company's ESU's which are classified as debt obligations on the Company's balance sheet. The increase is due to the comparison of 2003 with twelve months of interest expense to the 2002 Period. Income taxes and the effective income tax rate for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
Increase 2003 2002 Period (decrease) ------------ ----------- --------------- Income taxes ............................................... $ 48,875 4,655 $ 44,220 Effective income tax rate .................................. 25.2% 42.0% (16.8) points
The increase in income tax expense is due to the increase in net income before taxes in 2003 over the 2002 Period. The effective tax rate for 2003 was affected by a significant amount of income derived from business underwritten in 2002, which was assumed and retained by Platinum US and subject to U.S. - 48 - corporate tax. The effective tax rate for 2003 was also affected by expenses related to the separation and consulting agreement with the Company's former chief executive officer that were incurred by Platinum Holdings without tax benefit, thereby increasing the 2003 effective tax rate. The effective tax rate in the 2002 Period was higher than any tax rate of the taxable jurisdictions in which the Company operates due to significant start-up expenses incurred by Platinum Holdings for which no tax benefit was available. SEGMENT INFORMATION The Company conducts its worldwide reinsurance business through three operating segments: Property and Marine, Casualty and Finite Risk. In managing the Company's operating segments, management uses measures such as underwriting income and underwriting ratios to evaluate segment performance. Management does not allocate by segment its assets or certain income and expenses such as investment income, interest expense and certain corporate expenses. Segment underwriting income is reconciled to income before income taxes. The measures used by management in evaluating the Company's operating segments should not be used as a substitute for measures determined under U.S. GAAP. The following table summarizes underwriting activity and ratios for the three operating segments for the years ended December 31, 2004 and 2003 and the 2002 Period ($ in thousands):
Property and Marine Casualty Finite Risk Total ----------- -------- ----------- ----------- Year ended December 31, 2004: Net premiums written ........................................ $ 504,439 677,399 464,175 $ 1,646,013 ---------- ------- ------- ----------- Net premiums earned ......................................... 485,135 611,893 350,907 1,447,935 Losses and LAE .............................................. 349,557 418,355 251,892 1,019,804 Acquisition expenses ........................................ 76,360 151,649 99,812 327,821 Other underwriting expenses ................................. 27,827 19,086 6,224 53,137 ---------- ------- ------- ----------- Segment underwriting income (loss)....................... $ 31,391 22,803 (7,021) $ 47,173 ---------- ------- ------- Corporate expenses not allocated to segments ................ (13,196) Net foreign currency exchange gains ......................... 725 Interest expense ............................................ (9,268) Other income ................................................ 3,211 Net investment income and net realized gains on investments . 86,487 ----------- Income before income taxes .............................. $ 115,132 ----------- Ratios: Losses and LAE ............................................ 72.1% 68.4% 71.8% 70.4% Acquisition expense ....................................... 15.7% 24.8% 28.4% 22.6% Other underwriting expense ................................ 5.7% 3.1% 1.8% 3.7% ---------- ------- ------- ----------- Combined ................................................ 93.5% 96.3% 102.0% 96.7% ---------- ------- ------- -----------
- 49 -
Property and Marine Casualty Finite Risk Total ---------- -------- ----------- ----------- Year ended December 31, 2003: Net premiums written ........................................ $ 352,908 474,000 345,234 $ 1,172,142 ---------- ------- ------- ----------- Net premiums earned ......................................... 355,556 391,170 320,801 1,067,527 Losses and LAE .............................................. 169,944 266,836 147,391 584,171 Acquisition expenses ........................................ 52,154 101,005 98,067 251,226 Other underwriting expenses ................................. 35,598 21,060 12,870 69,528 ---------- ------- ------- ----------- Segment underwriting income ............................. $ 97,860 2,269 62,473 $ 162,602 ---------- ------- ------- Corporate expenses not allocated to segments ................ (23,067) Net foreign currency exchange losses ........................ (114) Interest expense ............................................ (9,492) Other income ................................................ 3,343 Net investment income and net realized gains on investments . 60,426 ----------- Income before income taxes .............................. $ 193,698 ----------- Ratios: Losses and LAE ............................................ 47.8% 68.2% 45.9% 54.7% Acquisition expense ....................................... 14.7% 25.8% 30.6% 23.5% Other underwriting expense ................................ 10.0% 5.4% 4.0% 6.5% ---------- ------- ------- ----------- Combined ................................................ 72.5% 99.4% 80.5% 84.7% ---------- ------- ------- ----------- 2002 Period: Net premiums written ........................................ $ 89,341 164,929 43,844 $ 298,114 ---------- ------- ------- ----------- Net premiums earned ......................................... 43,047 39,320 24,731 107,098 Losses and LAE .............................................. 21,558 29,498 9,300 60,356 Acquisition expenses ........................................ 7,798 9,269 8,407 25,474 Other underwriting expenses ................................. 5,960 4,136 2,068 12,164 ---------- ------- ------- ----------- Segment underwriting income (loss) $ 7,731 (3,583) 4,956 $ 9,104 ---------- ------- ------- Corporate expenses not allocated to segments ................ (4,170) Net foreign currency exchange gains ......................... 2,017 Interest expense ............................................ (1,261) Other income ................................................ 167 Net investment income and net realized gains on investments ............................................... 5,236 ----------- Income before income taxes .............................. $ 11,093 ----------- Ratios: Losses and LAE ............................................ 50.1% 75.0% 37.6% 56.4% Acquisition expense ....................................... 18.1% 23.6% 34.0% 23.8% Other underwriting expense ................................ 13.8% 10.5% 8.4% 11.4% ---------- ------- ------- ----------- Combined ................................................ 82.0% 109.1% 80.0% 91.6% ---------- ------- ------- -----------
PROPERTY AND MARINE The Property and Marine operating segment includes principally property (including crop) and marine reinsurance coverages that are written in the United States and international markets. This business includes catastrophe excess-of-loss treaties, per-risk excess-of-loss treaties and proportional - 50 - treaties. This operating segment generated 30.6%, 30.1% and 30.0% of the Company's net premiums written in 2004, 2003 and the 2002 Period, respectively. Year Ended December 31, 2004 as Compared with the Year Ended December 31, 2003 Net premiums written and net premiums earned for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ---------- ------- ---------- Net premiums written..... $ 504,439 352,908 $ 151,531 Net premiums earned...... $ 485,135 355,556 $ 129,579
Net premiums written and earned increased in 2004, as compared with 2003, due to growth across all property classes. The increase in net premiums written is also the result of a more efficient use of catastrophe capacity through enhanced modeling capabilities, an increase of property pro-rata business and a transfer of catastrophe capacity from the Finite Risk segment to the Property and Marine segment. Net premiums written and earned also include approximately $16,198,000 of additional premiums from reinsurance contracts that incurred losses arising from the Hurricanes. Losses and LAE and the resulting loss ratios for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ----------- -------- ----------- Losses and LAE ........ $ 349,557 169,944 $ 179,613 Losses and LAE ratio .. 72.1% 47.8% 24.3 points
The increase in losses and LAE and the related losses and LAE ratio in 2004 is due to losses of $169,652,000 from the Hurricanes as compared with the low level of catastrophe losses in 2003. Also contributing to the increase in losses and LAE in 2004 as compared with 2003 is the growth in business. Partially offsetting the increased losses and LAE relating to the Hurricanes is approximately $50,980,000 of favorable development of prior years' unpaid losses and LAE in 2004 as compared with approximately $31,600,000 of favorable development in 2003. During 2004 and 2003, actual reported losses were significantly less than expected for the short-tailed non-catastrophe property lines resulting in reductions in estimated ultimate losses. Acquisition expenses and resulting acquisition expense ratios for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ---------- ------- ---------- Acquisition expenses ....... $ 76,360 52,154 $ 24,206 Acquisition expense ratio .. 15.7% 14.7% 1.0 point
The increase in acquisition expenses in 2004 as compared with 2003 is consistent with the growth in business. The increase in the acquisition expense ratio is primarily due to profit commissions related to the favorable development of non-catastrophe losses and LAE and changes in the mix of business. Other underwriting expenses for the years ended December 31, 2004 and 2003 were $27,827,000 and $35,598,000, respectively. The decrease in other underwriting expenses is due to cost reductions in the Property and Marine segment in 2004, the reduction of incentive based compensation in 2004, as well - 51 - as various non-recurring start-up costs incurred in 2003. Other underwriting expenses for the years ended December 31, 2004 and 2003 include fees of $6,396,000 and $5,350,000, respectively, relating to the RenRe Agreement. Year Ended December 31, 2003 as Compared with the Period Ended December 31, 2002 Net premiums written and net premiums earned for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
2003 2002 Period Increase ---------- ----------- ---------- Net premiums written .... $ 352,908 89,341 $ 263,567 Net premiums earned ..... $ 355,556 43,047 $ 312,509
The Company's first complete year of operations was 2003 as compared with the 2002 Period which represents a two-month period during which the Company had minimal underwriting activity. Consequently, net premiums written and earned increased by $263,567,000 and $312,509,000, respectively. Net premiums written in the 2002 Period include $77,049,000 of premiums assumed from St. Paul under the Quota Share Retrocession Agreements representing unearned premiums related to contracts written by St. Paul during the first ten months of 2002. Net premiums written in 2003 reflect a growth in business underwritten in 2003 over 2002. Similar to net premiums written, net premiums earned in 2003 represent twelve months of underwriting activity whereas the 2002 Period represents two months. Net premiums earned are recognized subsequent to net premiums written. Net premiums earned in the 2002 Period are relatively low due to the commencement of operations during 2002. Net premiums earned for 2003 reflect business underwritten in 2003 and 2002. Losses and LAE and the resulting loss ratios for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
Increase 2003 2002 Period (decrease) ---------- ----------- ------------- Losses and LAE .......... $ 169,944 21,558 $ 148,386 Losses and LAE ratio .... 47.8% 50.1% (2.3) points
The increase in losses and LAE is primarily due to the comparison of 2003 with twelve months of underwriting operations to the 2002 Period. Losses and LAE in 2003 were favorably affected by a relatively low level of catastrophe losses while the 2002 Period had no catastrophe losses. Losses and LAE in 2003 also included favorable development in 2003 of losses and LAE as of December 31, 2002 of approximately $31,600,000. Additionally, the losses and LAE in 2003 were favorably impacted by improved profitability relating to net earned premium in 2003 on business underwritten in 2002. Acquisition expenses and resulting acquisition expense ratios for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
Increase 2003 2002 Period (decrease) ---------- ----------- ------------- Acquisition expenses ....... $ 52,154 7,798 $ 44,356 Acquisition expense ratio .. 14.7% 18.1% (3.4) points
The increase in acquisition expenses is primarily due to the comparison of 2003 with twelve months of underwriting operations to the 2002 Period. The ratios fluctuate as a result of the changes in mix of business and the contract terms and conditions. - 52 - Other underwriting expenses for the year ended December 31, 2003 and the 2002 Period were $35,598,000 and $5,960,000, respectively, and represent costs such as salaries, rent and like items. The increase is primarily due to the comparison of 2003 with twelve months of operations to the 2002 Period. Other underwriting expenses include fees of $5,350,000 in 2003 and $46,000 in the 2002 Period relating to the RenRe Agreement. Operating expenses for the 2002 Period include one-time expenses incurred in connection with the completion of the Initial Public Offering, the formation of the Company and the assumption of business from St. Paul. CASUALTY The Casualty operating segment includes reinsurance treaties that principally cover umbrella liability, general and product liability, professional liability, workers' compensation, casualty clash, automobile liability, surety and trade credit. This operating segment also includes accident and health treaties, which are predominantly reinsurance of health insurance products. This operating segment generated 41.2%, 40.4% and 55.3% of the Company's net premiums written for the years ended December 31, 2004 and 2003 and the 2002 Period, respectively. The percentage in the 2002 Period was impacted by the unearned premiums assumed from St. Paul under the Quota Share Retrocession Agreements which was also included in net premiums written. Year Ended December 31, 2004 as Compared with the Year Ended December 31, 2003 Net premiums written and net premiums earned for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ---------- ------- ---------- Net premiums written .... $ 677,399 474,000 $ 203,399 Net premiums earned ..... $ 611,893 391,170 $ 220,723
The increase in premiums written and earned is due to the growth in contracts bound in both 2003 and 2004 and rate increases in certain lines of business in 2004 that together generate net premiums written in 2004. The Company continues to expand its treaty participation with existing clients and form new client relationships. Additionally, in 2004 the Company expanded its participation in surety and trade credit business. In response to deteriorating market conditions in 2004 in the directors and officers liability line of business, the Company has begun to significantly decrease its involvement in that line. Also, increases in premiums written were offset by revisions of estimates of Casualty premiums that resulted in reductions of net premiums written and earned in 2004 of approximately $21,000,000 and $14,300,000, respectively, as compared with similar reductions of net premiums written and earned in 2003 of $35,300,000 and $16,100,000, respectively. The revisions to estimates are based on reported premiums from ceding companies and revised projections of ultimate premiums written under reinsurance contracts. The net effect on underwriting income of the revisions of estimates, after related reductions in losses, LAE and acquisitions expenses, was not significant. The increase in net premium earned is related to and consistent with the increase in net premiums written and is affected by changes in the mix of business and the structure of the underlying reinsurance contracts. Losses and LAE and the resulting loss ratios for the years ended December 31, 2004 and 2003 were as follows ($ in thousands): - 53 -
2004 2003 Increase ---------- ------- ------------ Losses and LAE .......... $ 418,355 266,836 $ 151,519 Losses and LAE ratio .... 68.4% 68.2% 0.2 points
The increase in losses and LAE in 2004 as compared with 2003 is consistent with the growth in net premiums earned. The resulting losses and LAE ratios in 2004 and 2003 are comparable. Improvements in the loss ratio in 2004, due to increased profitability of the 2004 and 2003 underwriting years over the 2002 underwriting year, were offset by adverse development with respect to automobile liability reinsurance in the United Kingdom and losses arising from the partial collapse of the new airport terminal in Paris, France. Acquisition expenses and resulting acquisition expense ratios for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
Increase 2004 2003 (decrease) ---------- ------- ------------ Acquisition expenses ....... $ 151,649 101,005 $ 50,644 Acquisition expense ratio .. 24.8% 25.8% (1.0) point
The increase in acquisition expenses is due primarily to the increase in net premiums earned in 2004 as compared with 2003. The decrease in acquisition expense ratios for the year ended December 31, 2004 as compared with 2003 is due to changes in the mix of business toward lines with higher expected loss ratios and lower acquisition expense ratios. Other underwriting expenses for the years ended December 31, 2004 and 2003 were $19,086,000 and $21,060,000, respectively. The decrease in other underwriting expenses is due to the reduction of incentive based compensation in 2004, as well as various non-recurring start-up costs incurred in 2003. The resulting other underwriting expense ratios for the years ended December 31, 2004 and 2003 were 3.1% and 5.4%, respectively. The decrease in the ratio in 2004 as compared with 2003 is due to both the increase in net premiums earned and the decline in other underwriting expenses. Year Ended December 31, 2003 as Compared with the Period Ended December 31, 2002 Net premiums written and net premiums earned for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
2003 2002 Period Increase ---------- ----------- ---------- Net premiums written .... $ 474,000 164,929 $ 309,071 Net premiums earned ..... $ 391,170 39,320 $ 351,850
The Company's first complete year of operations was 2003 as compared with the 2002 Period which represents a two-month period during which the Company had minimal underwriting activity. Consequently, net premiums written and net premiums earned increased by $309,071,000 and $351,850,000, respectively. Net premiums written in the 2002 Period include $140,386,000 of premiums assumed from St. Paul under the Quota Share Retrocession Agreements representing unearned premiums related to contracts written by St. Paul during the first ten months of 2002. Net premiums written in 2003 reflect a growth in business underwritten in 2003 over 2002. Premiums written are based partially on estimates of ultimate premiums from reinsurance contracts and the estimates are updated quarterly. Net premiums written in 2003 include a reduction in premiums estimated in the 2002 underwriting year, a - 54 - portion of which were written and earned by St. Paul Re, that reduced net premiums written in the Company's Casualty segment in 2003 by approximately $35,300,000. Similar to net premiums written, net premiums earned in 2003 represent twelve months of underwriting activity whereas the 2002 Period represents two months. Net premiums earned for 2003 reflect business underwritten in 2003 and 2002 while net premiums earned in the 2002 Period reflect only business underwritten in 2002. The reduction, in 2003, of net premiums written and earned in the 2002 Period resulted in a reduction of net premiums earned in 2003 of approximately $16,100,000. Losses and LAE and the resulting loss ratios for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
Increase 2003 2002 Period (decrease) ---------- ----------- -------------- Losses and LAE .......... $ 266,836 29,498 $ 237,338 Losses and LAE ratio .... 68.2% 75.0% (6.8) points
The increase in losses and LAE is primarily due to the comparison of 2003 with twelve months of underwriting operations to the 2002 Period. The loss ratio on business underwritten in 2003 is lower than the loss ratio for business underwritten in the 2002 Period primarily due to rate increases achieved during 2003. Losses and LAE in 2003 includes amounts from business underwritten in 2003 and business underwritten in 2002 while the 2002 Period includes amounts only from business underwritten in 2002. Losses and LAE in 2003 included a reduction in the estimated liability as of December 31, 2002 of $14,500,000, of which $13,100,000 relates to the reduction in 2003 of net premiums written and earned in the 2002 Period. The remaining $1,400,000 relates to favorable development. The decline in the loss ratio was further influenced by a shift in the mix of business toward contracts that have lower loss ratios and higher expense ratios. Acquisition expenses and resulting acquisition expense ratios for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
2003 2002 Period Increase ---------- ----------- ---------- Acquisition expenses ......... $ 101,005 9,269 $ 91,736 Acquisition expense ratio .... 25.8% 23.6% 2.2 points
The increase in acquisition expenses is due primarily to the comparison of 2003 with twelve months of underwriting operations to the 2002 Period. The resulting acquisition expense ratios reflect a shift in the mix of business and effects of differences in contract terms and conditions. Other underwriting expenses for the year ended December 31, 2003 and the 2002 Period were $21,060,000 and $4,136,000, respectively, and represent costs such as salaries, rent and like items. The increase is primarily due to the comparison of 2003 with twelve months of operations to the 2002 Period. Other underwriting expenses in the 2002 Period include one-time expenses incurred in connection with the completion of the Initial Public Offering, the formation of the Company and the assumption of business from St. Paul. FINITE RISK The Finite Risk operating segment includes principally structured reinsurance contracts with ceding companies whose needs may not be met efficiently through traditional reinsurance products. The classes of risks underwritten through finite risk contracts are generally consistent with the classes covered - 55 - by traditional products. Typically, the amount of claims we might pay is finite or capped. In return for this limit on claims, we often accept a cap on the potential profit margin specified in the treaty and return profits above this margin to the ceding company. The three main categories of finite risk contracts are finite quota share, multi-year excess-of-loss and whole account aggregate stop loss. This operating segment generated 28.2%, 29.5% and 14.7% of the Company's net premiums written for the years ended December 31, 2004 and 2003 and the 2002 Period, respectively. Due to the direct inter-relationship between losses and commissions for this segment, the Company believes it is important to evaluate the overall combined ratio, rather than its component parts of loss and loss adjustment expense ratios. Year Ended December 31, 2004 as Compared with the Year Ended December 31, 2003 Net premiums written and net premiums earned for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ---------- ------- ---------- Net premiums written ...... $ 464,175 345,234 $ 118,941 Net premiums earned ....... $ 350,907 320,801 $ 30,106
The increase in net premiums written and net premiums earned is primarily attributable to several large capped quota share contracts that were written in 2004. Net premiums earned are related to current and prior periods' net premiums written and are affected by changes in the mix of business and the structure of the underlying reinsurance contracts. Net premiums written and earned also include approximately $13,067,000 of additional premiums from reinsurance contracts that incurred losses arising from the Hurricanes. Losses and LAE, acquisition expenses and the resulting ratios for the years ended December 31, 2004 and 2003 were as follows ($ in thousands):
2004 2003 Increase ---------- ------- ------------- Losses and LAE ................. $ 251,892 147,391 $ 104,501 Acquisition expenses ........... 99,812 98,067 1,745 Losses, LAE and acquisition .... $ 351,704 245,458 $ 106,246 Losses, LAE and acquisition .... 100.2% 76.5% 23.7 points
The increase in losses, LAE and acquisition expenses and the losses, LAE and acquisition expense ratio in 2004 as compared with 2003 is primarily due to losses of $60,823,000 from the Hurricanes, partially offset by a reduction in profit commissions of $10,243,000. There were no catastrophe losses in 2003. In addition, several capped quota share contracts were written in 2004 that included primarily casualty business as compared with business written in 2003 that included a higher percentage of finite property business with lower loss ratios. Favorable development impacting both losses and LAE and acquisition expenses occurred in both 2004 and 2003. Net favorable development in 2004 and 2003 amounted to $9,348,000 and $17,900,000, respectively. Other underwriting expenses for the years ended December 31, 2004 and 2003 were $6,224,000 and $12,870,000, respectively. The decrease in other underwriting expenses is due to cost reductions in the Finite Risk segment in 2004, the reduction of incentive based compensation in 2004, as well as various non-recurring start-up costs incurred in 2003. - 56 - Year Ended December 31, 2003 as Compared with the Period Ended December 31, 2002 Net premiums written and net premiums earned for the year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
2003 2002 Period Increase ---------- ----------- ---------- Net premiums written .... $ 345,234 43,844 $ 301,390 Net premiums earned ..... $ 320,801 24,731 $ 296,070
The Company's first complete year of operations was 2003 as compared with the 2002 Period which represents a two-month period during which the Company had minimal underwriting activity. Consequently, net premiums written and net premiums earned increased by $301,390,000 and $296,070,000, respectively. The Finite Risk portfolio consists of a small number of contracts which can be large in premium size and are written on an intermittent basis. Consequently net premiums written are expected to vary significantly from year to year. A few significant finite quota share treaties were underwritten in the latter part of 2002 and early 2003 that together produced net premiums written of $220,000,000 in 2003. Similar to net premiums written, net premiums earned in 2003 includes twelve months of underwriting activity whereas the net premiums earned in the 2002 Period includes two months. In addition, net premiums earned are recognized subsequent to net premiums written. The net premiums earned in 2003 reflect premiums from contracts underwritten in 2003 and 2002 whereas the net premiums earned in the 2002 Period only reflects premiums from contracts underwritten in 2002 as there was no business underwritten prior to 2002. Losses and LAE, acquisition expenses and the resulting ratios year ended December 31, 2003 and the 2002 Period were as follows ($ in thousands):
2003 2002 Period Increase ---------- ----------- ----------- Losses and LAE .................. $ 147,391 9,300 $ 138,091 Acquisition expenses ............ 98,067 8,407 89,660 Losses, LAE and acquisition ..... $ 245,458 17,707 $ 227,751 Losses, LAE and acquisition ..... 76.5% 71.6% 4.9 points
The increase in losses and LAE and acquisition expenses is primarily due to the comparison of 2003 with twelve months of underwriting operations to the 2002 Period. Both 2003 and the 2002 Period benefited from the absence of any catastrophe losses. In 2003 there was a significantly greater amount of finite quota share contracts that had higher loss ratios. The resulting effect was partially mitigated by favorable development in 2003 of losses and LAE as of December 31, 2002 of approximately $17,900,000, which includes the effect of commutations. The increase in acquisition expenses is related to the increase in net premiums earned in 2003 over the 2002 Period. The ratios reflect the mix of business and effects of differences in terms and conditions of various contracts. Other underwriting expenses for the year ended December 31, 2003 and the 2002 Period were $12,870,000 and $2,068,000, respectively, and represent costs such as salaries, rent and like items. The increase is due to the comparison of 2003 with twelve months of operations to the 2002 Period. Other underwriting expenses in 2002 include one-time expenses incurred in connection with the completion of the Initial Public Offering, the formation of the Company and the assumption of business from St. Paul. - 57 - FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES FINANCIAL CONDITION Cash and cash equivalents were $209,897,000 and $105,461,000 as of December 31, 2004 and 2003, respectively. Fixed maturities were $2,240,202,000 and $1,678,138,000 as of December 31, 2004 and 2003 respectively. The investment portfolio increased due to positive cash flow from operations, excluding trading securities activities, which was $698,223,000 and $469,168,000 in 2004 and 2003, respectively. The Company's fixed maturity available-for-sale and trading portfolios are comprised entirely of publicly traded fixed maturity investments. The investment portfolio, which includes cash and cash equivalents, had a weighted average duration of 3.6 years and 3.7 years as of December 31, 2004 and 2003, respectively. Other invested assets currently represent a strategic equity investment in a privately held reinsurance company. The Company maintains and periodically updates an overall duration target for the portfolio and routinely monitors the composition of, and cash flows from, the portfolio to maintain liquidity necessary to meet the Company's obligations. Certain assets and liabilities associated with underwriting have increased significantly, some of which include significant estimates. Premiums receivable, deferred acquisition costs, unpaid losses and LAE, unearned premiums and commissions payable all include significant estimates. Premiums receivable as of December 31, 2004 of $580,048,000 include $530,066,000 that is based upon estimates. Premiums receivable as of December 31, 2003 of $487,441,000 include $396,541,000 that is based upon estimates. Net unpaid losses and LAE, net of reinsurance recoverable, as of December 31, 2004 of $1,378,950,000 include $1,151,222,000 of net IBNR. Net unpaid losses and LAE, net of reinsurance recoverable, as of December 31, 2003 of $731,918,000 include $639,218,000 of net IBNR. Commissions payable as of December 31, 2004 of $181,925,000 include $165,050,000 that is based upon estimates. Commissions payable as of December 31, 2003 of $176,310,000 include $146,637,000 that is based upon estimates. 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 actual cash and cash equivalents held by the Company. Net cash flows provided by operations, excluding trading securities activities, for the years ended December 31, 2004 and 2003 and the 2002 Period were $698,223,000, $469,168,000 and $281,393,000, respectively, 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 US, Platinum UK and Platinum Bermuda. As a holding company, the cash flow of Platinum Holdings consists primarily of dividends, interest and other permissible payments from its subsidiaries. Platinum Holdings depends on such payments for general corporate purposes and to meet its obligations, including the contract adjustment payments related to the ESU's and the payment of any dividends to its shareholders. The Company has filed an unallocated universal shelf registration statement with the Securities and Exchange Commission ("SEC"), which the SEC declared effective on April 5, 2004. The securities registered under the shelf registration statement for possible future sales include up to $750,000,000 of common shares, preferred shares and various types of debt securities. The registration statement included common shares held by St. Paul and RenaissanceRe and common shares issuable upon exercise of options owned by St. Paul and RenaissanceRe. On June 25, 2004, the Company announced St. Paul's - 58 - 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 ESUs in November 2002, which consist of a contract to purchase common shares from the Company in 2005 (the "Purchase Contracts") and an ownership interest in a senior note due 2007 issued by Platinum Finance (the "Senior Notes"). During 2005, the Company expects to issue common shares in accordance with the Purchase Contracts and remarket the Senior Notes, which the Company expects to generate cash of approximately $137,500,000, less fees and expenses associated with the remarketing. LIQUIDITY REQUIREMENTS The principal consolidated cash requirements of the Company are the payment of losses and LAE, commissions, brokerages, operating expenses, dividends to its shareholders, the servicing of debt (including interest payments on the senior notes and contract adjustment payments on the Purchase Contracts included in the Company's 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. Platinum UK and Platinum Bermuda are not licensed, approved or accredited as reinsurers anywhere in the United States and therefore, under the terms of most of their contracts with United States ceding companies, they are required to provide collateral to these ceding companies for unpaid ceded liabilities in a form acceptable to state insurance commissioners. Typically, this type of collateral takes the form of a letter of credit issued by an acceptable bank, the establishment of a trust, or a cash advance. Platinum UK and Platinum Bermuda expect to obtain letters of credit through commercial banks and may be required to provide the banks with a security interest in certain of Platinum UK's and Platinum Bermuda's investments. As of December 31, 2004, $29,159,000 of unsecured letters of credit were issued to various cedants. Platinum US and Platinum Bermuda have reinsurance and other contracts that require them to provide collateral to ceding companies should certain events occur, such as a decline in the rating by A.M. Best below specified levels or a decline in statutory equity below specified amounts, or when certain levels of assumed liabilities are attained. Some reinsurance contracts also have special termination provisions that permit early termination should certain events occur. As of December 31, 2004, investments with a carrying value of $5,779,000 and cash and cash equivalents of $1,153,000 were held in trust and an unsecured letter of credit of $8,128,000 was issued to satisfy these requirements. Platinum US is obligated to collateralize the liabilities assumed from St. Paul under the Quota Share Retrocession Agreements. Investments with a carrying value of $318,586,000 and cash and cash equivalents of $4,846,000 at December 31, 2004 were held in trust to collateralize an equivalent amount of liabilities ceded by St. Paul to the Company under the Quota Share Retrocession Agreements. 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 - 59 - dividends or other distributions by the reinsurance subsidiaries of the Company in 2005 without prior regulatory approval is estimated to be $139,620,000. 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. During the year ended December 31, 2004 the Company purchased 349,700 of its common shares in the open market at an aggregate amount of $9,985,000 at a weighted average price of $28.55 per share. The shares purchased by the Company were canceled. Management believes that the cash flow generated by the operating activities of the Company's subsidiaries will provide sufficient funds for the Company to meet its liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to the Company may be influenced by a variety of factors, including economic conditions in general and in the insurance and reinsurance markets, legal and regulatory changes as well as fluctuations from year to year in claims experience and the presence or absence of large catastrophic events. If the Company's liquidity needs accelerate beyond our ability to fund such obligations from current operating cash flows, the Company may need to liquidate a portion of its investment portfolio or raise additional capital in the capital markets. The Company's ability to meet its liquidity needs by selling investments or raising additional capital is subject to the timing and pricing risks inherent in the capital markets. ECONOMIC CONDITIONS Periods of moderate economic recession or inflation tend not to have a significant direct effect on the Company's underwriting operations. Significant unexpected inflationary or recessionary periods can, however, impact the Company's underwriting operations and investment portfolio. Management considers the potential impact of economic trends in the estimation process for establishing unpaid losses and LAE. CAPITAL EXPENDITURES None of Platinum Holdings, Platinum US, Platinum UK or Platinum Bermuda has any material commitments for capital expenditures. CONTRACTUAL OBLIGATIONS The company has the following contractual obligations ($ in thousands):
Less than 1 - 3 3 - 5 More than Contractual Obligations Total 1 year years Years 5 years - --------------------------------- ---------- --------- ------- ------- ---------- Equity Security Units (1) ....... $ 137,500 137,500 - - $ - Operating Leases (2) ............ 17,255 2,570 4,121 3,794 6,770 Gross unpaid losses and LAE (3).. $1,380,955 496,189 327,172 164,267 $ 393,327
(1) See note 6 of the Notes to the Consolidated Financial Statements. (2) See note 11 of the Notes to the Consolidated Financial Statements. (3) There are generally no stated amounts related to reinsurance contracts. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the gross unpaid losses and LAE do not represent all of the obligations that will arise under the contracts, but rather only the estimated liability incurred through December 31, 2004. There are reinsurance contracts that have terms extending into 2005 under which additional obligations will be incurred. - 60 - OFF BALANCE SHEET ARRANGEMENTS The Company does not have any arrangements that are not accounted for or disclosed in the consolidated financial statements. 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 written premium. We anticipate that our total net premium written in 2005 will be approximately the same as for 2004. If rates deteriorate more quickly than we anticipate, then our 2005 net written premium will likely be lower than the 2004 level. For the Property and Marine segment underlying primary rates are declining at a rapid pace for commercial properties in the US and abroad rendering some proportional business unattractive in light of the catastrophe risks assumed. The level of rate increase in Florida that will be allowed by regulators for residential properties is not currently known and may not be sufficient to compensate for the perceived riskiness of the business. Consequently, our level of business written on a proportional basis may decline as compared to 2004. To the extent that excess-of-loss reinsurance rates adjust to partially mitigate the negative impact of underlying rate decreases we are more likely to renew this business and therefore anticipate premium volume for 2005 that is substantially similar to 2004. With selective and disciplined underwriting, we believe that the business we accept will generate acceptable profitability. For the Casualty segment, we believe that differences of opinion between primary insurers and reinsurers regarding the profitability of the casualty business will persist. Accordingly, we anticipate that well capitalized primary carriers will retain more of their business. Less well capitalized carriers may seek reinsurance with more restrictions on risk transfer to drive down costs. Although the overall quantity of casualty reinsurance ceded may decrease in 2005 versus 2004, we believe that our strong 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 good 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 and New York Attorney General will reduce, but not eliminate, demand for limited risk transfer products in the short term. Although we cannot predict with certainty the outcome of these investigations, we believe that once the buyers and sellers of these products perceive that the accounting, headline and regulatory risk has receded, demand will increase. Accordingly, the likelihood of writing a significant volume of new finite business is lower for 2005 than for 2004. Our existing portfolio of finite risk contracts is expected to generate premium volume for 2005 that is substantially the same as for 2004. Given our current mix of business by segment and expected profitability of that business we anticipate continued positive cash flow, and consequently believe that our 2005 net investment income will exceed that of 2004. RISK FACTORS Numerous factors could cause our actual results to differ materially from those in the forward-looking statements set forth in this Form 10-K and in other documents that we file with the Securities and Exchange Commission. Those factors include the following: - 61 - Increased competition could adversely affect our profitability. The property and casualty reinsurance industry is highly competitive. We compete with reinsurers worldwide, many of which have greater financial, marketing and management resources than ours. Some of our competitors are large financial institutions that have reinsurance segments, while others are specialty reinsurance companies. Financial institutions have also created alternative capital market products that compete with reinsurance products, such as reinsurance securitization. Following the September 11, 2001 terrorist attack, a number of individuals and companies in the reinsurance industry established new, well-capitalized, Bermuda-based reinsurers to benefit from improved market conditions, and a number of existing competitors raised additional capital. Many of the reinsurers that entered the reinsurance markets have or could have more capital than we have. In addition, there may be established companies or new companies of which we are not aware that may be planning to commit capital to this market. The full effect of this additional capital on the reinsurance market and on the terms and conditions of the reinsurance contracts of the types we expect to underwrite may not be known for some time. Competition in the types of reinsurance business that we underwrite is based on many factors, including premium charges and other terms and conditions offered, services provided, ratings assigned by independent rating agencies, speed of claims payment, claims experience, perceived financial strength and experience and reputation of the reinsurer in the line of reinsurance to be underwritten. Traditional as well as new capital market participants from time to time produce alternative products (such as reinsurance securitizations, catastrophe bonds and various derivatives such as swaps) that may compete with certain types of reinsurance, such as property catastrophe. Over time, these numerous initiatives could significantly affect supply, pricing and competition in our industry. A downgrade in the rating assigned by Best's to our operating subsidiaries could adversely affect our ability to write new business. Best's has assigned a financial strength rating of "A" (Excellent) to our operating subsidiaries. This rating is the third highest of sixteen rating levels. According to Best's, a rating of "A" indicates Best's opinion that a company has an excellent ability to meet its ongoing obligations to policyholders. This rating is subject to periodic review by Best's and may be revised downward or revoked at the sole discretion of Best's. Best's may increase its scrutiny of rated companies, revise their rating standards or take other action. If Best's revises the rating standard associated with our current rating, our rating may be downgraded or we may need to raise additional capital to maintain our rating. Best's 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, a ceding company's own rating 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. It is increasingly common for our reinsurance contracts to contain terms that would allow the ceding companies to cancel the contract if we are downgraded below a certain rating level or require collateral to be posted for a portion of our obligations. 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 - 62 - 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 Best's 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 trust for the benefit of the ceding company or permitting the ceding company 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. We are not currently rated by any rating agencies other than Best's. We may from time to time obtain ratings from other rating agencies, though we are unable to predict the impact of any such ratings at this time. The occurrence of severe catastrophic events could have a material adverse effect on our financial condition or results of operations. Because we underwrite property and casualty reinsurance and have large aggregate exposures to natural and man-made disasters, we expect that our loss experience generally will include infrequent events of great severity. The frequency and severity of catastrophe losses are inherently unpredictable. Consequently, the occurrence of losses from a severe catastrophe or series of catastrophes could have a material adverse effect on our results of operations and financial condition. In addition, catastrophes are an inherent risk of our business and a severe catastrophe or series of catastrophes could have a material adverse effect on our ability to write new business, and our financial condition and results of operations, possibly to the extent of eliminating our shareholders' equity and statutory surplus (which is the amount remaining after all liabilities, including liabilities for losses and LAE, are subtracted from all admitted assets, as determined under statutory accounting principles prescribed or permitted by U.S. insurance regulatory authorities). Increases in the values and geographic concentrations of insured property and the effects of inflation have historically resulted in increased severity of industry losses in recent years, and, although we seek to limit our overall exposure to risk by limiting the amount of reinsurance we write by geographic zone, we expect that those factors will increase the severity of catastrophe losses in the future. If the loss limitation methods and pricing models we employ are not effective, our financial condition or results of operations could be materially adversely affected. Our property and casualty reinsurance contracts cover unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions, freezes, riots, floods and other natural or man-made disasters. We seek to limit our overall exposure to risk by limiting the amount of reinsurance we write by geographic zone, peril and type of program or contract. Our risk management uses a variety of means, including the use of contract terms, diversification criteria, probability analysis and analysis of comparable historical loss experience. We estimate the impact of certain catastrophic events using catastrophe modeling software and contract information to evaluate our exposure to losses from individual contracts and in the aggregate. For example, the majority of the - 63 - natural peril catastrophe reinsurance we write relates to exposures within the United States, Europe and Japan. Accordingly, we monitor our exposure to events that affect these regions, such as hurricanes and earthquakes in the United States, flood and wind in Europe and typhoons and earthquakes in Japan. We take an active role in the evaluation of commercial catastrophe exposure models, which form the basis for our own proprietary pricing models. These computer-based loss modeling systems utilize direct exposure information obtained from our clients and independent external data to assess each client's potential for catastrophe losses. We believe that modeling is an important part of the underwriting process for catastrophe exposure pricing. However, these models depend on the quality of the information obtained from our clients and the external data we obtain from third parties and may prove inadequate for determining the pricing for certain catastrophe exposures. Many of our reinsurance contracts do not contain an aggregate loss limit or a loss ratio limit, which means that there is no contractual limit to the losses that we may be required to pay pursuant to such reinsurance contracts. Substantially all of our property reinsurance contracts with natural catastrophe exposure have occurrence limits that limit our exposure. Substantially all of our high layer property, casualty and marine excess-of-loss contracts also contain aggregate loss limits, with limited reinstatements of an occurrence limit, which restore the original limit under the contract after the limit has been depleted by losses incurred on that treaty. Various provisions of our contracts, such as limitations or exclusions from coverage or choice of forum, may not be enforceable in the manner we intend, due to, among other things, disputes relating to coverage and choice of legal forum. Underwriting is a matter of judgment, involving important assumptions about matters that are inherently difficult to predict and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more catastrophic or other events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our financial condition or our results of operations, possibly to the extent of eliminating our shareholders' equity and statutory surplus. If we are required to increase our liabilities for losses and LAE, our operating results may be adversely affected. We are required by applicable insurance laws and regulations and U.S. GAAP to establish liabilities on our consolidated balance sheet for payment of losses and LAE that will arise from our reinsurance products. At any time, these liabilities may prove to be inadequate to cover our actual losses and LAE. To the extent these liabilities may be insufficient to cover actual losses or LAE, we will have to add to these liabilities and incur a charge to our earnings, which could have a material adverse effect on our financial condition, results of operations and cash flows. The liabilities established on our consolidated balance sheet do not represent an exact calculation of liability, but rather are estimates of the expected cost of the ultimate settlement of losses. All of our liability estimates are based on actuarial and statistical projections at a given time, facts and circumstances known at that time and estimates of trends in loss severity and other variable factors, including new concepts of liability and general economic conditions. Changes in these trends or other variable factors could result in claims in excess of the liabilities that we have established. Unforeseen losses, the type or magnitude of which we cannot predict, may emerge in the future. These additional losses could arise from changes in the legal environment, catastrophic events, extraordinary events affecting our clients such as reorganizations and liquidations or changes in general economic conditions. - 64 - In addition, because we, like other reinsurers, do not separately evaluate each of the individual risks assumed under reinsurance treaties, we are largely dependent on the original underwriting decisions made by ceding companies. We are subject to the risk that our ceding companies may not have adequately evaluated the risks to be reinsured and that the premiums ceded to us may not adequately compensate us for the risks we assume. Under U.S. GAAP, Platinum US, Platinum UK and Platinum Bermuda are not permitted to establish liabilities until an event occurs which may give rise to a loss. Once such an event occurs, liabilities are established based upon estimates of the total losses incurred by the ceding companies and an estimate of the portion of such loss our three operating subsidiaries have reinsured. As a result, only liabilities applicable to losses incurred up to the reporting date may be established, with no allowance for the provision of a contingency reserve to account for unexpected future losses. Losses arising from future events will be estimated and recognized at the time the loss is incurred. Such future losses could be substantial. Retrocessional reinsurance may become unavailable on acceptable terms. In order to limit the effect on our financial condition of large and multiple losses, we may buy retrocessional reinsurance, which is reinsurance for our own account. From time to time, market conditions have limited, and in some cases have prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. If we are unable or unwilling to obtain retrocessional reinsurance, our financial position and results of operations may be materially adversely affected by catastrophic losses. Elimination of all or portions of our retrocessional coverage could subject us to increased, and possibly material, exposure or could cause us to underwrite less business. A retrocessionaire's insolvency or its inability or unwillingness to make payments under the terms of its reinsurance treaty with us could have a material adverse effect on us. Therefore, our retrocessions subject us to credit risk because the ceding of risk to retrocessionaires does not relieve a reinsurer of its liability to the ceding companies. We are dependent on the business provided to us by reinsurance brokers and we may be exposed to liability for brokers' failure to make payments to clients for their claims. We market most of our reinsurance products through reinsurance brokers. The reinsurance brokerage industry generally, and our sources of business specifically, are concentrated. The loss of business relationships with any of our top five brokers could have a material adverse effect on our business. In addition, some of these brokers have invested in new Bermuda reinsurance companies that may compete with us. In accordance with industry practice, we expect to frequently pay amounts owing in respect of claims under our policies 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, we may remain liable to the ceding company for the deficiency. Conversely, in certain jurisdictions, when premiums for such policies are paid to reinsurance brokers for payment over to us, such premiums will be deemed to have been paid and the ceding company will no longer be liable to us for those amounts whether or not actually received by us. Consequently, we assume a degree of credit risk associated with our brokers during the payment process. In October 2004, the Office of the Attorney General of the State of New York announced that it had commenced a civil suit against Marsh & McLennan Companies ("Marsh"), alleging that certain of its - 65 - business practices were fraudulent and violated antitrust and securities laws. This action resulted from an industry-wide investigation relating to the conduct of insurance and reinsurance brokers, which is ongoing. Regulatory authorities in several other states have opened similar investigations. In January 2005, Marsh agreed to pay $850 million to settle these charges. The Company was not a party to this litigation and did not receive any subpoena or information requests with respect to this litigation. We underwrite substantially all of our reinsurance through brokers, including a substantial portion through Marsh. We are unable to predict the impact, if any, that these investigations, and any increased regulatory oversight that might result therefrom, may have on our business. The current investigations into certain non-traditional, or loss mitigation, insurance products could have a material adverse effect on our financial condition or results of operations. In November and December 2004, we 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. We are 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, we are unable to predict the direction the investigation will take and the impact, if any, it may have on our business. The property and casualty reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable pricing. Historically, property and casualty reinsurers have experienced significant fluctuations in operating results. Demand for reinsurance is influenced significantly by underwriting results of primary insurers and prevailing general economic and market conditions, all of which affect ceding companies' decisions as to the amount or portion of risk that they retain for their own accounts and consequently reinsurance premium rates. The supply of reinsurance is related to prevailing prices, the levels of insured losses and levels of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the reinsurance industry. As a result, the property and casualty reinsurance business historically has been a cyclical industry, characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable pricing. We can expect to experience the effects of such cyclicality. The cyclical trends in the industry and the industry's profitability can also be affected significantly by volatile and unpredictable developments, including what management believes to be a trend of courts to grant increasingly larger awards for certain damages, natural disasters (such as catastrophic hurricanes, windstorms, tornadoes, earthquakes and floods), fluctuations in interest rates, changes in the investment environment that affect market prices of and income and returns on investments and inflationary pressures that may tend to affect the size of losses experienced by primary insurers. We cannot predict whether market conditions will improve, remain constant or deteriorate. A return to unfavorable market conditions may affect our ability to write reinsurance at rates that we consider appropriate relative to the risk assumed. If we cannot write property and casualty reinsurance at appropriate rates, our ability to transact reinsurance business would be significantly and adversely affected. Our invested assets are subject to market volatility and interest rate and currency exchange rate fluctuation. The Company's principal invested assets are fixed maturities, which are subject to the market risk of potential losses from adverse changes in interest rates. Depending on our classification of our investments as available-for-sale, trading or other assets, changes in the market value of our securities are - 66 - reflected in either our consolidated balance sheet or statement of income. The Company's investment portfolio is also subject to credit risk resulting from adverse changes in the issuer's ability to repay the debt. These risks could materially adversely affect our results of operations. The Company's principal exposure to foreign currency risk is its obligation to settle claims in foreign currencies. The possibility exists that the Company may incur foreign currency exchange gains or losses as it ultimately settles claims required to be paid in foreign currencies. To the extent the Company does not seek to hedge its foreign currency risk or hedges prove ineffective, the resulting impact of a movement in foreign currency exchange rate could materially adversely affect our results of operations. Platinum Holdings is a holding company and, consequently, its cash flow is dependent on dividends, interest and other permissible payments from its subsidiaries. Platinum Holdings is a holding company that conducts no reinsurance operations of its own. All operations are conducted by its wholly owned operating subsidiaries, Platinum US, Platinum UK and Platinum Bermuda. As a holding company, Platinum Holdings' cash flow 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 payment of any dividends to its shareholders. Additionally, under the Bermuda Companies Act 1981, Platinum Holdings may declare or pay a dividend only if, among other things, it has reasonable grounds for believing that it is, or after the payment would be, able to pay its liabilities as they become due. For a discussion of the legal limitations on our subsidiaries' ability to pay dividends to Platinum Holdings, see "Business - Regulation." The imposition of U.S. corporate income tax on Platinum Holdings and its non-U.S. subsidiaries could adversely affect our results of operations. We believe that Platinum Holdings, Platinum UK, Platinum Bermuda and Platinum Ireland each operate in such a manner that none of these companies is subject to U.S. corporate income tax because they are not engaged in a trade or business in the U.S. Nevertheless, because definitive identification of activities which constitute being engaged in a trade or business in the U.S. is not provided by the tax authorities, the U.S. Internal Revenue Service might contend that any of these companies is engaged in a trade or business in the U.S., which would subject such company to U.S. tax at regular corporate rates on the income that is effectively connected with the U.S. trade or business, plus an additional 30% "branch profits" tax on such income remaining after the regular tax in certain circumstances. Any such tax could materially adversely affect our results of operations. The regulatory system under which we operate, and potential changes thereto, could significantly and adversely affect our business. The business of reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. Reinsurers are generally subject to less direct regulation than primary insurers. In Bermuda, we operate under relatively less intensive regulatory requirements. However, in the United States and in the United Kingdom licensed reinsurers are highly regulated and must comply with financial supervision standards comparable to those governing primary insurers. For a detailed discussion of the regulatory requirements to which Platinum Holdings and its subsidiaries are subject, see "Business -- Regulation." Any failure to comply with applicable laws could result in the imposition of significant restrictions on our ability to do business, and could also result in fines and other sanctions, any or all of which could materially adversely affect our financial results and operations. In addition, these statutes and regulations may, in effect, restrict the ability of our subsidiaries to write new business or, as indicated above, distribute funds to Platinum Holdings. In recent years, some - 67 - state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. Moreover, the NAIC and state insurance regulators regularly reexamine existing laws and regulations, interpretations of existing laws and the development of new laws that may be more restrictive or may result in higher costs to us than current statutory requirements. Platinum Bermuda is not registered or licensed as an insurance company in any jurisdiction outside Bermuda. Platinum Bermuda conducts its business solely through its offices in Bermuda and does not maintain an office, and its personnel do not conduct any insurance activities, in the U.S. or elsewhere. Although Platinum Bermuda does not believe it is in violation of insurance laws of any jurisdiction outside Bermuda, inquiries or challenges to Platinum Bermuda's insurance activities may still be raised in the future. The offshore insurance and reinsurance regulatory framework recently has become subject to increased scrutiny in many jurisdictions, including U. S. federal and various state jurisdictions. In the past, there have been congressional and other proposals in the United States regarding increased supervision and regulation of the insurance industry, including proposals to supervise and regulate reinsurers domiciled outside the United States. If Platinum Bermuda were to become subject to any insurance laws and regulations of the United States or any U.S. state, which are generally more restrictive than those applicable to it in Bermuda, Platinum Bermuda might be required to post deposits or maintain minimum surplus levels and might be prohibited from engaging in lines of business or from writing specified types of policies or contracts. Complying with those laws could have a material adverse effect on the ability of the Company to conduct its business. ITEM 7A. 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 December 31, 2004, the portfolio has a dollar weighted average rating of Aa3. The Company has other receivable amounts subject to credit risk. The most significant of these are reinsurance premiums receivable from ceding companies. 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 credit risk related to amounts recoverable from retrocessionaires is not material as of December 31, 2004, 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 Best's unless the retrocessionaire's 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 Best's. The financial performance and rating status of all material retrocessionaires is routinely monitored. - 68 - 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. Conversely, 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 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 December 31, 2004 is approximately as follows ($ in thousands):
Interest Rate Shift in Basis Points ---------------------------------------------------------------------- - 100 bp - 50 bp Current + 50 bp + 100 bp ------------ ---------- --------- ----------- ------------- Total market value .................. $ 2,320,272 2,279,434 2,240,202 2,194,504 2,151,497 Percent change in market value ...... 3.6% 1.8% - (2.0%) (4.0%) Resulting unrealized appreciation / (depreciation) .................... $ 93,051 52,213 12,981 (32,717) $ (75,724)
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. SOURCES OF FAIR VALUE The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 2004 ($ in thousands): - 69 -
Carrying Fair Amount Value ------------- ------------- Financial assets: Fixed maturities available-for-sale .................... $ 2,157,529 $ 2,157,529 Fixed maturity trading securities ...................... 82,673 82,673 ------------- ------------- Total fixed maturities ........................... 2,240,202 2,240,202 ------------- ------------- Other invested asset ................................... 6,769 6,769 Financial liabilities: Debt obligations ....................................... $ 137,500 $ 165,000
The fair value of fixed maturities is based on quoted closing market prices at the reporting date for those or similar investments. The fair values of debt obligations are based on quoted market prices. Other invested asset represents a strategic investment in a non-public reinsurance company and is carried at estimated fair value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company as of December 31, 2004 and 2003 and for the years then ended and for the period from April 19, 2002 (date of inception) through December 31, 2002, together with the report thereon by KPMG LLP, the Company's independent registered public accounting firm, are set forth on pages F-1 through F-40 hereto. The combined statements of the reinsurance underwriting segment of St. Paul prior to the Initial Public Offering (the "Predecessor") for the period from January 1, 2002 through November 1, 2002, together with the report thereon by KPMG LLP, the Predecessor's independent registered public accounting firm, are set forth on pages P-1 through P-14 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. 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 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. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act). Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, - 70 - conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004 based on the integrated framework published in September 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective in that it provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that provide reasonable assurance that transactions are recorded as necessary and that expenditures are being made only with proper authorization. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No changes occurred during the quarter ended December 31, 2004 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. - 71 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Platinum Underwriters Holdings, Ltd: We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Platinum Underwriters Holdings, Ltd. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. - 72 - In our opinion, management's assessment that Platinum Underwriters Holdings, Ltd. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Platinum Underwriters Holdings, Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Platinum Underwriters Holdings, Ltd. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for the years ended December 31, 2004 and 2003, and the period from April 19, 2002 (date of inception) to December 31, 2002, and our report dated February 25, 2005 expressed an unqualified opinion on these consolidated financial statements. /s/ KPMG LLP New York, New York February 25, 2005 - 73 - ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item relating to our directors and executive officers is incorporated herein by reference to "Proposal 1 - Election of Directors" under the headings "Information Concerning Nominees," "Information Concerning Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" of our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2005 Annual General Meeting of Shareholders (our "Proxy Statement"). The Company intends to file the Proxy Statement prior to April 30, 2005. CODE OF ETHICS We have adopted a Code of Ethics within the meaning of Item 406 of Regulation S-K of the Exchange Act. Our Code of Ethics applies to all of our directors and employees including, without limitation, our principal executive officer, our principal financial officer, our principal accounting officer and all of our employees performing financial or accounting functions. A copy of our Code of Ethics is posted on our website at www.platinumre.com and may be found under the "Investor Relations" section by clicking on "Corporate Governance." In the event that we make any amendment to, or grant any waiver from, a provision of our Code of Ethics that requires disclosure under Item 5.05 of Form 8-K, we will post such information on our website at the location specified above. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item relating to executive compensation is incorporated herein by reference to "Proposal 1 - Election of Directors" under the heading "Executive Compensation" of our Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information required by this Item relating to security ownership of certain beneficial owners and management and related shareholder matters is incorporated herein by reference to "Proposal 1 - Election of Directors" under the headings "Equity Based Compensation Information," "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" of our Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item relating to certain relationships and related transactions is incorporated herein by reference to "Proposal 1 - Election of Directors" under the heading "Related Party Transactions" of our Proxy Statement. - 74 - ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item relating to principal accountant fees and services is incorporated herein by reference to "Proposal 2 - Ratification of Selection of the Independent Registered Public Accounting Firm" of our Proxy Statement. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS The consolidated financial statements of the Company as of December 31, 2004 and 2003 and for the years then ended and for the period from April 19, 2002 (date of inception) through December 31, 2002, together with the report thereon by KPMG LLP, the Company's independent registered public accounting firm, are set forth on pages F-1 through F-40 hereto. The combined statements of the Predecessor for the period from January 1, 2002 through November 1, 2002, together with the report thereon by KPMG LLP, the Predecessor's independent registered public accounting firm, are set forth on pages P-1 through P-14 hereto. SCHEDULES SUPPORTING FINANCIAL STATEMENTS The schedules relating to the consolidated financial statements of the Company as of December 31, 2004 and 2003 and for the years then ended and for the period from April 19, 2002 (date of inception) through December 31, 2002, together with the independent registered public accounting firm's report thereon, are set forth on pages S-1 through S-8 hereto. Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X. EXHIBITS
Exhibit Number Description - ------- ---------------------------------------------------------------------------------------------- 2.1 Formation and Separation Agreement dated October 28, 2002 between The St. Paul Companies, Inc. and Platinum Holdings. (2) 3(i).1 Memorandum of Association of Platinum Holdings. (1) 3(ii).2 Bye-Laws of Platinum Holdings. (8) 4.1 Form of Certificate of the Common Shares of Platinum Holdings. (2) 4.2 Indenture dated October 10, 2002 among Platinum Holdings, Platinum Finance and JPMorgan Chase Bank. (2) 4.3 Indenture Supplement dated November 1, 2002 among Platinum Holdings, Platinum Finance and JPMorgan Chase Bank. (2) 4.4 Purchase Contract Agreement dated November 1, 2002 between Platinum Holdings and JPMorgan Chase Bank. (2) 4.5 Pledge Agreement dated November 1, 2002 among Platinum Holdings, State Street Bank and Trust Company and JPMorgan Chase Bank. (2) 4.6 Form of Senior Note of Platinum Finance. (2) 4.7 Form of Guarantee of Platinum Holdings. (2)
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 4.8 Form of Normal Unit. (2) 4.9 Form of Stripped Unit. (2) 10.1* Share Unit Plan for Non-Employee Directors. (2) 10.2* Summary of Director Compensation (12) 10.3* 2002 Share Incentive Plan. (2) 10.4* 2002 Share Incentive Plan (UK Sub-Plan). (7) 10.5* Annual Incentive Plan. (7) 10.6* Section 162(m) Performance Incentive Plan. (7) 10.7* Executive Retirement Savings Plan. (7) 10.8* Executive Bonus Deferral Plan. (7) 10.9* Executive Incentive Plan. (7) 10.10* First Amendment to the Executive Incentive Plan dated November 5, 2004. (9) 10.11* Capital Accumulation Plan. (2) 10.12* Employment Agreement dated July 5, 2002 between Michael E. Lombardozzi and St. Paul Re, Inc. and assumed by Platinum Holdings. (1) 10.13* Amendment dated August 15, 2002 to the Employment Agreement dated July 5, 2002 between Michael E. Lombardozzi and St. Paul Re, Inc. and assumed by Platinum Holdings. (1) 10.14* Amendment dated March 12, 2004 to the Employment Agreement dated July 5, 2002 between Michael E. Lombardozzi and St. Paul Re, Inc. and assumed by Platinum Holdings. (7) 10.15* Letter Agreement dated March 1, 2002 between Steven H. Newman and The St. Paul Companies, Inc. (1) 10.16* Amendment dated June 14, 2002 to the Letter Agreement dated March 1, 2002 between Steven H. Newman and The St. Paul Companies, Inc. (1) 10.17* Consulting Agreement dated March 1, 2002 between Steven H. Newman and The St. Paul Companies, Inc. and assumed by Platinum US. (1) 10.18* Amendment dated March 12, 2004 to the Consulting Agreement dated March 1, 2002 between Steven H. Newman and The St. Paul Companies, Inc. and assumed by Platinum US. (7) 10.19* Employment Agreement dated August 4, 2004 between Michael D. Price and Platinum US. (8) 10.20* Employment Agreement dated July 3, 2002 between William A. Robbie and St. Paul Re, Inc. and assumed by Platinum Holdings. (1) 10.21* Amendment dated August 16, 2002 to the Employment Agreement dated July 3, 2002 between William A. Robbie and St. Paul Re, Inc. (1)
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 10.22* Amendment dated March 12, 2004 to the Employment Agreement dated July 3, 2002 between William A. Robbie and St. Paul Re, Inc. and assumed by Platinum Holdings. (7) 10.23* Separation Agreement dated June 24, 2004 between William A. Robbie and Platinum Holdings. (8) 10.24* Letter Agreement dated August 14, 2002 between Neal J. Schmidt and St. Paul Re, Inc. and assumed by Platinum US. (2) 10.25* Separation and Consulting Agreement dated May 13, 2003 between Jerome T. Fadden and Platinum Holdings. (3) 10.26* Letter Agreement, dated June 20, 2003 between Gregory E.A. Morrison and Platinum Holdings. (4) 10.27* Amendment dated January 7, 2004 to the Letter Agreement dated June 20, 2003 between Gregory E.A. Morrison and Platinum Holdings. (6) 10.28 Securities Purchase Agreement dated July 20, 2003 between Gregory E.A. Morrison and Platinum Holdings. (4) 10.29* Employment Agreement dated June 24, 2004 between Joseph F. Fisher and Platinum Holdings. (8) 10.30* Letter Agreement dated June 24, 2004 between H. Elizabeth Mitchell and Platinum US. (8) 10.31 Capital Support Agreement dated November 1, 2002 between Platinum Holdings and Platinum UK. (2) 10.32 Capital Support Agreement dated November 26, 2002 between Platinum Holdings and Platinum US. (2) 10.33 Registration Rights Agreement dated November 1, 2002 between The St. Paul Companies, Inc. and Platinum Holdings. (2) 10.34 Option Agreement dated November 1, 2002 among St. Paul Reinsurance Company Limited, Platinum Holdings and St. Paul. (2) 10.35 Option Agreement dated November 1, 2002 between St. Paul and Platinum Holdings. (2) 10.36 Amendment dated January 10, 2005 to the Option Agreement dated November 1, 2002 among St. Paul Reinsurance Company Limited, Platinum Holdings and St. Paul. (11) 10.37 Amendment dated January 10, 2005 to the Option Agreement dated November 1, 2002 between St. Paul and Platinum Holdings. (11) 10.38 Employee Benefits and Compensation Matters Agreement dated November 1, 2002 between St. Paul and Platinum US. (2) 10.39 Master Services Agreement dated November 1, 2002 between Platinum Holdings and St. Paul. (2) 10.40 Letter Agreement dated June 30, 2003 extending the Master Services Agreement dated November 1, 2002 between Platinum Holdings and St. Paul. (4)
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 10.41 Letter Agreement dated May 19, 2004 extending the Master Services Agreement dated November 1, 2002 between Platinum Holdings and St. Paul. (8) 10.42 UK Master Services Agreement dated November 1, 2002 between St. Paul Reinsurance Company Limited and Platinum UK. (2) 10.43 Addendum dated December 10, 2003 to the UK Master Services Agreement dated November 1, 2002 between St. Paul Reinsurance Company Limited and Platinum UK. (6) 10.44 Runoff Services Agreement dated November 1, 2002 among Platinum US, Mountain Ridge Insurance Company and St. Paul Fire and Marine Insurance Company. (2) 10.45 U.K. Runoff Services Agreement dated November 1, 2002 between St. Paul Reinsurance Company Limited and Platinum UK. (2) 10.46 Underwriting Management Agreement dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.47 U.K. Underwriting Agency and Underwriting Management Agreement dated November 1, 2002 between St. Paul Reinsurance Company Limited and Platinum US. (2) 10.48 U.K. Business Transfer Agreement dated November 1, 2002 among St. Paul Reinsurance Company Limited, Platinum UK and St. Paul Management Limited. (2) 10.49 Intra-Group Asset Transfer Agreement dated November 1, 2002 among Platinum Holdings, St. Paul Reinsurance Company Limited and St. Paul Management Limited. (2) 10.50 Form of Transitional Trademark License Agreement between St. Paul and Platinum Holdings. (2) 10.51 Investment Agreement dated September 20, 2002 among Platinum Holdings, St. Paul, and RenaissanceRe Holdings Ltd. (2) 10.52 First Amendment dated November 1, 2002 to the Investment Agreement dated September 20, 2002 among Platinum Holdings, St. Paul, and RenaissanceRe Holdings Ltd. (2) 10.53 Transfer Restrictions, Registration Rights and Standstill Agreement dated November 1, 2002 between St. Paul and Platinum Holdings. (2) 10.54 Amendment dated March 22, 2004 to Registration Rights Agreement dated November 1, 2002 between St. Paul and Platinum Holdings. (7) 10.55 Reimbursement Letter Agreement dated March 25, 2004 between St. Paul and Platinum Holdings. (7) 10.56 Option Agreement dated November 1, 2002 between Platinum Holdings and RenaissanceRe Holdings Ltd. (2) 10.57 Amended and Restated Option Agreement dated November 18, 2004 between Platinum Holdings and RenaissanceRe Holdings Ltd. (10)
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 10.58 Services and Capacity Reservation Agreement dated November 1, 2002 between Platinum Holdings and RenaissanceRe Holdings Ltd. (2) 10.59 100% Quota Share Retrocession Agreement (traditional) dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.60 100% Quota Share Retrocession Agreement (non-traditional - A) dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.61 100% Quota Share Retrocession Agreement (non-traditional - B-1) dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.62 100% Quota Share Retrocession Agreement (non-traditional - B-2) dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.63 100% Quota Share Retrocession Agreement (non-traditional - C) dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.64 100% Quota Share Retrocession Agreement (non-traditional - D-3) dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.65 100% Quota Share Retrocession Agreement (non-traditional - D-4) dated November 1, 2002 between St. Paul Fire and Marine Insurance Company and Platinum US. (2) 10.66 100% Quota Share Retrocession Agreement (non-traditional - D-1) dated November 1, 2002 between Mountain Ridge Insurance Company and Platinum US. (2) 10.67 100% Quota Share Retrocession Agreement (non-traditional - D-2) dated November 1, 2002 between Mountain Ridge Insurance Company and Platinum US. (2) 10.68 Commutation and Release Agreement dated June 11, 2003 between Platinum US and Mountain Ridge Insurance Company. (4) 10.69 100% Quota Share Retrocession Agreement (non-traditional - D Stop Loss) dated November 1, 2002 between Mountain Ridge Insurance Company and Platinum US. (2) 10.70 100% Quota Share Retrocession Agreement (non-traditional - D Spread Loss) dated November 1, 2002 between Mountain Ridge Insurance Company and Platinum US. (2) 10.71 100% Quota Share Retrocession Agreement (non-traditional - E) dated November 1, 2002 between Mountain Ridge Insurance Company and Platinum US. (2) 10.72 UK 100% Quota Share Retrocession Agreement (traditional) dated November 1, 2002 between St. Paul Reinsurance Company Limited and Platinum US. (2) 10.73 UK 100% Quota Share Retrocession Agreement (non-traditional - A) dated November 1, 2002 between St. Paul Reinsurance Company Limited and Platinum US. (2) 10.74 UK 100% Quota Share Retrocession Agreement (non-traditional - B-1) dated November 1, 2002 between St. Paul Reinsurance Company Limited and Platinum US. (2) 10.75 100% Quota Share Retrocession Agreement dated November 27, 2002 between St. Paul Reinsurance Company Limited and Platinum UK. (2) 10.76 Property Catastrophe Excess of Loss Reinsurance Contract dated September 10, 2003 between the Glencoe Group of Companies and Platinum US (15% participation). (7)
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 10.77 Property Catastrophe Excess of Loss Reinsurance Contract dated September 10, 2003 between the Glencoe Group of Companies and Platinum US (5% participation). (7) 10.78 Security Agreement dated November 27, 2002 between Platinum UK and St. Paul Reinsurance Company Limited. (2) 10.79 Control Agreement dated November 27, 2002 between Platinum UK, St. Paul Reinsurance Company Limited and State Street Bank and Trust Company. (2) 10.80 Discretionary Investment Advisory Agreement dated November 27, 2002 between Platinum UK and Alliance Capital Management L.P. (2) 10.81 Revised and Amended Trust Agreement dated November 1, 2002 and amended December 12, 2002, among Platinum US, St. Paul Fire and Marine Insurance Company and State Street Bank and Trust Company. (2) 10.82 Letter Amendment dated December 12, 2002 to the Revised and Amended Trust Agreement dated November 1, 2002 and amended December 12, 2002, among Platinum US, St. Paul Fire and Marine Insurance Company, Mountain Ridge Insurance Company, and State Street Bank and Trust Company. (2) 10.83 Discretionary Investment Advisory Agreement dated November 4, 2002 between Platinum US and Alliance Capital Management L.P. (2) 10.84 Revised and Amended Trust Agreement dated November 1, 2002 and amended December 12, 2002, among Platinum US, Mountain Ridge Insurance Company and State Street Bank and Trust Company. (2) 10.85 Discretionary Investment Advisory Agreement dated November 4, 2002 between Platinum US and Alliance Capital Management L.P. (2) 10.86 Quota Share Retrocession Agreement dated November 26, 2002 between Platinum Bermuda and Platinum UK. (2) 10.87 Quota Share Retrocession Agreement dated March 27, 2003 between Platinum Bermuda and Platinum UK. (7) 10.88 Addendum No. 1 effective April 1, 2003 to the Quota Share Retrocession Agreement dated March 27, 2003, between Platinum Bermuda and Platinum UK. (7) 10.89 Addendum No. 2 effective March 27, 2003 to the Quota Share Retrocession Agreement dated March 27, 2003, between Platinum Bermuda and Platinum UK. (7) 10.90 Security Agreement dated November 26, 2002 between Platinum Bermuda and Platinum UK. (2) 10.91 Addendum No. 1 effective January 1, 2004 to the Security Agreement dated November 26, 2002, between Platinum Bermuda and Platinum UK. (7) 10.92 Control Agreement dated November 26, 2002 among Platinum Bermuda, Platinum UK and State Street Bank and Trust Company. (2) 10.93 Discretionary Investment Advisory Agreement dated November 26, 2002 between Platinum Bermuda and Platinum UK. (2)
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 10.94 Trust Agreement effective January 1, 2003 among Platinum Bermuda, Platinum US and State Street Bank and Trust Company. (4) 10.95 Quota Share Retrocession Agreement dated May 13, 2003 between Platinum Bermuda and Platinum US. (4) 10.96 Addendum No. 1 dated December 31, 2003 to the Quota Share Retrocession Agreement dated May 13, 2003, between Platinum Bermuda and Platinum US. (6) 10.97 Quota Share Retrocession Agreement dated May 6, 2004 between Platinum Bermuda and Platinum US. (8) 10.98 Aggregate Excess of Loss Retrocession Agreement dated June 11, 2003 between Platinum US and Mountain Ridge Insurance Company. (4) 10.99 Excess of Loss Retrocession Agreement dated April 15, 2004 between Platinum UK and Platinum US. (7) 10.100 Referral Agreement between Platinum Bermuda and Renaissance Underwriting Managers Ltd. (4) 10.101 Referral Agreement between Platinum US and Renaissance Underwriting Managers Ltd. (6) 10.102 Novation and Transfer Agreement for the Multi-Line Excess of Loss Reinsurance Agreement dated September 16, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Wisconsin Mutual Insurance Company, effective as of January 1, 2003. (5) 10.103 Novation and Transfer Agreement for the Casualty Excess of Loss Reinsurance Agreement dated September 16, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Wisconsin Mutual Insurance Company, effective as of January 1, 2003. (5) 10.104 Novation and Transfer Agreement for the First Property Catastrophe Excess of Loss Reinsurance Agreement dated September 16, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Wisconsin Mutual Insurance Company, effective as of January 1, 2003. (5) 10.105 Novation and Transfer Agreement for the Second Property Catastrophe Excess of Loss Reinsurance Agreement dated September 16, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Wisconsin Mutual Insurance Company, effective as of January 1, 2003. (5) 10.106 Novation and Transfer Agreement for the Third Property Catastrophe Excess of Loss Reinsurance Agreement dated September 16, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Wisconsin Mutual Insurance Company, effective as of January 1, 2003. (5) 10.107 Novation and Transfer Agreement for the Casualty Clash Excess of Loss Reinsurance Contract effective as of January 1, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Crusader Insurance Company. (6)
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 10.108 Novation and Transfer Agreement for the Property Clash Excess of Loss Reinsurance Contract effective as of January 1, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Crusader Insurance Company. (6) 10.109 Novation and Transfer Agreement for the Multi Line Excess of Loss Reinsurance Contract effective as of January 1, 2003, among Platinum US, St. Paul Fire and Marine Insurance Company and Crusader Insurance Company. (6) 10.110 Novation and Transfer Agreement for the Property Catastrophe Excess of Loss Reinsurance Agreement dated February 19, 2004, among Platinum US, St. Paul Fire and Marine Insurance Company and Germantown Mutual Insurance Company, effective as of January 1, 2003. (7) 10.111 Novation and Transfer Agreement for the Workers' Compensation and Employers' Liability Excess of Loss Reinsurance Agreement dated February 19, 2004, among Platinum US, St. Paul Fire and Marine Insurance Company and Germantown Mutual Insurance Company, effective as of January 1, 2003. (7) 10.112 Novation and Transfer Agreement for the Property Per Risk Excess of Loss Reinsurance Agreement dated February 19, 2004, among Platinum US, St. Paul Fire and Marine Insurance Company and Germantown Mutual Insurance Company, effective as of January 1, 2003. (7) 10.113 Novation and Transfer Agreement for the Casualty Excess of Loss Reinsurance Agreement dated February 19, 2004, among Platinum US, St. Paul Fire and Marine Insurance Company and Germantown Mutual Insurance Company, effective as of January 1, 2003. (7) 10.114 Combined Catastrophe Excess of Loss Reinsurance Contract effective January 1, 2003 for the Alfa Insurance Group. (6) 10.115 Addendum No. 6 to the Interests and Liabilities Agreement with respect to the Combined Catastrophe Excess of Loss Reinsurance Contract between members of the Alfa Insurance Group, St. Paul Fire and Marine Insurance Company and Platinum US. (6) 10.116 Guaranty dated December 31, 2003 between Platinum Holdings, as Guarantor, and Platinum US. (6) 10.117 Guarantee dated December 31, 2003 between Platinum Holdings, as Guarantor, and Platinum UK. (6) 21.1 Subsidiaries of Platinum Holdings. (12) 23.1 Independent Registered Public Accounting Firm's Consent (New York, New York) 23.2 Independent Registered Public Accounting Firm's Consent (Minneapolis, Minnesota) 31.1 Certification of Gregory E.A. Morrison, Chief Executive Officer of Platinum Holdings, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Joseph F. Fisher, Chief Financial Officer of Platinum Holdings, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
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Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------ 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.
* Items denoted with an asterisk represent management contracts or compensatory plans or arrangements. - ----------------------- (1) Incorporated by reference from the Registration Statement on Form S-1 (Registration No. 333-86906) of Platinum Holdings. (2) Incorporated by reference from Platinum Holdings' Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on March 31, 2003. (3) Incorporated by reference from Platinum Holdings' Report on Form 8-K, filed with the Commission on May 13, 2003. (4) Incorporated by reference from Platinum Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Commission on August 14, 2003. (5) Incorporated by reference from Platinum Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed with the Commission on November 14, 2003. (6) Incorporated by reference from Platinum Holdings' Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Commission on March 15, 2004. (7) Incorporated by reference from Platinum Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed with the Commission on May 10, 2004. (8) Incorporated by reference from Platinum Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed with the Commission on August 6, 2004. (9) Incorporated by reference from Platinum Holdings' Current Report on Form 8-K, filed with the Commission on November 9, 2004. (10) Incorporated by reference from Platinum Holdings' Current Report on Form 8-K, filed with the Commission on November 18, 2004. (11) Incorporated by reference from Platinum Holdings' Current Report on Form 8-K, filed with the Commission on January 11, 2005. (12) Incorporated by reference from Platinum Holdings' Annual Report on Form 10-K, filed with the Commission on March 16, 2005 - 83 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf of the undersigned, thereunto duly authorized in Pembroke, Bermuda. Date: September 20, 2005 PLATINUM UNDERWRITERS HOLDINGS, LTD. /s/ Gregory E.A. Morrison -------------------------------------- Gregory E.A. Morrison President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------------- ---------------------------------- ---- /s/ Gregory E.A. Morrison President, Chief Executive Officer * - -------------------------- and Director Gregory E.A. Morrison (Principal Executive Officer) /s/ Joseph F. Fisher Executive Vice President and Chief * - -------------------------- Financial Officer (Principal Joseph F. Fisher Financial and Accounting Officer) /s/ Steven H. Newman Chairman of the Board of Directors * - -------------------------- Steven H. Newman Director - -------------------------- H. Furlong Baldwin /s/ Jonathan F. Bank Director * - -------------------------- Jonathan F. Bank Director - -------------------------- Dan R. Carmichael /s/ Robert V. Deutsch Director * - -------------------------- Robert V. Deutsch Director - -------------------------- Peter T. Pruitt
* - Signed as of September 20, 2005 - 84 - PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS PAGE
Page ---- Report of Independent Registered Public Accounting Firm............................................ F-2 Consolidated Balance Sheets as of December 31, 2004 and 2003....................................... F-3 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) through December 31, 2002...... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) through December 31, 2002................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) through December 31, 2002....................... F-6 Notes to Consolidated Financial Statements......................................................... F-7
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Platinum Underwriters Holdings, Ltd: We have audited the accompanying consolidated balance sheets of Platinum Underwriters Holdings, Ltd. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) to December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Platinum Underwriters Holdings, Ltd. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) to December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Platinum Underwriters Holdings, Ltd. and subsidiaries' internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP New York, New York February 25, 2005 F-2 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2004 and 2003 (amounts in thousands, except share data)
2004 2003 --------------- --------------- ASSETS Investments: Fixed maturities available-for-sale at fair value (amortized cost - $2,144,290 and $1,560,807, respectively)............... $ 2,157,529 $ 1,583,505 Fixed maturity trading securities at fair value (amortized cost - $82,931 and $95,926, respectively)..................... 82,673 94,633 Other invested asset....................................................... 6,769 6,910 --------------- --------------- Total investments.................................................... 2,246,971 1,685,048 Cash and cash equivalents.................................................... 209,897 105,461 Accrued investment income.................................................... 23,663 17,492 Reinsurance premiums receivable.............................................. 580,048 487,441 Reinsurance recoverable on ceded losses and loss adjustment expenses......... 2,005 5,102 Prepaid reinsurance premiums................................................. 2,887 6,129 Funds held by ceding companies............................................... 198,048 65,060 Deferred acquisition costs................................................... 136,038 79,307 Income tax recoverable....................................................... 1,325 9,360 Deferred tax assets.......................................................... 8,931 3,711 Other assets................................................................. 12,182 21,461 --------------- --------------- Total assets......................................................... $ 3,421,995 $ 2,485,572 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Unpaid losses and loss adjustment expenses................................. $ 1,380,955 $ 736,934 Unearned premiums.......................................................... 502,423 305,985 Reinsurance deposit liabilities............................................ 20,189 5,699 Debt obligations........................................................... 137,500 137,500 Ceded premiums payable..................................................... 2,384 6,205 Commissions payable........................................................ 181,925 176,310 Funds withheld............................................................. 11,999 - Deferred tax liabilities................................................... 10,404 5,503 Other liabilities.......................................................... 41,213 44,233 --------------- --------------- Total liabilities.................................................... 2,288,992 1,418,369 --------------- --------------- 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, 43,087,407 and 43,054,125 shares issued and outstanding, respectively............... 430 430 Additional paid-in capital................................................. 911,851 910,505 Accumulated other comprehensive income..................................... 12,252 18,774 Retained earnings.......................................................... 208,470 137,494 --------------- --------------- Total shareholders' equity........................................... 1,133,003 1,067,203 --------------- --------------- Total liabilities and shareholders' equity........................... $ 3,421,995 $ 2,485,572 =============== ===============
See accompanying notes to consolidated financial statements. F-3 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income For the years ended December 31, 2004 and 2003 and for the period from April 19, 2002 (date of inception) through December 31, 2002 (amounts in thousands, except share data)
2004 2003 2002 ------------- --------- ----------- Revenue: Net premiums earned........................................... $ 1,447,935 1,067,527 $ 107,098 Net investment income......................................... 84,532 57,645 5,211 Net realized gains on investments............................. 1,955 2,781 25 Other income.................................................. 3,211 3,343 167 ------------- --------- ----------- Total revenue........................................... 1,537,633 1,131,296 112,501 ------------- --------- ----------- Expenses: Losses and loss adjustment expenses........................... 1,019,804 584,171 60,356 Acquisition expenses.......................................... 327,821 251,226 25,474 Operating expenses............................................ 66,333 92,595 16,334 Net foreign currency exchange losses (gains).................. (725) 114 (2,017) Interest expense.............................................. 9,268 9,492 1,261 ------------- --------- ----------- Total expenses.......................................... 1,422,501 937,598 101,408 ------------- --------- ----------- Income before income tax expense........................ 115,132 193,698 11,093 Income tax expense.............................................. 30,349 48,875 4,655 ------------- --------- ----------- Net income.............................................. $ 84,783 144,823 $ 6,438 ============= ========= =========== Earnings per share: Basic earnings per share...................................... $ 1.96 3.37 $ 0.15 Diluted earnings per share.................................... $ 1.81 3.09 $ 0.15 Comprehensive income: Net income.................................................... $ 84,783 144,823 $ 6,438 Other comprehensive income: Unrealized gains on available-for-sale securities, net of deferred tax.............................................. (6,910) 7,570 10,581 Cumulative translation adjustments, net of deferred tax..... 388 623 - ------------- --------- ----------- Comprehensive income.................................... $ 78,261 153,016 $ 17,019 ============= ========= =========== Shareholder dividends: Dividends declared............................................ $ 13,807 13,767 $ - Dividends declared per share.................................. $ 0.32 0.32 $ -
See accompanying notes to consolidated financial statements. F-4 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the years ended December 31, 2004 and 2003 and for the Period from April 19, 2002 (date of inception) through December 31, 2002 (amounts in thousands)
2004 2003 2002 ----------- --------- ------------ Preferred shares: Balances at beginning and end of period..................... $ - - $ - ----------- --------- ------------ Common shares: Balances at beginning of period............................. 430 430 Initial capitalization...................................... - - 12 Redemption of shares issued in initial capitalization....... - - (12) Exercise of share options................................... 2 - - Issuance of common shares................................... 1 - 430 Purchase of common shares................................... (3) - - ----------- --------- ------------ Balances at end of period............................. 430 430 430 ----------- --------- ------------ Additional paid-in-capital: Balances at beginning of period............................. 910,505 903,797 - Initial capitalization...................................... - - 108 Redemption of shares issued in initial capitalization....... - - (108) Exercise of share options................................... 7,405 678 - Share based compensation.................................... 2,358 5,510 - Issuance of common shares................................... 1,565 520 904,658 Purchase of common shares................................... (9,982) - - Purchase contract adjustment payments....................... - - (6,639) Assets contributed by St. Paul.............................. - - 5,778 ----------- --------- ------------ Balances at end of period............................. 911,851 910,505 903,797 ----------- --------- ------------ Accumulated other comprehensive income (loss): Balances at beginning of period............................. 18,774 10,581 - Net change in unrealized (losses) gains and losses on available-for-sale securities, net of deferred tax........ (6,910) 7,570 10,581 Net change in cumulative translation adjustments, net of deferred tax.............................................. 388 623 - ----------- --------- ------------ Balances at end of period............................. 12,252 18,774 10,581 ----------- --------- ------------ Retained earnings: Balances at beginning of period............................. 137,494 6,438 - Net income.................................................. 84,783 144,823 6,438 Dividends paid to shareholders.............................. (13,807) (13,767) - ----------- --------- ------------ Balances at end of period............................. 208,470 137,494 6,438 ----------- --------- ------------ Total shareholders' equity............................ $ 1,133,003 1,067,203 $ 921,246 =========== ========= ============
See accompanying notes to consolidated financial statements. F-5 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended December 31, 2004 and 2003 and for the Period from April 19, 2002 (date of inception) through December 31, 2002 (amounts in thousands)
2004 2003 2002 ----------- ---------- ------------ Operating Activities: Net income............................................................. $ 84,783 144,823 $ 6,438 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization........................................ 20,642 23,321 2,469 Net realized gains on investments.................................... (1,955) (2,781) (25) Net foreign currency exchange (gains) losses......................... (725) 114 - Share based compensation............................................. 2,358 5,510 - Trading securities activities........................................ 16,510 (85,861) - Changes in assets and liabilities: Increase in accrued investment income.............................. (6,171) (7,499) (9,993) Increase in reinsurance premiums receivable........................ (92,607) (481,843) (5,599) (Increase) decrease in amounts receivable from St. Paul............ - 54,096 (39,750) Increase in funds held by ceding companies......................... (132,988) (10,158) - (Increase) decrease in deferred acquisition costs.................. (56,731) (29,975) 4,058 Increase in net unpaid losses and loss adjustment expenses......... 641,062 440,859 60,356 Increase (decrease) in net unearned premiums....................... 199,680 108,840 (52,984) Increase (decrease) in reinsurance deposit liabilities............. 14,490 (17,962) (167) Increase (decrease) in ceded premiums payable...................... (3,821) 6,205 - Increase in commissions payable.................................... 5,615 138,749 6,595 Increase in funds withheld......................................... 11,999 - - Changes in other assets and liabilities............................ 12,210 (12,094) 19,152 Cash from St. Paul related to the November 1, 2002 assumption of liabilities on reinsurance contracts becoming effective in 2002...... - 108,336 288,648 Other net.............................................................. 382 627 2,195 ----------- ---------- ------------ Net cash provided by operating activities........................ 714,733 383,307 281,393 ----------- ---------- ------------ Investing Activities: Proceeds from sale of available-for-sale fixed maturities.............. 498,945 393,245 120,421 Proceeds from maturity or paydown of available-for-sale fixed maturities........................................................... 136,472 132,979 - Acquisition of available-for-sale fixed maturities..................... (1,230,895) (1,066,077) (1,157,416) Other invested asset acquired.......................................... - (6,910) - ----------- ---------- ------------ Net cash used in investing activities............................ (595,478) (546,763) (1,036,995) ----------- ---------- ------------ Financing Activities: Net proceeds from shares issued in initial capitalization.............. - - 120 Redemption of shares issued in initial capitalization.................. - - (120) Dividends paid to shareholders......................................... (13,807) (13,767) - Proceeds from exercise of share options................................ 7,406 678 - Proceeds from issuance of common shares................................ 1,567 520 905,088 Net proceeds from issuance of debt securities.......................... - - 132,000 Purchase of common shares.............................................. (9,985) - - ----------- ---------- ------------ Net cash (used in) provided by financing activities............. (14,819) (12,569) 1,037,088 ----------- ---------- ------------ Net increase (decrease) in cash and cash equivalents............. 104,436 (176,025) 281,486 Cash and cash equivalents at beginning of period......................... 105,461 281,486 - ----------- ---------- ------------ Cash and cash equivalents at end of period............................... $ 209,897 105,461 $ 281,486 =========== ========== ============ Supplemental disclosures of cash flow information: Income taxes paid...................................................... $ 8,549 65,912 $ - Interest paid.......................................................... $ 7,442 7,888 $ -
See accompanying notes to consolidated financial statements. F-6 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION Platinum Underwriters Holdings, Ltd. ("Platinum Holdings") is a Bermuda holding company organized in 2002. Platinum Holdings and its subsidiaries (the "Company") operate through three licensed reinsurance subsidiaries: Platinum Underwriters Reinsurance, Inc. ("Platinum US"), Platinum Re (UK) Limited ("Platinum UK") and Platinum Underwriters Bermuda, Ltd. ("Platinum Bermuda"). The Company provides property and marine, casualty and finite risk reinsurance coverages, through reinsurance intermediaries, to a diverse clientele of insurers and select reinsurers on a worldwide basis. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). These financial statements reflect the consolidated position of the Company, including Platinum US, Platinum UK, Platinum Bermuda, Platinum Underwriters Finance, Inc. ("Platinum Finance"), Platinum Regency Holdings and Platinum Administrative Services, Inc. All material intercompany transactions have been eliminated in preparing these consolidated financial statements. 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 subsequently 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. In addition to the common shares issued, the Company issued Equity Security Units ("ESU"). The ESU's consist of a contract to purchase common shares in 2005 and an ownership interest in a senior note due 2007. Concurrent with these transactions, the Company and St. Paul entered into several agreements for the transfer of continuing reinsurance business and certain related assets of St. Paul. Among these agreements were quota share retrocession agreements effective November 2, 2002 under which the Company assumed from St. Paul unpaid losses and loss adjustment expenses ("LAE"), unearned premiums and certain other liabilities on reinsurance contracts becoming effective in 2002 (the "Quota Share Retrocession Agreements"). The underwriting operations, as well as substantially all other operations of the Company commenced in November 2002. The 2002 consolidated statements of income and comprehensive income, shareholders' equity and cash flows include all activity from incorporation on April 19, 2002 through December 31, 2002 (the "2002 Period"). SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investments Fixed maturities owned that the Company may not have the positive intent to hold until maturity F-7 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued 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 tax. Fixed maturities owned that the Company has the intent to sell prior to maturity are classified as trading securities and reported at fair value, with unrealized gains and losses included in other income. Securities classified as trading securities are generally foreign currency denominated securities intended to match net liabilities denominated in foreign currencies in order to minimize net exposures arising from fluctuations in foreign currency exchange rates. The fair values of fixed maturities are based on quoted market prices at the reporting date for those or similar investments. Premiums and discounts on fixed maturity securities are amortized into interest income over the life of the security under the effective yield method. Premiums and discounts on mortgage and asset-backed securities are amortized into interest income based on prepayment assumptions obtained from outside investment managers. These assumptions are consistent with the current interest rate and economic environment. The retrospective adjustment method is used to value asset-backed securities. Realized gains and losses on sales of investments are determined on the basis of the specific identification method. 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. Other invested asset represents a strategic investment in a non-public reinsurance company and is carried at estimated fair value. Short-Term Investments and Cash Equivalents Short-term investments are carried at cost, which approximates fair value. Short-term investments mature within one year from the purchase date. Cash equivalents are carried at amortized cost, which approximates fair value, and include all securities that, at their purchase date, have a maturity of less than 90 days. Premium Revenues Assumed reinsurance premiums are recognized as revenues when premiums become earned proportionately over the coverage period. Net premiums earned are recorded in the statement of income, net of the cost of retrocession. Net premiums written not yet recognized as revenue are recorded in the balance sheet as unearned premiums, gross of any ceded unearned premiums. Due to the nature of reinsurance, ceding companies routinely report and remit premiums subsequent to the contract coverage period and, consequently, include 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 estimates of WBNR and EBNR include amounts reported by the ceding companies, information obtained during audits and other information received from ceding companies. The Company also estimates the expenses associated with these premiums in the form of losses, loss adjustment expenses ("LAE") and commissions. As actual premiums are reported by ceding companies, management evaluates the appropriateness of the premium estimates and any adjustments to these estimates are accounted for as changes in estimates and are reflected in the results of operations in the period in which they are made. Adjustments to original premium estimates could be material and could significantly impact earnings in the period they are recorded. Due to the time lag F-8 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued inherent in the reporting of premiums by ceding companies, a significant portion of amounts included as premiums written and receivable represent estimated premiums, net of commissions, and is not currently due based on the terms of the underlying contracts. Certain of our reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the experience under the contracts. 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 premiums triggered by losses and are earned immediately. Reinstatement premiums and additional premiums are recognized in accordance with the provisions of assumed reinsurance contracts, based on loss experience under such contracts. An allowance for uncollectible premiums is established for possible non-payment of such amounts due, as deemed necessary. Funds Held by Ceding Companies The Company writes business on a funds held basis. Under these contractual arrangements, the ceding company holds the net funds that would otherwise be remitted to the Company and generally credits the funds held balance with interest income. The general objective of the funds held balances is to provide the ceding company with collateral for obligations of the Company. The Company bears the credit risk in the event that the ceding company fails to remit the net funds held balances, however, that credit risk is somewhat mitigated by the contractual ability to offset funds held balances with any loss amounts owed by the Company. Deferred Acquisition Costs Costs of acquiring business, primarily commissions and other direct underwriting expenses, which vary with and are directly related to the production of business, are deferred and amortized over the same period as the corresponding premiums are recorded as revenues. On a regular basis, an analysis of the recoverability of deferred acquisition costs is performed based on the profitability of the underlying reinsurance contracts including anticipated investment income. Any adjustments are reflected in the results of operations in the period in which they are made. Should the analysis indicate that the acquisition costs deferred are not recoverable, further analyses are performed to determine if a liability is required to provide for losses that may exceed the related unearned premiums. Deferred acquisition costs amortized in 2004, 2003 and the 2002 Period were $224,307,000, $227,240,000 and $14,449,000, respectively. Debt Obligations and Deferred Debt Issuance Costs The net proceeds from the sale of the Company's ESU's were allocated between the purchase contracts and the senior notes based on the underlying fair value of each instrument. The present value of the purchase contract adjustment payments were initially charged to shareholders' equity, with an offsetting credit to liabilities. Subsequent contract adjustment payments are allocated between this liability account and interest expense based on a constant rate calculation over the life of the transaction. Costs incurred in issuing debt are capitalized and amortized over the life of the debt. If the effect of the issuance of common shares in exchange for the senior notes is dilutive to earnings per share, it is included in the calculation of diluted earnings per share as if the common shares were issued and the F-9 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued proceeds received were used to pay down the senior notes at the beginning of the reporting period. Unpaid Losses and LAE Unpaid losses and LAE are estimated based upon reports received from ceding companies, supplemented by the Company's estimates of losses for which ceding company reports have not been received and historical company and industry experience for unreported claims. Unpaid losses and LAE include estimates of the cost of claims that were reported, but not yet paid, and the cost of claims incurred but not yet reported ("IBNR"). Estimated amounts recoverable from reinsurers on unpaid losses and LAE are reflected as assets. While the Company commenced operations in 2002, the business written is sufficiently similar to the historical reinsurance business of St. Paul that the Company is able to use the historical loss experience of the reinsurance business of St. Paul to estimate its ultimate losses and LAE. Unpaid losses and LAE represent management's best estimate at a given point in time and are subject to the effects of trends in loss severity and frequency. These estimates are reviewed regularly and adjusted as experience develops or new information becomes available. Any such adjustments are accounted for as changes in estimates and reflected in the results of operations in the period in which they are made. It is possible that the ultimate liability may materially differ from such estimates. Reinsurance Deposit Liabilities Reinsurance contracts entered into by the Company which are not deemed to transfer significant insurance risk are accounted for as deposits, whereby liabilities are initially recorded at the same amount as assets received. Risk transfer involves evaluating significant assumptions relating to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms. Interest expense related to the deposit is recognized as incurred. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the basic earnings per share adjusted for the potential dilution that would occur if the issued options were exercised and considers the outstanding purchase contracts relating to the ESU. Securities that are convertible into common shares that are anti-dilutive are not included in the calculation of diluted earnings per share. Reinsurance Ceded Reinsurance ceded, which transfers risk and the related premiums, commissions and losses incurred to the reinsurer, is reflected as reductions of the respective income and expense accounts. Unearned premiums ceded and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets. Income Taxes 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 F-10 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the change is enacted. A valuation allowance is established for deferred tax assets where it is more likely than not that future tax benefits will not be realized. Stock-Based Compensation During 2003, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Awards of Stock Based Compensation to Employees" ("SFAS 123") and Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 123 requires that the fair value of shares granted under the Company's share option plan subsequent to the 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 transitioning guidance for a voluntary adoption of SFAS 123 as well as amends the disclosure requirements of SFAS 123. For the 2002 Period, 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 APB25. The adoption of SFAS 148 did not have a material effect on the Company's financial position or results of operations. Had the Company calculated and recorded compensation expense for share option grants based on the "fair value" method described in SFAS 123 for options granted prior to 2003, net income and earnings per share, net of tax, for the years ended December 31, 2004 and 2003 and the 2002 Period would have been the pro forma amounts as indicated below ($ in thousands, except per share data):
2004 2003 2002 Period ------------- ------- ------------- Share based compensation expense: As reported........................... $ 2,358 5,510 $ - Pro forma............................. 7,026 14,774 1,070 Net income: As reported............................ 84,783 144,823 6,438 Pro forma.............................. 80,115 135,559 5,368 Basic earnings per share: As reported............................ 1.96 3.37 0.15 Pro forma.............................. 1.86 3.15 0.12 Diluted earnings per share: As reported............................ 1.81 3.09 0.15 Pro forma.............................. $ 1.72 2.90 $ 0.12
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 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires that, prospectively, compensation F-11 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued costs be recognized for the fair value of all share options, 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 above are the same as if the Company had adopted SFAS 123R in 2004. Foreign Currency Exchange The Company's functional currency is generally the currency of the local operating environment. Transactions conducted in other than functional currencies are remeasured to the Company's functional currency, and the resulting foreign exchange gains and losses are included in net foreign currency exchange gains or losses. Functional currency based assets and liabilities are translated into U.S. dollars using current rates of exchange prevailing at the balance sheet date and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income, net of applicable deferred income tax. Organizational Cost Costs incurred by the Company relating to its organization were expensed as incurred. Use of Estimates The Company's financial statements include estimates and assumptions that have an effect on the amounts reported. The most significant estimates are those relating to unpaid losses and LAE. These estimates are continually reviewed and adjustments made as necessary, but actual results could be significantly different than expected at the time such estimates are made. Results of changes in estimates are reflected in results of operations in the period in which the change is made. Reclassifications Certain reclassifications have been made to the 2003 financial statements in order to conform to the 2004 presentation. 2. SEPARATION FROM AND CONTINUING RELATIONSHIP WITH ST. PAUL As discussed more fully in Note 8, on November 1, 2002, Platinum Holdings completed the Initial Public Offering as well as an offering of ESU's. Concurrently with the Initial Public Offering, Platinum Holdings sold 6,000,000 common shares to St. Paul in a private placement and issued to St. Paul an option to purchase up to 6,000,000 additional common shares at any time during the ten years following the Initial Public Offering at a price of $27.00 per share. St. Paul subsequently sold its 6,000,000 common shares in June 2004. Concurrent with the transactions in November 2002, the Company and St. Paul entered into several agreements for the transfer of continuing reinsurance business and certain related assets of St. Paul. Among these agreements were quota share retrocession agreements effective November 2, 2002 under which the Company assumed from St. Paul unpaid losses and LAE, unearned premiums and certain other liabilities on reinsurance contracts becoming effective in 2002. A summary of the liabilities assumed and assets received on November 2, 2002 are as follows ($ in thousands): F-12 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Liabilities assumed: Net unpaid losses and LAE.................................. $ 221,303 Net unearned premiums...................................... 244,000 Reinsurance deposit liabilities............................ 23,828 Profit commission liabilities.............................. 16,145 ------------- 505,276 Ceding commission to St. Paul................................ (53,390) ------------- 451,886 ------------- Assets received: Cash....................................................... 288,648 Funds held................................................. 54,902 ------------- 343,550 ------------- Amount due from St. Paul..................................... $ 108,336 -------------
Amounts due from St. Paul at December 31, 2002 were settled during 2003. Included in assumed premiums written in the 2002 Period is $292,302,000 assumed from St. Paul. Premiums assumed from St. Paul includes $244,000,000 of unearned premiums as of November 2, 2002 on reinsurance contracts becoming effective in 2002 and additional assumed premiums written of approximately $48,302,000 for the 2002 Period. While the Company did not cede any premiums in the 2002 Period, it assumed business from St. Paul net of retrocessional reinsurance and may be subject to the credit risk related to such retrocessional reinsurance. The Company entered into an Employee Benefits and Compensation Matters Agreement with St. Paul that provided for the transfer of employees from St. Paul and provided for the allocation of assets and liabilities and certain other agreements with respect to employee compensation and benefit plans. In addition, St. Paul reimbursed the Company for the annual bonuses of the Company's employees prorated for the period from January 1, 2002 through the date of completion of the Initial Public Offering. The agreement also provided for reimbursement of a portion of severance and retention payments to the Company's employees. 3. INVESTMENTS The Company's available-for-sale fixed maturities at December 31, 2004 and 2003 were as follows ($ in thousands): F-13 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value -------------- ---------- ---------- ------------ December 31, 2004: U.S. Government and U.S. Government agencies......... $ 4,227 - 24 $ 4,203 Corporate bonds...................................... 1,349,167 14,960 4,775 1,359,352 Mortgage and asset-backed securities................. 508,757 3,898 1,586 511,069 Municipal bonds...................................... 214,088 1,751 588 215,251 Foreign governments and states....................... 64,301 57 380 63,978 -------------- ---------- ---------- ------------ Total bonds.................................. 2,140,540 20,666 7,353 2,153,853 Redeemable preferred stocks.......................... 3,750 - 74 3,676 -------------- ---------- ---------- ------------ Total available-for-sale fixed maturities.... $ 2,144,290 20,666 7,427 $ 2,157,529 -------------- ---------- ---------- ------------ December 31, 2003: U.S. Government and U.S. Government agencies......... $ 5,065 22 55 $ 5,032 Corporate bonds...................................... 1,077,399 20,412 1,856 1,095,955 Mortgage and asset-backed securities................. 267,774 1,386 785 268,375 Municipal bonds...................................... 91,019 1,130 106 92,043 Foreign governments and states....................... 115,800 2,891 273 118,418 -------------- ---------- ---------- ------------ Total bonds.................................. 1,557,057 25,841 3,075 1,579,823 Redeemable preferred stocks.......................... 3,750 - 68 3,682 -------------- ---------- ---------- ------------ Total available-for-sale fixed maturities.... $ 1,560,807 25,841 3,143 $ 1,583,505 -------------- ---------- ---------- ------------
Amortized cost and fair value of available-for-sale fixed maturities by contractual maturity at December 31, 2004 are shown below; actual maturities could differ from contractual maturities due to call or prepayment provisions ($ in thousands):
Amortized Cost Fair Value ------------- ------------- Due in one year or less............................... $ 54,567 $ 54,390 Due from one to five years............................ 929,647 932,655 Due from five to ten years............................ 411,388 415,697 Due in ten or more years.............................. 236,181 240,042 Mortgage and asset backed securities.................. 508,757 511,069 ------------- ------------- Total bonds................................... 2,140,540 2,153,853 Redeemable preferred stocks........................... 3,750 3,676 ------------- ------------- Total available-for-sale fixed maturities..... $ 2,144,290 $ 2,157,529 ------------- -------------
Investment income for the years ended December 31, 2004 and 2003 and the 2002 Period is summarized as follows ($ in thousands): F-14 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
2004 2003 2002 Period ----------- ------ ----------- Fixed maturities............................ $ 82,038 55,727 $ 4,389 Cash and cash equivalents................... 2,261 3,133 1,183 Funds held.................................. 2,651 776 - ----------- ------ ----------- 86,950 59,636 5,572 Less investment expenses.................. 2,418 1,991 361 ----------- ------ ----------- Net investment income....................... $ 84,532 57,645 $ 5,211 ----------- ------ -----------
Net realized gains and losses from investments for the years ended December 31, 2004 and 2003 and the 2002 Period were as follows ($ in thousands):
2004 2003 2002 Period ----------- ----- ----------- Gross realized gains........................ $ 5,706 4,639 $ 423 Gross realized losses....................... 3,751 1,858 398 ----------- ----- ----------- Net realized gains.................. $ 1,955 2,781 $ 25 ----------- ----- -----------
Proceeds from sales, maturities and calls of available-for-sale fixed maturities were $635,417,000, $526,224,000 and $120,421,000 for the years ended December 31, 2004 and 2003 and the 2002 Period, respectively. Proceeds from sales, maturities and calls of trading securities were $50,542,000 for the year ended December 31, 2004. There were no sales in the trading securities portfolio in 2003 or the 2002 Period. Net change in unrealized investment gains (losses) for the years ended December 31, 2004 and 2003 and the 2002 Period were as follows ($ in thousands):
2004 2003 2002 Period ----------- ------ ----------- Fixed maturities available for sale......... $ (9,459) 10,405 $ 12,293 Less deferred tax........................... 2,549 2,835 1,712 ----------- ------ ----------- Net change in unrealized gains...... $ (6,910) 7,570 $ 10,581 ----------- ------ -----------
Investments with a carrying value of $4,355,000 were on deposit with regulatory authorities as of December 31, 2004. Investments with a carrying value of $318,586,000 and cash and cash equivalents of $4,846,000 at December 31, 2004 were held in trust to collateralize liabilities ceded by St. Paul to the Company under the Quota Share Retrocession Agreements. Investments with a carrying value of $5,779,000 and cash and cash equivalents of $1,153,000 at December 31, 2004 were held in trust to collateralize obligations under various other reinsurance contracts. The unrealized losses of fixed maturities available-for-sale aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows: F-15 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
Unrealized Fair Value Loss ---------- ---------- Less than twelve months: U.S. Government and U.S. Government agencies.............. $ 4,203 $ 24 Corporate bonds........................................... 526,856 4,396 Mortgage and asset-backed securities...................... 150,597 1,131 Municipal bonds........................................... 50,227 588 Foreign governments and states............................ 38,574 337 Redeemable preferred stock................................ 3,677 74 ---------- ---------- Total............................................. $ 774,134 $ 6,550 ---------- ---------- Twelve months or more: Corporate bonds........................................... $ 13,758 $ 422 Mortgage and asset-backed securities...................... 29,124 455 ---------- ---------- Total............................................. $ 42,882 $ 877 ---------- ---------- Total unrealized losses: U.S. Government and U.S. Government agencies.............. $ 4,203 $ 24 Corporate bonds........................................... 540,614 4,818 Mortgage and asset-backed securities...................... 179,721 1,586 Municipal bonds........................................... 50,227 588 Foreign governments and states............................ 38,574 337 Redeemable preferred stocks............................... 3,677 74 ---------- ---------- Total............................................. $ 817,016 $ 7,427 ---------- ----------
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, 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. This is based on current and anticipated future positive cash flow from operations that generates sufficient liquidity in order to meet our 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 December 31, 2004 management believes that the Company's investment portfolio does not contain any securities that have other-than-temporary impairments. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 2004 and 2003 ($ in thousands): F-16 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
December 31, 2004 December 31, 2003 ----------------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------- --------- --------- ----------- Financial assets: Fixed maturities................. $ 2,240,202 2,240,202 1,678,138 $ 1,678,138 Other invested asset............. 6,769 6,769 6,910 6,910 Financial liabilities: Debt obligations................. $ 137,500 165,000 137,500 $ 170,445
The fair values of financial instruments are based on quoted market prices at the reporting date for those or similar instruments. The fair values of debt obligations are based on quoted market prices. Other invested asset represents a strategic investment in a non-public reinsurance company and is carried at estimated fair value. 4. UNPAID LOSSES AND LAE In late August and September of 2004, there were four significant named hurricanes, Charley, Frances, Ivan and Jeanne (the "Hurricanes"), that caused severe damage in the Caribbean and the southeast United States. As a result of losses arising from these catastrophic events, certain reinsurance contracts generated additional premiums. Further, previously accrued profit commissions for certain reinsurance contracts were reduced. The aggregate adverse impact on net income of the Company for the year ended December 31, 2004 from the Hurricanes is summarized as follows ($ in thousands): Losses..................................................................... $ 230,475 Less: Additional premiums earned............................................... (29,265) Profit commissions....................................................... (10,243) ---------- Net adverse impact before income tax benefit ...................... $ 190,967 ----------
Activity in the liability for unpaid losses and LAE for the years ended December 31, 2004, 2003 and the 2002 Period is summarized as follows ($ in thousands):
2004 2003 2002 Period ------------- ------- ----------- Net unpaid losses and LAE as of the beginning of period................................................ $ 731,918 281,659 $ - ------------- ------- ----------- Net incurred related to: Current year.......................................... 1,101,820 648,137 60,356 Prior year............................................ (82,016) (63,966) - ------------- ------- ----------- Total net incurred losses and LAE............... 1,019,804 584,171 60,356 ------------- ------- ----------- Unpaid losses and LAE assumed from St. Paul............. - - 221,303 ------------- ------- ----------- Net paid losses and LAE: Current year.......................................... 174,870 102,669 - Prior year............................................ 205,889 41,709 - ------------- ------- ----------- Total net paid losses and LAE................... 380,759 144,378 - ------------- ------- -----------
F-17 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
2004 2003 2002 Period ------------- ------- ----------- Effects of foreign currency exchange rate changes....... 8,264 10,466 - ------------- ------- ----------- Net unpaid losses and LAE as of the end of period....... 1,379,227 731,918 281,659 Reinsurance recoverable................................. 1,728 5,016 - ------------- ------- ----------- Gross unpaid losses and LAE at end of period............ $ 1,380,955 736,934 $ 281,659 ------------- ------- -----------
The favorable development in 2004 related to the prior year of $82,016,000 includes approximately $57,151,000 of net favorable development on property and certain other lines of business with relatively short patterns of reported losses, including approximately $7,700,000 attributable to prior years' catastrophe losses. In addition, the favorable development in 2004 includes approximately $24,865,000 of reductions in unpaid losses and LAE associated with changes in 2004 of estimates of premiums and the patterns of their earnings across current and prior accident years. Such changes did not have a significant net effect on the current year's results of operations. The lines experiencing favorable development are principally property coverages provided in both the Property and Marine and Finite Risk segments. During 2004 and 2003, actual reported losses were significantly less than expected for these short-tailed property lines resulting in reductions in estimated ultimate losses. The favorable development in 2003 related to the prior year of $63,966,000 includes approximately $50,866,000 of net favorable development on property and certain other lines of business with relatively short patterns of reported losses. The favorable development also includes approximately $13,100,000 of reductions in unpaid losses and LAE associated with changes in 2003 of estimates of casualty premiums and their patterns of earnings between 2002 and 2003. Because many of the reinsurance coverages offered by the Company will likely involve claims that may not ultimately be settled for many years after they are incurred, subjective judgments as to ultimate exposure to losses are an integral and necessary component of the process of estimating unpaid losses and LAE. The inherent uncertainties of estimating unpaid losses and LAE are further exacerbated with respect to reinsurers by the significant amount of time that often elapses between the occurrence of an insured loss, the reporting of that loss to the primary reinsurer and then to the reinsurer, and the primary insurer's payment of that loss to the insured and subsequent payment by the reinsurer to the primary insurer. Unpaid losses and LAE are reviewed quarterly using a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data and prevailing economic, social and legal factors. Unpaid losses and LAE established in prior years are adjusted as loss experience develops and new information becomes available. Adjustments to previously estimated unpaid losses and LAE are reflected in financial results in the periods in which they are made. 5. RETROCESSIONAL REINSURANCE Reinsurance is the transfer of risk, by contract, from one insurance company to another for consideration of premium. Retrocessional reinsurance is reinsurance ceded by a reinsurer to insure against all or a portion of its reinsurance written. Retrocessional reinsurance agreements provide the Company with increased capacity to write larger risks, limit its maximum loss arising from any one occurrence and maintain its exposure to loss within its capital resources. Retrocessional reinsurance contracts do not relieve the Company from its obligations under its contracts. Failure of reinsurers to F-18 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued honor their obligations could result in losses to the Company. Consequently, the Company has a contingent liability to the extent of any unpaid losses and LAE ceded to another company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The effects of reinsurance on premiums, losses and LAE for the years ended December 31, 2004 and 2003 and the 2002 Period are as follows ($ in thousands):
Assumed Ceded Net ------------ ------ ------------ As of and for the year ended December 31, 2004: Premiums written...................................... $ 1,659,790 13,777 $ 1,646,013 Premiums earned....................................... 1,465,058 17,123 1,447,935 Losses and LAE........................................ 1,018,106 (1,698) 1,019,804 Unpaid losses and LAE ................................ $ 1,380,955 1,728 $ 1,379,227 As of and for the year ended December 31, 2003: Premiums written...................................... $ 1,198,473 26,331 $ 1,172,142 Premiums earned....................................... 1,088,109 20,582 1,067,527 Losses and LAE........................................ 589,656 5,485 584,171 Unpaid losses and LAE................................. $ 736,934 5,016 $ 731,918 As of December 31, 2002 and the 2002 Period: Premiums written...................................... $ 298,114 - $ 298,114 Premiums earned....................................... 107,098 - 107,098 Losses and LAE........................................ 60,356 - 60,356 Unpaid losses and LAE................................. $ 281,659 - $ 281,659
Effective January 1, 2004, Platinum US and Platinum UK entered into an excess-of-loss retrocessional contract, with an unaffiliated reinsurer, that provided up to $100 million of coverage. Premiums ceded under this contract vary depending on the amount of the ceded losses under the contract and the severity of individual loss events on the insurance industry. The Company evaluated the Hurricane losses and the effect of the contract on the Company's results of operations and commuted the contract effective November 8, 2004. Results for the year ended December 31, 2004 do not include any benefit from the contract. In 2003, Platinum US and Platinum UK entered into a quota share retrocession agreements with Platinum Bermuda. Platinum US retrocedes approximately 70% of its business to Platinum Bermuda and Platinum UK retrocedes approximately 55% of its business to Platinum Bermuda. Following is a summary of the premiums earned and losses ceded from Platinum US and Platinum UK to Platinum Bermuda for the years ended December 31, 2004 and 2003 ($ in thousands): F-19 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
2004 2003 ---- ---- Retroceded by Platinum US to Platinum Bermuda: Premiums earned ................................ $ 515,869 $ 270,913 Incurred losses and LAE ........................ 562,193 214,796 Retroceded by Platinum UK to Platinum Bermuda: Premiums earned ................................ 89,394 43,998 Incurred losses and LAE ........................ $ 57,830 $ 17,542
These transactions had no net effect on underwriting results in the consolidated financial statements. 6. EQUITY SECURITY UNITS AND CREDIT AGREEMENTS Concurrently with the completion of the Initial Public Offering, Platinum Holdings completed an offering of 5,500,000 Equity Security Units at a price of $25 per unit (the "ESU Offering"). Each Equity Security Unit ("ESU") consists of a contract to purchase common shares of the Company in 2005, and an ownership interest in a senior note, due 2007, of Platinum Finance. Platinum Holdings makes quarterly contract adjustment payments under the purchase contracts of 1.75 percent per year of the stated amount of $25 per unit. In addition, Platinum Finance makes quarterly interest payments on the senior notes at an annual rate of 5.25 percent. The senior notes are guaranteed by Platinum Holdings on a senior, unsecured basis and are pledged to collateralize the holders' obligations to acquire common shares in 2005. As of December 31, 2004, the fair value of the ESU's was $165,000,000 and was based on quoted market prices. The Company made interest payments in cash of $7,442,000 and $7,888,000 for the years ended December 31, 2004 and 2003, respectively. There were no cash payments of interest in the 2002 Period. Based on the fair value of the Company's common shares, the Company would issue 5,008,850 common shares of the Company in exchange for the senior notes if the contract holders were able to purchase common shares at December 31, 2004. A decrease in the fair value of the Company's common shares from the fair value at December 31, 2004 would increase the number of common shares that would be issued by as much as 1,102,200 additional shares. An increase in the fair value of the Company's common shares from the fair value at December 31, 2004 would not alter the number of common shares that would be issued. The maximum number of common shares that the Company is obligated to issue in exchange for the senior notes is 6,111,050 should the fair value of the common shares be $22.50 per share or less. The ESU related agreements provides for the issuance of additional common shares as well as the remarketing of the ESU debt obligations in 2005. Credit Agreement The Company does not currently have a committed credit facility in place; however, as of December 31, 2004, the Company had approximately $37,287,000 of unsecured letters of credit outstanding in favor of various cedants. These letters of credit are issued, by various banks, on an uncommitted basis, and subject the Company to certain terms and conditions including the requirement to collateralize, these currently unsecured obligations, to the extent certain thresholds or ratings criteria are exceeded. F-20 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued 7. INCOME TAXES The Company provides income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. Platinum Holdings and Platinum Bermuda are incorporated under the laws of Bermuda and are subject to Bermuda law with respect to taxation. Under current Bermuda law, they are not taxed on any Bermuda income or capital gains and they have received an assurance from the Bermuda Minister of Finance 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. Platinum Holdings has subsidiaries based in the United States, the United Kingdom and Ireland that are subject to the tax laws thereof. Under current United States law, Platinum US will be subject to the 35 percent corporate tax rate. Under current United Kingdom law, Platinum UK is taxed at the U.K. corporate tax rate (generally 30 percent). There is no withholding tax on dividends distributed from Platinum UK to Platinum Ireland. Under current Irish law, Platinum Ireland is taxed at a 25 percent corporate tax rate on non-trading income and a 12.5 percent corporate tax rate on trading income. There is no withholding tax on dividends distributed from Platinum Ireland to Platinum Holdings. Income (loss) before income taxes for the years ended December 31, 2004 and 2003 and the 2002 Period by location is as follows ($ in thousands):
2004 2003 2002 Period ---- ---- ----------- United States .......................... $ 73,020 122,485 $ 13,858 Bermuda ................................ 19,423 48,191 (1,735) Other .................................. 22,689 23,022 (1,030) ---------- ------- ---------- Income before income taxes ..... $ 115,132 193,698 $ 11,093 ---------- ------- ----------
Income tax expense for the years ended December 31, 2004 and 2003 and the 2002 Period is comprised of current and deferred as follows ($ in thousands):
2004 2003 2002 Period ---- ---- ----------- Current ................................ $ 28,133 56,681 $ (129) Deferred ............................... 2,216 (7,806) 4,784 ---------- ------- ---------- Total .......................... $ 30,349 48,875 $ 4,655 ---------- ------- ----------
A reconciliation of expected income tax expense, computed by applying a 35 percent income tax rate to income before income taxes, to income tax expense for the years ended December 31, 2004 and 2003 and the 2002 Period is as follows ($ in thousands): F-21 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
2004 2003 2002 Period ---------- ------- ----------- Expected income tax expense at 35% ........................................ $ 40,296 67,794 $ 3,883 Effect of foreign income or loss subject to tax at rates other than 35% ... (8,222) (18,316) 712 Tax exempt investment income .............................................. (1,084) (740) - Other, net ................................................................ (641) 137 60 ---------- ------- ---------- Income tax expense ................................................ $ 30,349 48,875 $ 4,655 ---------- ------- ----------
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows ($ in thousands):
2004 2003 ---------- ---------- Deferred tax assets: Unpaid losses and LAE ................................................... $ 31,314 $ 27,492 Unearned premiums ....................................................... 15,095 11,142 Other deferred tax assets ............................................... 188 325 ---------- ---------- Total deferred tax assets ......................................... 46,597 38,959 ---------- ---------- Deferred tax liabilities: Deferred acquisition costs .............................................. 36,892 25,783 Difference in tax basis carrying value of assets ........................ - 5,337 Timing differences in recognition of expenses ........................... 558 1,172 Unrealized net foreign currency exchange losses ......................... 7,766 3,625 Net unrealized gains on investments ..................................... 1,999 4,547 Other deferred tax liabilities .......................................... 855 287 ---------- ---------- Total deferred tax liabilities .................................... 48,070 40,751 ---------- ---------- Total net deferred tax liabilities ................................ $ 1,473 $ 1,792 ---------- ----------
Income tax assets and liabilities are recorded by offsetting assets and liabilities by tax jurisdiction. The deferred tax assets and liabilities at December 31, 2004 and 2003 are included in the balance sheet as follows ($ in thousands):
2004 2003 ---------- ---------- Platinum US deferred tax assets ........................................... $ 49,254 $ 39,848 Platinum US deferred tax liabilities ...................................... 40,323 36,137 ---------- ---------- Net Platinum US deferred tax assets ............................... 8,931 3,711 ---------- ---------- Platinum UK deferred tax assets ........................................... - 28 Platinum UK deferred tax liabilities ...................................... 10,404 5,531 ---------- ---------- Net Platinum UK deferred tax liabilities .......................... 10,404 5,503 ---------- ---------- Total net deferred tax liabilities ................................ $ 1,473 $ 1,792 ---------- ----------
To evaluate the realization of the deferred tax assets, management considers the timing of the reversal of deferred income and expense items as well as the likelihood that the Company will generate F-22 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued sufficient taxable income to realize the future tax benefits. Management believes that the Company will generate sufficient taxable income to realize the deferred assets and, consequently, did not consider a valuation allowance necessary. The Company has a net operating loss carryforward arising from its operation in the U.K. The net operating loss carryforward does not have an expiration date. Income taxes paid in 2004 and 2003 were $8,549,000 and $65,912,000, respectively. There were no cash payments of income taxes in the 2002 Period. 8. SHAREHOLDERS' EQUITY AND REGULATION The Company's initial capitalization of $120,000 was provided by an organizing trust. On May 29, 2002, Platinum Holdings completed a 100-for-1 split of its common shares, resulting in 135,000,000 common shares authorized and 1,200,000 common shares issued and outstanding, all with a par value of $0.01 per share. On October 28, 2002, the shareholder of Platinum Holdings increased the number of common shares authorized to 200,000,000 common shares and 25,000,000 preferred shares. Concurrent with the Initial Public Offering, the 1,200,000 common shares were redeemed and canceled. On November 1, 2002, Platinum Holdings completed the Initial Public Offering of 33,044,000 common shares at a price to the public of $22.50 per share. Concurrently with the completion of the Initial Public Offering, Platinum Holdings sold 6,000,000 common shares (or 14 percent of the then outstanding common shares) to St. Paul at a price of $22.50 per share less the underwriting discount (the "St. Paul Investment") in a private placement pursuant to a Formation and Separation Agreement dated as of October 28, 2002 between Platinum Holdings and St. Paul (the "Formation Agreement"). The Bye-laws of Platinum Holdings provide that the voting power of St. Paul's common shares is limited to 9.9 percent of the voting power of the outstanding common shares. Pursuant to the Formation Agreement, St. Paul received an option to purchase up to 6,000,000 additional common shares at any time during the ten years following the Initial Public Offering at a price of $27.00 per share (the "St. Paul Option"). In return for the common shares and the St. Paul Option, St. Paul contributed to the Company cash in the amount of $122 million and substantially all of the continuing reinsurance business and related assets of the reinsurance segment of St. Paul, including all of the outstanding capital stock of Platinum US. Among the fixed assets transferred were furniture, equipment, systems and software, and intangible assets including broker lists, contract renewal rights and licenses. These assets were recorded at the values reflected on St. Paul's books at the time of transfer. Concurrent with the completion of the Initial Public Offering, Platinum Holdings also sold 3,960,000 common shares (or nine percent of the outstanding common shares) to RenaissanceRe Holdings Ltd. ("RenaissanceRe") at a price of $22.50 per share less the underwriting discount in a private placement pursuant to an Investment Agreement dated as of September 20, 2002 by and among Platinum Holdings, St. Paul and RenaissanceRe (the "Investment Agreement"). Pursuant to the Investment Agreement, RenaissanceRe received an option to purchase up to 2,500,000 additional common shares at any time during the ten years following the Initial Public Offering at a purchase price of $27.00 per share (the "RenRe Option "). On November 18, 2004, Platinum Holdings and RenaissanceRe amended the terms of the RenRe Option. As a result of the amendment, in lieu of paying $27.00 per share, any exercise by RenaissanceRe of its option will be settled on a net share basis, which will result in Platinum issuing to RenaissanceRe a number of common shares equal to the excess of the market price per share, determined in accordance F-23 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued with the amendment, 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. On January 10, 2005, Platinum Holdings and St. Paul amended the terms of the St. Paul Option. As a result of this amendment, any exercise by St. Paul of its option will be settled on a net share basis, similar that of RenaissanceRe. This amendment had no effect on the consolidated financial statements. The Company filed an unallocated universal shelf registration statement with the Securities and Exchange Commission ("SEC"), which the SEC declared effective on April 5, 2004. The securities registered under the shelf registration statement for possible future sales include up to $750,000,000 of common shares, preferred shares and various types of debt securities. The registration statement included common shares held by St. Paul and RenaissanceRe and common shares issuable upon exercise of the St. Paul Option and the RenRe Option. On June 30, 2004, St. Paul completed the sale of its 6,000,000 common shares in an underwritten public offering, which was effected pursuant to a prospectus supplement to the shelf registration statement dated June 28, 2004. 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 6,000,000 common shares sold by St. Paul amounted to $177,330,000 of the securities registered under the $750,000,000 shelf registration statement. 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. During the year ended December 31, 2004 the Company purchased 349,700 of its common shares in the open market at an aggregate amount of $9,985,000 at a weighted average price of $28.55 per share. The common shares purchased by the Company were canceled. The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. 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 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 $139,620,000. The combined statutory capital and surplus and statutory net income as reported to relevant regulatory authorities for the reinsurance subsidiaries of the Company were as follows ($ in thousands):
2004 2003 2002 Period ----------- --------- ----------- Statutory capital and surplus ..... $ 1,124,446 1,096,398 $ 965,956 Statutory net income .............. $ 51,803 117,172 $ 32,093
The Company's insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by domestic or foreign insurance regulatory authorities. The differences between statutory financial statements in the United States and financial statements prepared in accordance with U.S. GAAP vary between domestic and foreign jurisdictions. The principal differences are that statutory financial statements do not reflect deferred acquisition costs, bonds are carried at amortized cost, deferred income tax is charged or credited directly to equity, subject to limits, and reinsurance assets and liabilities are presented net of reinsurance. The Company has not used any statutory accounting practices that are not prescribed. F-24 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued 9. EARNINGS PER SHARE Following is a reconciliation of the basic and diluted earnings per share computations for the years ended December 31, 2004 and 2003 and the 2002 Period ($ in thousands, except per share data):
Weighted Average Net Shares Earnings Income Outstanding Per Share ------ ----------- --------- Year Ended December 31, 2004: Basic earnings per share: Net income ................................ $ 84,783 43,158 $ 1.96 Effect of dilutive securities: Share options and restricted shares ....... - 2,094 Interest expense related to ESU's ......... 6,097 - Common share conversion of ESU's .......... - 5,009 Diluted earnings per share: --------- ------ Income available to common shareholders ... $ 90,880 50,261 $ 1.81 --------- ------ Year Ended December 31, 2003: Basic earnings per share: Net income ................................ $ 144,823 43,019 $ 3.37 Effect of dilutive securities: Share options ............................. - 717 Interest expense related to ESU's ......... 6,290 - Common share conversion of ESU's .......... - 5,137 Diluted earnings per share: --------- ------ Income available to common shareholders ... $ 151,113 48,873 $ 3.09 --------- ------ 2002 Period: Basic earnings per share: Net income ................................ $ 6,438 43,004 $ 0.15 Effect of dilutive securities: Share options ............................. - 518 Diluted earnings per share: --------- ------ Income available to common shareholders ... $ 6,438 43,522 $ 0.15 --------- ------
10. SHARE INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS Share Incentive Compensation The Company has a share incentive plan under which key employees and directors of the Company and its subsidiaries may be granted options, restricted share awards or share units. An option award under the Company's share incentive plan allows for the purchase of common shares at a price F-25 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued equal to the closing price of common shares on the New York Stock Exchange on the date immediately preceding the date of the grant. Options to purchase common shares are granted periodically by the Compensation Committee of the Board of Directors, generally vest over three or four years, and expire ten years from the date of grant. The following summary sets forth option activity for the years ended December 31, 2004 and 2003 and the 2002 Period (in thousands, except per share exercise price):
As and for the As and for the As and for the year ended year ended period ended December 31, 2004 December 31, 2003 December 31, 2002 ------------------ ------------------ ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ------- ------- ------- ------- ------- Outstanding - beginning of the period .... 4,614 $ 22.92 4,347 $ 22.50 - $ - Granted ................................ 227 31.43 670 25.41 4,352 22.50 Exercised .............................. 329 22.50 30 22.50 - - Forfeited .............................. 84 22.50 373 22.50 5 22.50 ----- ----- ----- Outstanding - end of the period .......... 4,428 $ 23.40 4,614 $ 22.92 4,347 $ 22.50 ----- ----- ----- Options exercisable at year-end .......... 3,636 1,834 - Weighted average exercise price of options exercisable at year-end ....... $ 22.99 $ 22.50
The following table summarizes information about share options outstanding at December 31, 2004 (in thousands, except per share exercise price):
Exercisable Weighted ------------------------- Average Weighted Weighted Range of Remaining Average Average exercise Number Contractual Exercise Number Exercise prices Outstanding Life Price Outstanding Price - ---------------- ----------- ----------- --------- ----------- ----------- $22.50 3,530 7.8 $ 22.50 3,198 $ 22.50 22.51 - 25.00 165 8.2 22.79 91 22.76 25.01 - 30.00 520 8.2 26.32 269 26.31 $ 30.01 - $35.00 213 9.4 $ 31.67 78 $ 31.74
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Dividend yield .................... 1.4% Risk free interest rate ........... 3.0% Expected volatility ............... 30.0% Expected option life .............. 7 years
These assumptions would have resulted in the following stock-based compensation expense, net of tax ($ in thousands): F-26 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
2004 2003 2002 Period ------ ------ ----------- Stock-based compensation expense, net of tax ...... $6,640 14,511 $1,070 Stock-based compensation expense, net of tax included in financial statements $1,814 5,175 $ -
The Company's share incentive plan also provides for the issuance of restricted shares to key employees. During 2004, the Company granted 98,531 restricted shares that vest over a five year period. The fair value of the shares at the date of grant was $2,750,000. There were no restricted share awards in 2003 and 2002. On May 13, 2003 the Company entered into a Separation and Consulting Agreement with its former President and Chief Executive Officer pursuant to which the Company paid him $4,950,000 and on June 1, 2003 fully vested his option to purchase 975,000 of the Company's common shares with an exercise period of five years. The differential between the option price and the market value of 975,000 common shares on May 13, 2003 of $4,339,000 was recognized as compensation expense with a corresponding credit to additional paid in capital. Defined Contribution Plan In 2003, the Company adopted an employee savings plan as a defined contribution plan intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") and covering substantially all U.S. employees. The savings plan allows eligible employees to contribute up to 50 percent of their annual compensation on a tax-deferred basis up to limits under the Code and the Company will match up to the first four percent. In addition, the Company may, at its discretion, make additional contributions. Expenses related to the savings plan were $1,255,000 and $1,718,000, for the years ended December 31, 2004 and 2003, respectively. 11. LEASE COMMITMENTS Future minimum annual lease commitments under various non-cancelable operating leases for the Company's office facilities are as follows: ($ in thousands): Years Ending December 31, 2005 ....................... $ 2,570 2006 ....................... 2,336 2007 ....................... 1,785 2008 ....................... 1,860 2009 ....................... 1,934 Thereafter ................. 6,770 -------- Total ................ $ 17,255 --------
Rent expense was $3,070,000 and, $3,636,000 for the years ended December 31, 2004 and 2003, respectively. F-27 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued 12. RELATED PARTY TRANSACTIONS AND AGREEMENTS In connection with the Initial Public Offering and the transfer of business, the Company entered into various agreements with St. Paul and its affiliates and RenaissanceRe and its affiliates. These agreements include several quota share retrocession agreements pursuant to which St. Paul's subsidiaries transferred the liabilities, related assets and rights and risks under substantially all of the reinsurance contracts entered into by St. Paul's subsidiaries on or after January 1, 2002 (except for certain liabilities relating to the flooding in Europe in August 2002, named storms in existence at the time of the completion of the Initial Public Offering, and business underwritten in London for certain financial services companies) (the "Quota Share Retrocession Agreements"). These agreements provided for the transfer to subsidiaries of the Company of cash and other assets in an amount equal to substantially all of the existing unpaid losses (excluding reserves relating to liabilities retained by St. Paul), unpaid allocated LAE, other liabilities related to non-traditional reinsurance treaties, unearned premium reserves (subject to agreed upon adjustments) and other related reserves, which relate to contracts entered into on and after January 1, 2002, as of the date of the transfer (as determined 90 days after such date) and 100 percent of future premiums (less any ceding commission under the Quota Share Retrocession Agreements) associated with the reinsurance contracts relating to periods after the date of the transfer. In connection with the Initial Public Offering and transfer of the business, certain subsidiaries of the Company entered into several agreements with St. Paul pursuant to which St. Paul provides various services, including accounting and administration of the business assumed under the Quota Share Retrocession Agreements. The Company paid St. Paul a total of $326,000 and $274,000 and $0 for such services provided in 2004, 2003 and the 2002 Period, respectively. Platinum Holdings also entered into a five-year Services and Capacity Reservation Agreement with RenaissanceRe, effective October 1, 2002, pursuant to which RenaissanceRe will provide services to subsidiaries of the Company in connection with their property catastrophe book of business. At the Company's request, RenaissanceRe will analyze the Company's property catastrophe treaties and contracts twice per year and will assist the Company in measuring risk and managing the Company's property catastrophe treaties and contacts. Based upon such analysis, RenaissanceRe will provide the Company with quotations for rates for non-marine non-finite property catastrophe retrocessional coverage with aggregate limits up to $100 million annually, either on an excess-of-loss or proportional basis. The Company and RenaissanceRe may then enter into retrocessional agreements on the basis of the quotations. The fee for the coverage commitment and the services provided by RenaissanceRe under this agreement is 3.5 percent of the Company's gross written non-marine non-finite property catastrophe premium for the contract year, subject to a minimum of $4 million. Either party may terminate this agreement if the other is deemed impaired or insolvent by applicable regulatory or judicial authorities or is the subject of conservation, rehabilitation, liquidation, bankruptcy or similar insolvency proceedings. Fees related to this agreement were $6,395,000, $5,350,000 and $46,000 for the years ended December 31, 2004 and 2003 and the 2002 Period, respectively. Fees related to this agreement are included in operating expenses. Renaissance Underwriting Managers Ltd. ("RUM"), a subsidiary of RenaissanceRe, and Platinum Bermuda entered into an agreement whereby RUM will, from time to time, provide referrals of treaty and facultative reinsurance contracts to Platinum Bermuda for a fee. The fee is 1.0% of gross premiums written for all pro-rata business, 2.5% of gross premiums written on all excess of loss business, and 7.5% of the margin on all finite business. The Company paid $846,000 and $400,000 in fees for such referrals F-28 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued for the years ended December 31, 2004 and 2003, respectively. The business referred is also subject to a profit commission. Included in the fees under this agreement in 2004 was $727,000 of profit commissions. There were no profit commissions paid under this agreement in 2003. Platinum US is a party to two property catastrophe excess of loss programs with the Glencoe Group of Companies, which are affiliates of RenaissanceRe. Platinum US has a 5% participation across four layers of reinsurance on one program and a 15% participation on the other program. Platinum US is a party to a quota share retrocession agreement with Glencoe Insurance Ltd., an affiliate of RenaissanceRe, pursuant to which Platinum US cedes to Glencoe Insurance Ltd. 85% of all liabilities under the subject property facultative certificates. Premium ceded in 2004 under this agreement was approximately $3,400,000. Pursuant to the employment agreement between the Company's chief executive officer (the "CEO") and the Company, dated as of June 20, 2003, the CEO purchased 20,000 common shares from the Company on July 30, 2003 for an aggregate purchase price of $520,000. These common shares were sold to the CEO at a price of $26.00 per common share, which was the closing price of the common shares on the date prior to the date that the Company's Board of Directors approved his employment agreement. The Company is a party to an investment management agreement with Alliance Capital Management L.P. ("Alliance"), pursuant to which Alliance provides investment advisory services to the Company. The Company pays a fee to Alliance for these services based on the amount of the Company's assets managed by Alliance. The Company paid $2,248,000, $1,629,000 and $0 in investment advisory fees to Alliance for the years ended December 31, 2004, 2003 and the 2002 Period, respectively. A Senior Vice President at AllianceBernstein Institutional Investment Management, a unit of Alliance, is the wife of a senior officer of Platinum US. 13. OPERATING SEGMENT INFORMATION The Company has organized its worldwide reinsurance business around three operating segments: Property and Marine, Casualty and Finite Risk. The Property and Marine operating segment includes principally property (including crop) 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 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, surety and trade credit. 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. 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. 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 together F-29 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued with a reconciliation of underwriting profit or loss to income before income tax expense for the years ended December 31, 2004 and 2003 and the 2002 Period ($ in thousands):
Property and Marine Casualty Finite Risk Total ---------- -------- ----------- ---------- Year ended December 31, 2004: Net premiums written .......................................... $ 504,439 677,399 464,175 $1,646,013 ---------- ------- ------- ---------- Net premiums earned ........................................... 485,135 611,893 350,907 1,447,935 Losses and LAE ................................................ 349,557 418,355 251,892 1,019,804 Acquisition expenses .......................................... 76,360 151,649 99,812 327,821 Other underwriting expenses ................................... 27,827 19,086 6,224 53,137 ---------- ------- ------- ---------- Segment underwriting income (loss) ........................ $ 31,391 22,803 (7,021) 47,173 ---------- ------- ------- Corporate expenses not allocated to segments .................. (13,196) Net foreign currency exchange gains ........................... 725 Interest expense .............................................. (9,268) Other income .................................................. 3,211 Net investment income and net realized gains on investments ... 86,487 ---------- Income before income taxes ................................ $ 115,132 ---------- Ratios: Losses and LAE .............................................. 72.1% 68.4% 71.8% 70.4% Acquisition expense ......................................... 15.7% 24.8% 28.4% 22.6% Other underwriting expense .................................. 5.7% 3.1% 1.8% 3.7% ---------- ------- ------- ---------- Combined .................................................. 93.5% 96.3% 102.0% 96.7% ---------- ------- ------- ---------- Year ended December 31, 2003: Net premiums written .......................................... $ 352,908 474,000 345,234 $1,172,142 ---------- ------- ------- ---------- Net premiums earned ........................................... 355,556 391,170 320,801 1,067,527 Losses and LAE ................................................ 169,944 266,836 147,391 584,171 Acquisition expenses .......................................... 52,154 101,005 98,067 251,226 Other underwriting expenses ................................... 35,598 21,060 12,870 69,528 ---------- ------- ------- ---------- Segment underwriting income ............................... $ 97,860 2,269 62,473 162,602 ---------- ------- ------- Corporate expenses not allocated to segments .................. (23,067) Net foreign currency exchange losses .......................... (114) Interest expense .............................................. (9,492) Other income .................................................. 3,343 Net investment income and net realized gains on investments ... 60,426 ---------- Income before income taxes ............................ $ 193,698 ---------- Ratios: Losses and LAE .............................................. 47.8% 68.2% 45.9% 54.7% Acquisition expense ......................................... 14.7% 25.8% 30.6% 23.5% Other underwriting expense .................................. 10.0% 5.4% 4.0% 6.5% ---------- ------- ------- ---------- Combined .............................................. 72.5% 99.4% 80.5% 84.7% ---------- ------- ------- ----------
F-30 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
Property and Marine Casualty Finite Risk Total ---------- -------- ----------- ---------- 2002 Period: Net premiums written .......................................... $ 89,341 164,929 43,844 $ 298,114 ---------- ------- ------ ---------- Net premiums earned ........................................... 43,047 39,320 24,731 107,098 Losses and LAE ................................................ 21,558 29,498 9,300 60,356 Acquisition expenses .......................................... 7,798 9,269 8,407 25,474 Other underwriting expenses ................................... 5,960 4,136 2,068 12,164 ---------- ------- ------ ---------- Segment underwriting income (loss) ........................ $ 7,731 (3,583) 4,956 9,104 ---------- ------- ------ Corporate expenses not allocated to segments .................. (4,170) Net foreign currency exchange gains ........................... 2,017 Interest expense .............................................. (1,261) Other income .................................................. 167 Net investment income and net realized gains on investments ... 5,236 ---------- Income before income taxes ................................ $ 11,093 ---------- Ratios: Losses and LAE .............................................. 50.1% 75.0% 37.6% 56.4% Acquisition expense ......................................... 18.1% 23.6% 34.0% 23.8% Other underwriting expense .................................. 13.8% 10.5% 8.4% 11.4% ---------- ------- ------ ---------- Combined .................................................. 82.0% 109.1% 80.0% 91.6% ---------- ------- ------ ----------
Corporate expenses, interest expenses, net investment income, net realized investment gains and other income or expense items that are not specifically attributable to operating segments are not allocated. The following table sets forth the net premiums written by the Company for the years ended December 31, 2004 and 2003 and the 2002 Period by geographic location of the ceding company ($ in thousands):
2004 2003 2002 Period ----------- --------- ----------- United States .................................... $ 1,350,408 912,586 $ 153,872 International .................................... 295,605 259,556 144,242 ----------- --------- ----------- Total .................................... $ 1,646,013 1,172,142 $ 298,114 ----------- --------- -----------
14. COMPREHENSIVE INCOME The components of comprehensive income for the years ended December 31, 2004, 2003 and the 2002 Period are as follows ($ in thousands, except per share data): F-31 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
2004 2003 2002 Period ---------- ------ ----------- Before tax amounts: Foreign currency translation adjustment ............................................ $ 555 890 $ - Net unrealized holding gains (losses) arising during the period .................... (12,054) 13,388 12,293 Less: reclassification adjustment for net (gains) losses realized in net income .... 2,594 (2,982) - ---------- ------ ---------- Other comprehensive income before tax ........................................ (8,905) 11,296 12,293 ---------- ------ ---------- Deferred income tax expense: Foreign currency translation adjustment ............................................ (167) (267) - Net unrealized holding gains (losses) arising during the period .................... 2,763 (2,983) 1,712 Less: reclassification adjustment for net (gains) losses realized in net income .... (213) 147 - ---------- ------ ---------- Deferred tax on other comprehensive income (loss) ............................ 2,383 (3,103) 1,712 ---------- ------ ---------- Net of tax amounts: .................................................................. - Net foreign currency translation adjustment ........................................ 388 623 Net unrealized holding gains (losses) arising during the period .................... (9,291) 10,405 10,581 Less: reclassification adjustment for net (gains) losses realized in net income .... 2,381 (2,835) - ---------- ------ ---------- Other comprehensive income (loss), net of tax ................................ $ (6,522) 8,193 $ 10,581 ---------- ------ ----------
15. QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 2004 and 2003 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations for such periods, have been made for a fair presentation of the results shown ($ in thousands, except per share data):
Three months ended --------------------------------------------------------- March 31, June 30, September 30, December 31, 2004 2004 2004 2004 ---------- -------- ------------- ------------ Net premiums earned .......... $ 321,042 310,867 383,090 $ 432,936 Net investment income ........ 17,484 19,377 21,429 26,242 Losses and LAE ............... 161,969 189,466 384,724 283,645 Acquisition expenses ......... 88,921 62,694 81,271 94,935 Operating expenses ........... 18,774 19,262 15,400 12,897 Net income ................... 54,814 49,799 (69,752) 49,922
F-32 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued
Three months ended --------------------------------------------------------- March 31, June 30, September 30, December 31, 2004 2004 2004 2004 --------- -------- ------------- ------------ Net income per share: Basic ......................... 1.27 1.15 (1.62) 1.16 Diluted ....................... $ 1.10 1.01 (1.62) $ 1.03 Average common shares outstanding: Basic ......................... 43,143 43,290 43,127 43,073 Diluted ....................... 50,984 50,788 43,127 49,819
Three months ended ------------------------------------------------------- March 31, June 30, September 30, December 31, 2003 2003 2003 2003 --------- -------- ------------- ------------ Net premiums earned .............. $238,069 279,376 272,265 $277,817 Net investment income ............ 14,203 13,431 14,780 15,231 Losses and LAE ................... 138,803 156,801 157,208 131,359 Acquisition expenses ............. 51,719 60,376 60,408 78,723 Operating expenses ............... 20,169 32,995 18,499 20,932 Net income ....................... 30,586 26,605 37,817 49,815 Net income per share: Basic ......................... 0.71 0.62 0.88 1.16 Diluted ....................... $ 0.66 0.57 0.81 $ 1.03 Average common shares outstanding: Basic ......................... 43,004 43,004 43,022 43,043 Diluted ....................... 49,008 48,871 48,876 49,868
16. INVESTIGATIONS BY THE SEC AND THE NEW YORK ATTORNEY GENERAL 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, we are unable to predict the direction the investigation will take and the impact, if any, it may have on the consolidated financial statements. (17) 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. F-33 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued 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 applicable jurisdictions, the maximum amount available for payment of dividends or other distributions by the reinsurance subsidiary of 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 the reinsurance subsidiary of Platinum Finance, without prior regulatory approval is estimated to be $139,620,000. The tables below present condensed consolidating financial information as of December 31, 2004 and 2003, for the years ended December 31, 2004 and 2003 and for the period from April 19, 2002 (date of inception) through December 31, 2002 of Platinum Holdings, Platinum Finance and the non-guarantor subsidiaries of Platinum Holdings ($ in thousands): 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 ========== ======= ========= ========== ==========
F-34 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2003
Platinum Platinum Non-guarantor Consolidating Holdings Finance Subsidiaries Adjustments Consolidated -------- ------- ------------ ----------- ------------ ASSETS Investments: Fixed maturities available-for-sale, at fair value $ - 2,464 1,581,041 - $1,583,505 Fixed maturity trading securities at fair value - - 94,633 - 94,633 Other invested asset - - 6,910 - 6,910 ---------- ------- --------- ---------- ---------- Total investments - 2,464 1,682,584 - 1,685,048 Investment in subsidiaries 1,069,521 363,038 414,511 (1,847,070) - Cash and cash equivalents 3,413 9,917 92,131 - 105,461 Reinsurance assets - - 1,292,394 (649,355) 643,039 Income tax recoverable - 3,757 5,603 - 9,360 Other assets 1,740 3,415 140,416 (102,907) 42,664 ---------- ------- --------- ---------- ---------- Total assets $1,074,674 382,591 3,627,639 (2,599,332) $2,485,572 ========== ======= ========= ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Reinsurance liabilities $ - - 1,858,185 (627,052) $1,231,133 Debt obligations - 137,500 - - 137,500 Other liabilities 7,471 1,029 66,745 (25,509) 49,736 ---------- ------- --------- ---------- ---------- Total liabilities 7,471 138,529 1,924,930 (652,561) 1,418,369 ---------- ------- --------- ---------- ---------- Shareholders' Equity: Preferred shares - - - - - Common shares 430 - - - 430 Additional paid-in capital 910,505 147,238 1,422,482 (1,569,720) 910,505 Accumulated other comprehensive income 18,774 7,289 28,140 (35,429) 18,774 Retained earnings 137,494 89,535 252,087 (341,622) 137,494 ---------- ------- --------- ---------- ---------- Total shareholders' equity 1,067,203 244,062 1,702,709 (1,946,771) 1,067,203 ---------- ------- --------- ---------- ---------- Total liabilities and shareholders' equity $1,074,674 382,591 3,627,639 (2,599,332) $2,485,572 ========== ======= ========= ========== ==========
F-35 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2004
Platinum Platinum Non-guarantor Consolidating Holdings Finance Subsidiaries Adjustments Consolidated -------- ------- ------------ ----------- ------------ Revenue: Net premiums earned $ - - 1,447,935 - $ 1,447,935 Net investment income 53 164 84,315 - 84,532 Net realized gains on investments - 6 1,949 - 1,955 Other income 2,944 - 48 219 3,211 ----------- ------ --------- -------- ----------- Total revenue 2,997 170 1,534,247 219 1,537,633 ----------- ------ --------- -------- ----------- Expenses: Losses and loss adjustment expenses - - 1,019,804 - 1,019,804 Acquisition expenses - - 331,754 (3,933) 327,821 Operating expenses 12,725 288 49,387 3,933 66,333 Net foreign currency exchange gains (3) - (722) - (725) Interest expense 207 9,061 - - 9,268 ----------- ------ --------- -------- ----------- Total expenses 12,929 9,349 1,400,223 - 1,422,501 ----------- ------ --------- -------- ----------- Income (loss) before income tax expense (9,932) (9,179) 134,024 219 115,132 Income tax expense (benefit) - (3,213) 33,562 - 30,349 ----------- ------ --------- -------- ----------- Net income (loss) before equity in earnings of subsidiaries (9,932) (5,966) 100,462 219 84,783 Equity in earnings of subsidiaries 94,715 55,006 60,799 (210,520) - ----------- ------ --------- -------- ----------- Net income $ 84,783 49,040 161,261 (210,301) $ 84,783 =========== ====== ========= ======== ===========
CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003
Platinum Platinum Non-guarantor Consolidating Holdings Finance Subsidiaries Adjustments Consolidated -------- ------- ------------ ----------- ------------ Revenue: Net premiums earned $ - - 1,067,527 - $1,067,527 Net investment income 46 121 57,478 - 57,645 Net realized gains on investments - - 2,781 - 2,781 Other income - - 3,343 - 3,343 ---------- ------ --------- -------- ---------- Total revenue 46 121 1,131,129 - 1,131,296 ---------- ------ --------- -------- ---------- Expenses: Losses and loss adjustment expenses - - 584,171 - 584,171 Acquisition expenses - - 256,248 (5,022) 251,226 Operating expenses 22,657 338 64,373 5,227 92,595 Net foreign currency exchange losses 4 - 110 - 114 Interest expense 344 9,148 - - 9,492 ---------- ------ --------- -------- ---------- Total expenses 23,005 9,486 904,902 205 937,598 ---------- ------ --------- -------- ---------- Income (loss) before income tax expense (22,959) (9,365) 226,227 (205) 193,698 Income tax expense (benefit) - (3,278) 52,153 - 48,875 ---------- ------ --------- -------- ---------- Net income (loss) before equity in earnings of subsidiaries (22,959) (6,087) 174,074 (205) 144,823 Equity in earnings of subsidiaries 167,782 86,576 92,374 (346,732) - ---------- ------ --------- -------- ---------- Net income $ 144,823 80,489 266,448 (346,937) $ 144,823 ========== ====== ========= ======== ==========
F-36 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued CONSOLIDATING STATEMENT OF INCOME FOR THE PERIOD FROM APRIL 19, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2002
Platinum Platinum Non-guarantor Consolidating Holdings Finance Subsidiaries Adjustments Consolidated -------- ------- ------------ ----------- ------------ Revenue: Net premiums earned $ - - 107,098 - $ 107,098 Net investment income 179 36 6,065 (1,069) 5,211 Net realized gains on investments - - 25 - 25 Other income - - 167 - 167 --------- ------ ------- ------- --------- Total revenue 179 36 113,355 (1,069) 112,501 --------- ------ ------- ------- --------- Expenses: Losses and loss adjustment expenses - - 60,356 - 60,356 Acquisition expenses - - 25,474 - 25,474 Operating expenses 3,986 204 12,144 - 16,334 Net foreign currency exchange gains - - (2,017) - (2,017) Interest expense 58 1,202 1,001 (1,000) 1,261 --------- ------ ------- ------- --------- Total expenses 4,044 1,406 96,958 (1,000) 101,408 --------- ------ ------- ------- --------- Income (loss) before income tax expense (3,865) (1,370) 16,397 (69) 11,093 Income tax expense (benefit) - (480) 5,135 - 4,655 --------- ------ ------- ------- --------- Net income (loss) before equity in earnings of subsidiaries (3,865) (890) 11,262 (69) 6,438 Equity in earnings of subsidiaries 10,303 9,938 7,524 (27,765) - --------- ------ ------- ------- --------- Net income $ 6,438 9,048 18,786 (27,834) $ 6,438 ========= ====== ======= ======= =========
F-37 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2004
Non- Platinum Platinum guarantor Consolidating Holdings Finance Subsidiaries Adjustments Consolidated ------------ -------- ------------- ------------- ------------ Net cash provided by (used in) operating activities $ (8,400) (436) 723,569 - $ 714,733 ------------ ------ ---------- ------- ------------ Investing Activities: Proceeds from sale of available-for-sale fixed maturities - 998 497,947 - 498,945 Proceeds from maturity or paydown of available-for-sale fixed maturities - 697 135,775 - 136,472 Acquisition of available-for-sale fixed maturities - (2,972) (1,227,923) - (1,230,895) Dividends from subsidiaries 22,000 - - (22,000) - Contributions to subsidiaries (250) - - 250 - ------------ ------ ---------- ------- ------------ Net cash provided by (used in) investing activities 21,750 (1,277) (594,201) (21,750) (595,478) ------------ ------ ---------- ------- ------------ Financing Activities: Dividends paid to shareholders (13,807) - (22,000) 22,000 (13,807) Proceeds from exercise of share options 7,406 - - - 7,406 Proceeds from issuance of common shares 1,567 - - - 1,567 Purchase of common shares (9,985) - - - (9,985) Capital contribution from parent - - 250 (250) - ------------ ------ ---------- ------- ------------ Net cash used in financing activities (14,819) - (21,750) 21,750 (14,819) ------------ ------ ---------- ------- ------------ Net increase (decrease) in cash and cash equivalents (1,469) (1,713) 107,618 - 104,436 Cash and cash equivalents at beginning of year 3,413 9,917 92,131 - 105,461 ------------ ------ ---------- ------- ------------ Cash and cash equivalents at end of year $ 1,944 8,204 199,749 - $ 209,897 ============ ====== ========== ======= ============
F-38 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2003
Non- Platinum Platinum guarantor Consolidating Holdings Finance Subsidiaries Adjustments Consolidated ------------ -------- ------------- ------------- ------------ Net cash provided by (used in) operating activities $ (21,103) (7,571) 411,981 - $ 383,307 ------------ ------ ---------- ------- ------------ Investing Activities: Proceeds from sale of available-for-sale fixed maturities - - 393,245 - 393,245 Proceeds from maturity or paydown of available-for-sale fixed maturities - 1,624 131,355 - 132,979 Acquisition of available-for-sale fixed maturities - (4,152) (1,061,925) - (1,066,077) Other invested asset acquired - (6,910) - (6,910) Dividends from subsidiaries 33,150 - - (33,150) - ------------ ------ ---------- ------- ------------ Net cash provided by (used in) investing activities 33,150 (2,528) (544,235) (33,150) (546,763) ------------ ------ ---------- ------- ------------ Financing Activities: Dividends paid to shareholders (13,767) - (33,150) 33,150 (13,767) Proceeds from exercise of share options 678 - - - 678 Proceeds from issuance of common shares 520 - - - 520 ------------ ------ ---------- ------- ------------ Net cash used in financing activities (12,569) - (33,150) 33,150 (12,569) ------------ ------ ---------- ------- ------------ Net decrease in cash and cash equivalents ( 522) (10,099) (165,404) - (176,025) Cash and cash equivalents at beginning of year 3,935 20,016 257,535 - 281,486 ------------ ------ ---------- ------- ------------ Cash and cash equivalents at end of year $ 3,413 9,917 92,131 - $ 105,461 ============ ======= ========== ======= ============
F-39 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE PERIOD FROM APRIL 19, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2002
Non- Platinum Platinum guarantor Consolidating Holdings Finance Subsidiaries Adjustments Consolidated ------------ --------- ------------- ------------- ------------ Net cash provided by (used in) operating activities $ (5,153) 16 286,530 - $ 281,393 ------------ -------- ---------- ---------- ------------ Investing Activities: Proceeds from sale of available-for-sale fixed maturities - - 120,421 - 120,421 Acquisition of available-for-sale fixed maturities - - (1,157,416) (1,157,416) Contributions to subsidiaries (896,000) (250,000) (296,007) 1,442,007 - ------------ -------- ---------- ---------- ------------ Net cash used in investing activities (896,000) (250,000) (1,333,002) 1,442,007 (1,036,995) ------------ -------- ---------- ---------- ------------ Financing Activities: Net proceeds from shares issued in initial capitalization 120 - - - 120 Redemption of shares issued in initial capitalization (120) - - - (120) Net proceeds from issuance of common shares 905,088 - - - 905,088 Net proceeds from issuance of debt securities - 132,000 132,000 Capital contribution from parent - 138,000 1,304,007 (1,442,007) - ------------ -------- ---------- ---------- ------------ Net cash provided by financing activities 905,088 270,000 1,304,007 (1,442,007) 1,037,088 ------------ -------- ---------- ---------- ------------ Net increase in cash and cash equivalents 3,935 20,016 257,535 - 281,486 Cash and cash equivalents at beginning of period - - - - - ------------ -------- ---------- ---------- ------------ Cash and cash equivalents at end of period $ 3,935 20,016 257,535 - $ 281,486 ============ ======== ========== ========== ============
F-40 PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Index to Schedules to Consolidated Financial Statements
Page ---- Report of Independent Registered Public Accounting Firm .......................................... S-2 Schedule I Summary of Investments - Other Than Investments in Related Parties as of December 31, 2004 .......................................................................... S-3 Schedule II Condensed Financial Information of the Registrant ................................. S-4 Schedule III Supplementary Insurance Information for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) to December 31, 2002 ....... S-7 Schedule IV Reinsurance for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) to December 31, 2002 ........................... S-8
Schedules other than those listed above are omitted for the reason that they are not applicable or the information is provided elsewhere in the consolidated financial statements. S-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Platinum Underwriters Holdings, Ltd.: Under date of February 25, 2005, we reported on the consolidated balance sheets of Platinum Underwriters Holdings, Ltd. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for the years ended December 31, 2004 and 2003 and the period from April 19, 2002 (date of inception) to December 31, 2002, which are included in the Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules appearing on pages S-3 through S-8 of the Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP New York, New York February 25, 2005 S-2 SCHEDULE I PLATINUM UNDERWRITERS HOLDINGS, LTD. AND SUBSIDIARIES Summary of Investments - Other Than Investments in Related Parties As of December 31, 2004 ($ in thousands)
Amount at which shown in Balance Cost Fair Value Sheet ------------- ---------- ------------ Fixed maturities: Bonds: United States Government and government agencies and authorities ............................................ $ 124,844 124,954 $ 124,954 State, municipalities and political subdivisions ......... 156,427 157,337 157,337 Foreign governments ...................................... 65,285 64,923 64,923 Foreign corporate ........................................ 280,270 282,284 282,284 Public utilities ......................................... 136,173 136,848 136,848 All other corporate ...................................... 1,460,472 1,470,180 1,470,180 ------------- ---------- ------------ Total bonds .......................................... 2,223,471 2,236,526 2,236,526 Redeemable preferred stock ................................. 3,750 3,676 3,676 ------------- ---------- ------------ Total fixed maturities ............................... 2,227,221 2,240,202 2,240,202 Other long term investments .................................. 6,749 6,769 6,769 ------------- ---------- ------------ Total investments .................................... $ 2,233,970 2,246,971 $ 2,246,971 ============= ========== ============
*Original cost of fixed maturities reduced by repayments and adjusted for amortization of premiums and discounts. S-3 SCHEDULE II PLATINUM UNDERWRITERS HOLDINGS, LTD. (Parent Company) Condensed Balance Sheets December 31, 2004 and 2003 ($ in thousands, except share data)
2004 2003 ------------- ------------- ASSETS Investment in affiliates .............................................. $ 1,135,434 $ 1,069,521 Cash .................................................................. 1,945 3,413 Other assets .......................................................... 1,648 1,740 ------------- ------------- Total assets................................................... $ 1,139,027 $ 1,074,674 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Contract adjustment payments ........................................ $ 2,335 $ 4,535 Accrued expenses and other liabilities .............................. 3,689 2,936 ------------- ------------- Total liabilities ............................................. 6,024 7,471 ------------- ------------- Shareholders' equity Preferred share, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding ................................... - - Common shares, $.01 par value, 200,000,000 shares authorized, 43,087,407 and 43,054,125 shares issued and outstanding respectively ...................................................... 430 430 Additional paid-in capital .......................................... 911,851 910,505 Accumulated other comprehensive income .............................. 12,252 18,774 Retained earnings ................................................... 208,470 137,494 ------------- ------------- Total shareholders' equity .................................... 1,133,003 1,067,203 ------------- ------------- Total liabilities and shareholders' equity .................... $ 1,139,027 $ 1,074,674 ============= =============
S-4 SCHEDULE II PLATINUM UNDERWRITERS HOLDINGS, LTD. (Parent Company) Condensed Statements of Income For the years ended December 31, 2004 and 2003, and the period from April 19, 2002 (date of inception) through December 31, 2002 ($ in thousands)
2002 2004 2003 Period ------------- ------------- ----------- Revenues: Net investment income ...................................... $ 53 46 $ 179 Other income ............................................... 2,944 - - ------------- ------------- ----------- 2,997 46 179 ------------- ------------- ----------- Expenses: Interest expenses .......................................... 207 344 58 Operating expenses ......................................... 12,722 22,661 3,986 ------------- ------------- ----------- Total expenses ............................................. 12,929 23,005 4,044 ------------- ------------- ----------- Net loss before equity in earnings of affiliate .............. (9,932) (22,959) (3,865) Equity in earnings of affiliates ............................. 94,715 167,782 10,303 ------------- ------------- ----------- Net income ................................................... $ 84,783 144,823 $ 6,438 ============= ============= ===========
S-5 SCHEDULE II PLATINUM UNDERWRITERS HOLDINGS, LTD. (Parent Company) Condensed Statements of Cash Flows For the years ended December 31, 2004 and 2003 and the Period from April 19, 2002 through December 31, 2002 ($ in thousands)
2004 2003 2002 -------------- ------------ ------------ Operating Activities: Net loss before equity in earnings of affiliates $ (9,932) (22,959) $ (3,865) Adjustments to reconcile net income to net cash provided in operations: Share based compensation ................................. 1,777 5,510 - Depreciation and amortization ............................ 125 - - Net increase in other assets and liabilities ............. 1,830 (1,550) 2,226 ------------- ----------- ----------- Net cash used in operating activities .................. (6,200) (18,999) (1,639) ------------- ----------- ----------- Investing Activities: Dividends and distributions from subsidiaries ................ 22,000 33,150 - Contributions to subsidiaries ................................ (250) - (896,000) ------------- ----------- ----------- Net cash provided by (used in) investing activities .... 21,750 33,150 (896,000) ------------- ----------- ----------- Financing Activities: Net proceeds from shares issued in initial capitalization .... - - 120 Redemption of shares issued in initial capitalization ........ - - (120) Net proceeds from issuance of common shares .................. 1,566 520 693,314 Net proceeds from issuance of common shares in private placements ................................................. - - 208,260 Proceeds from exercise of options ............................ 7,406 678 - Purchase of common shares .................................... (9,985) - - Change in contract adjustment payment liability .............. (2,199) (2,104) - Dividends paid to shareholders ............................... (13,807) (13,767) - ------------- ----------- ----------- Net cash provided by (used in) financing activities .... (17,019) (14,673) 901,574 ------------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ... (1,469) (522) 3,935 Cash and cash equivalents at beginning of period ............... 3,413 3,935 - ------------- ----------- ----------- Cash and cash equivalents at end of period ..................... $ 1,944 3,413 $ 3,935 ============= =========== ===========
S-6 SCHEDULE III PLATINUM UNDERWRITERS HOLDINGS, LTD. Supplementary Insurance Information ($ in thousands)
Unpaid Other Deferred losses policy policy and loss claims and Net Net acquisition adjustment Unearned benefits earned investment Period costs expenses premiums payable premium income - ------------------------------- ----------- ---------- ---------- ---------- --------- ---------- Year ended December 31, 2004: Property and Marine ......... $ 15,747 410,347 64,985 485,135 Casualty .................... 72,454 715,314 278,634 611,893 Finite Risk ................. 47,837 253,566 155,917 350,907 ----------- --------- ------- --------- Total ................. 136,038 1,379,227 499,536 - 1,447,935 84,532 ----------- --------- ------- --------- Year ended December 31, 2003: Property and Marine ......... $ 9,076 231,719 44,667 355,556 Casualty .................... 61,181 320,585 224,611 391,170 Finite Risk ................. 9,050 179,614 30,578 320,801 ----------- --------- ------- --------- Total ................. 79,307 731,918 299,856 - 1,067,527 57,645 ----------- --------- ------- --------- Period from November 1, 2002 through December 31, 2002: Property and Marine ......... 11,307 101,473 46,294 43,047 Casualty .................... 33,568 121,586 125,609 39,320 Finite Risk ................. 4,457 58,600 19,113 24,731 ----------- --------- ------- --------- Total ................. $ 49,332 281,659 191,016 - 107,098 5,211 ----------- --------- ------- --------- Losses Amortization and loss of deferred adjustment policy Other Net expenses acquisition operating written Period incurred costs expenses premiums - ------------------------------- ---------- ------------ --------- ------------ Year ended December 31, 2004: Property and Marine ......... 349,557 58,792 $ 504,439 Casualty .................... 418,355 118,734 677,399 Finite Risk ................. 251,892 46,781 464,175 --------- ------- ------------ Total ................. 1,019,804 224,307 13,196 1,646,013 --------- ------- ------------ Year ended December 31, 2003: Property and Marine ......... 169,944 48,756 $ 352,908 Casualty .................... 266,836 87,620 474,000 Finite Risk ................. 147,391 90,864 345,234 --------- ------- ------------ Total ................. 584,171 227,240 92,595 1,172,142 --------- ------- ------------ Period from November 1, 2002 through December 31, 2002: Property and Marine ......... 21,558 6,206 89,341 Casualty .................... 29,498 5,699 164,929 Finite Risk ................. 9,300 2,544 43,844 --------- ------- ------------ Total ................. 60,356 14,449 16,334 $ 298,114 --------- ------- ------------
S-7 SCHEDULE IV PLATINUM UNDERWRITERS HOLDINGS, LTD. Reinsurance ($ in thousands)
Assumed from Percentage of Direct Ceded to other other amount Description Amount companies companies Net Amount assumed to net - ---------------------------------------- ------ -------------- ------------ ---------- -------------- Property and liability premiums written: Year ended December 31, 2004: Property and Marine - $ 13,029 517,468 $ 504,439 102.6% Casualty - 748 678,147 677,399 100.1% Finite Risk - - 464,175 464,175 100.0% -------------- ------------ ---------- Total - 13,777 1,659,790 1,646,013 100.8% -------------- ------------ ---------- Year ended December 31, 2003: Property and Marine - $ 25,156 378,064 $ 352,908 107.1% Casualty - 1,175 475,175 474,000 100.2% Finite Risk - - 345,234 345,234 100.0% -------------- ------------ ---------- Total - 26,331 1,198,473 1,172,142 102.2% -------------- ------------ ---------- Period ended December 31, 2002: - Property and Marine - - 89,341 89,341 100.0% Casualty - - 164,929 164,929 100.0% Finite Risk - - 43,844 43,844 100.0% -------------- ------------ ---------- Total - $ - 298,114 $ 298,114 100.0% -------------- ------------ ----------
S-8 THE PREDECESSOR BUSINESS The St. Paul Companies, Inc. Reinsurance Underwriting Segment Following is selected historical combined financial data for the period from January 1, 2002 through November 1, 2002 of the reinsurance underwriting segment of The St. Paul Companies, Inc. (the "Predecessor") prior to the initial public offering of Platinum Underwriters Holdings, Ltd. ("Platinum"). The Predecessor operations include the continuing business and related assets transferred to Platinum upon completion of its initial public offering as well as the reinsurance business that remained with The St. Paul Companies, Inc. ("St. Paul") after the public offering. Accordingly, underwriting results and combined statements of the Predecessor presented in this report are not indicative of the actual results of Platinum subsequent to the public offering. In addition to the effect of the retention of certain portions of the Predecessor business by St. Paul and the exclusion of the corporate aggregate excess-of-loss reinsurance program of St. Paul, other factors may cause the actual results of Platinum to differ materially from the results of the Predecessor. On April 1, 2004, Travelers Property Casualty Corp. (TPC) merged with a subsidiary of St. Paul, as a result of which TPC became a wholly-owned subsidiary of the St. Paul Travelers Companies, Inc. (STA.) For accounting purposes, the transaction was accounted for as a reverse acquisition with TPC treated as the accounting acquirer. Accordingly, the transaction was accounted for as a purchase business combination, using TPC historical financial information and applying fair value estimates to the acquired assets, liabilities, and commitments of St. Paul as of April 1, 2004. Beginning on April 1, 2004, the results of operations and financial condition of St. Paul were consolidated with TPC's. P-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders: The St. Paul Companies, Inc.: We have audited the accompanying combined statements of underwriting results and identifiable underwriting cash flows of The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) for the period from January 1, 2002 through November 1, 2002. The combined statements are the responsibility of the Predecessor's management. Our responsibility is to express an opinion on these combined statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined statement presentation. We believe that our audit provide a reasonable basis for our opinion. The accompanying combined statements were prepared to present the historical underwriting results and identifiable cash flows of the Predecessor specifically attributable to reinsurance underwriting operations of The St. Paul Companies, Inc. (St. Paul) as described in Note 1. The combined statements do not contain an allocation of St. Paul's equity structure, investment portfolio assets, investment income or cash flows from investing and financing activities. Accordingly, the combined statements are not intended to be a complete presentation of the Predecessor's or St. Paul's results of operations or cash flows. In our opinion, the combined statements referred to above present fairly, in all material respects, the underwriting results and identifiable underwriting cash flows of the Predecessor for the period from January 1, 2002 through November 1, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Minneapolis, Minnesota March 21, 2003 P-2 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Combined Statement of Underwriting Results For the Period From January 1, 2002 through November 1, 2002 ($ in millions) Net premiums Net premiums written $ 1,007 Net change in unearned premiums 95 -------- Net premiums earned 1,102 -------- Underwriting deductions Losses and loss adjustment expenses incurred 791 Policy acquisition costs 257 Other underwriting expenses 62 -------- Total underwriting deductions 1,110 -------- Net underwriting loss $ (8) ========
Combined Statement of Identifiable Underwriting Cash Flows For the Period From January 1, 2002 through November 1, 2002 ($ in millions) Premiums collected, net $ 1,348 Losses and loss adjustment expenses paid (1,057) Policy acquisition expenses paid (275) Other underwriting expenses paid (62) -------- Net cash used by underwriting $ (46) ========
See accompanying notes to combined statements P-3 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying combined statements pertain to the reinsurance underwriting segment of The St. Paul Companies, Inc. ("St. Paul"), for the period from January 1, 2002 through November 1, 2002. The reinsurance underwriting segment of St. Paul is the predecessor to Platinum Underwriters Holdings, Ltd. and is hereinafter referred to as the "Predecessor." Predecessor statements are presented on a combined basis, including certain insurance and reinsurance subsidiaries within the St. Paul group, as well as the underwriting results of the reinsurance departments of St. Paul Fire and Marine Insurance Company ("Fire and Marine") and United States Fidelity and Guarantee Company ("USF&G"), St. Paul's two largest U.S. insurance subsidiaries. It is the practice of St. Paul to evaluate the performance of its property-liability insurance underwriting segments on the basis of underwriting results. St. Paul manages its property-liability investment portfolio in the aggregate, as part of a separate segment and does not allocate assets, or investment income, to its respective underwriting segments. Similarly, the statements of identifiable underwriting cash flows include only cash flow activity that is specifically attributable to the underwriting operations of Predecessor, and does not include any cash flows from investing and financing activities. ACCOUNTING PRINCIPLES The accompanying combined statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Predecessor's business is written by several of St. Paul's underwriting subsidiaries, which are required to file financial statements with state and foreign regulatory authorities. The accounting principles used to prepare these statutory financial statements follow prescribed or permitted accounting principles, which differ from U.S. GAAP. Prescribed statutory accounting practices include state laws, regulations and general administrative rules issued by the state of domicile as well as a variety of publications and manuals of the National Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting practices encompass all accounting practices not so prescribed, but allowed by the state of domicile. Use of Estimates These combined statements include estimates and assumptions that have an effect on the amounts reported. The most significant estimates are those relating to reserves for losses and loss adjustment expenses. These estimates are continually reviewed and adjustments are made as necessary, but actual results could be significantly different than expected when estimates were made. Net Premiums Earned Assumed reinsurance premiums are recognized as revenues proportionately over the coverage period. Net premiums earned are recorded in the statement of underwriting results, net of Predecessor's cost to purchase reinsurance. Net premiums not yet recognized as revenue are recorded in the balance sheet as unearned premiums, gross of any ceded unearned premiums. Written and earned premiums, and the related costs, which have not yet been reported to Predecessor are estimated and accrued. Due to the time lag inherent in reporting of premiums by ceding companies, such estimated premiums written and P-4 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued earned, as well as related costs, may be significant. Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined. Reinstatement and additional premiums are accrued as provided for in the provisions of assumed reinsurance contracts and based on experience under such contracts. Reinstatement premiums are the premiums charged for the restoration of the reinsurance limit of a catastrophe contract to its full amount after payment by the reinsurer of losses as a result of an occurrence. These premiums relate to the future coverage obtained during the remainder of the initial policy term, and are earned over the remaining policy term. Additional premiums are premiums charged after coverage has expired, related to experience during the policy term, which are earned immediately. An allowance for uncollectible premiums is established for possible non-payment of such amounts due, as deemed necessary. Insurance Losses and Loss Adjustment Expenses Losses represent the amounts paid, or expected to be paid, to ceding companies for events that have occurred. The costs of investigating, resolving and processing these claims are known as loss adjustment expenses ("LAE"). These items are recorded on the statement of underwriting results net of ceded reinsurance, meaning that gross losses and LAE incurred are reduced by the amounts recovered or expected to be recovered under retrocessional contracts. Insurance Reserves The reserves for losses and LAE are estimated based on reports received from ceding companies, supplemented with analysis by the claims department and actuaries of Predecessor. These reserves include estimates of the total cost of claims that were reported, but not yet paid, and the cost of claims incurred but not yet reported ("IBNR"). Loss reserves are reduced for estimated amounts of salvage and subrogation recoveries. Estimated amounts recoverable from reinsurers on unpaid losses and LAE are reflected as assets. Because many of the reinsurance coverages offered by Predecessor involve claims that ultimately may not be settled for many years after they are incurred, subjective judgments as to ultimate exposure to losses are an integral and necessary component of the loss reserving process. The inherent uncertainties of estimating loss reserves are further exacerbated for reinsurers by the significant amount of time that often elapses between the occurrence of an insured loss, the reporting of that loss to the primary insurer and, ultimately, to the reinsurer, and the primary insurer's payment of that loss and subsequent indemnification by the reinsurer. Reserves are recorded by considering a range of estimates bounded by a high and low point. Within that range, management's best estimate is recorded. Reserves are continually reviewed, using a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic, social and legal factors. Reserves established in prior years are adjusted as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in financial results in the periods in which they are made. While we believe the carried reserves make a reasonable provision for unpaid loss and LAE obligations, it should be noted that the process of estimating required reserves does, by its very nature, involve uncertainty. The level of uncertainty can be influenced by factors such as the existence of long-tail coverage (when loss payments may not occur for several years) and changes in claim handling practices, as well as the factors noted above, and actual claim payments and LAE could be significantly different from the estimates. P-5 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued Liabilities for unpaid losses and LAE related to certain assumed reinsurance contracts are discounted to the present value of estimated future payments. The liabilities related to these reinsurance contracts were discounted using rates up to 7.5 percent, based on our return on invested assets or, in many cases, on yields contractually guaranteed to us on funds held by the ceding company, as permitted by the Vermont Department of Banking, Insurance, Securities and Healthcare Administration. Reinsurance Written premiums, earned premiums, and incurred losses and LAE reflect the net effects of assumed and ceded reinsurance transactions. Reinsurance accounting is followed for assumed and ceded transactions when risk transfer requirements have been met. These requirements involve significant assumptions being made related to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms. Assumed reinsurance contracts that do not transfer significant insurance risk are required to be accounted for as deposits. These contract deposits are accounted for as financing transactions, with interest expense credited to the contract deposit. Policy Acquisition Expenses The costs directly related to the acquisition of reinsurance contracts are referred to as policy acquisition expenses and consist of commissions and other direct underwriting expenses. Although these expenses are incurred when a reinsurance contract is written, such expenses are deferred and amortized over the same period as the corresponding premiums are recorded as earned revenues. On a regular basis, an analysis of the recoverability of the deferred policy acquisition expenses, in relation to the expected recognition of revenues, including anticipated investment income is performed. Any adjustments are reflected as period costs. Should the analysis indicate that the acquisition costs are unrecoverable, further analyses are completed to determine if a reserve is required to provide for losses that may exceed the related unearned premiums. Foreign Currency Translation Functional currencies are assigned to foreign operations, which are generally the currencies of the local operating environment. Foreign currency amounts are remeasured to the functional currency, and the resulting foreign exchange gains or losses are reflected in income, outside of underwriting results. Functional currency amounts are then translated into U.S. dollars. The unrealized gain or loss from this translation is recorded in St. Paul's equity. Both the remeasurement and translation are calculated using current exchange rates for the balance sheet amounts and average exchange rates for revenues and expenses. 2. RELATED PARTY TRANSACTIONS The following summarizes Predecessor's related party transactions: REINSURANCE TRANSACTIONS WITH AFFILIATES Predecessor cedes certain business to two affiliated special purpose entities ("SPE") which were established by St. Paul for the purpose of increasing Predecessor's capacity to write certain excess-of-loss reinsurance, principally property, marine, and aviation. The most significant of these agreements is with George Town Re. George Town Re was established by St. Paul in 1996 for the purpose of entering into a P-6 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued single reinsurance treaty with Predecessor, providing an additional $45.1 million of underwriting capacity over a 10-year period. Premiums ceded under these agreements were $4.6 million in 2002. Losses ceded under these agreements totaled ($0.1) million in 2002. The agreement with George Town Re was terminated on July 8, 2002, and George Town Re was liquidated. There was no material impact on Predecessor's underwriting results from this transaction. Predecessor assumed certain primary business from other business segments of St. Paul. Premiums assumed under these agreements were $12.0 million in 2002. Losses assumed under these agreements were $22.8 million in 2002. Predecessor paid commissions of $3.9 million in 2002 related to business assumed under these agreements. MANAGEMENT AGREEMENTS WITH AFFILIATES St. Paul management has entered into various agreements with affiliated parties, under arm's-length terms. Under these agreements, the affiliated parties have agreed to perform investment management services for St. Paul Re UK, guarantee the performance of St. Paul's obligations, make funds available under a revolving loan agreement, and provide certain reinsurance coverage. Included in underwriting expenses are certain expenses allocated to Predecessor from St. Paul, including costs such as corporate communications and marketing, corporate finance, corporate actuarial, corporate tax, corporate audit, legal services, corporate executives, corporate human resources, and employee benefit costs. These allocated costs totaled $7.8 million in 2002. 3. SEPTEMBER 11, 2001 TERRORIST ATTACK On September 11, 2001, terrorists hijacked four commercial passenger jets in the United States. Two of the jets were flown into the World Trade Center towers in New York, NY, causing their collapse. The third jet was flown into the Pentagon building in Washington, DC, causing severe damage, and the fourth jet crashed in rural Pennsylvania. This terrorist attack caused significant loss of life and resulted in unprecedented losses for the property-casualty insurance industry. Estimated gross losses and LAE incurred as a result of the terrorist attack totaled $967 million. The estimated net underwriting loss of $580 million from that event included an estimated benefit of $160 million from cessions made under various reinsurance agreements, a net $136 million benefit from additional and reinstatement premiums, and a $91 million reduction in contingent commission expenses. The estimated losses were based on a variety of actuarial techniques, coverage interpretation and claims estimation methodologies, and included an estimate of losses incurred but not reported, as well as estimated costs related to the settlement of claims. The estimate of losses was also based on the belief that property and casualty insurance losses from the terrorist attack will total between $30 billion and $35 billion for the insurance industry. In 2002, Predecessor's estimate of industry losses was supplemented by its ongoing analysis of both paid and reported claims related to the attack. Predecessor's estimate of industry losses remains subject to significant uncertainties and is vulnerable to change over time as additional information becomes available. Predecessor and other insurers have obtained a summary judgment ruling that the World Trade Center property loss is a single occurrence. Certain insureds have appealed that ruling, asking the court to determine that the property loss constituted two separate occurrences rather than one. P-7 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued In addition, through separate litigation, the aviation losses could be deemed four separate events rather than three, for purposes of insurance and reinsurance coverage. Even if the courts ultimately rule against Predecessor regarding the number of occurrences or events, it believes the additional amount of estimated after-tax losses, net of reinsurance, that it would record would not be material to Predecessor's results of operations. The estimated underwriting loss of $580 million is recorded in the 2002 and 2001 combined statements of underwriting results in the following line items ($ in millions):
Period from January 1, 2002 through Year Ended November 1, 2002 December 31, 2001 --------------------- ------------------- Net premiums earned $ (5) 141 Losses and LAE (19) (788) Other underwriting expenses - 91 ------------------- ------------------- Total underwriting loss $ (24) (556) ------------------- -------------------
The estimated underwriting loss of $24 million in 2002 was distributed among Predecessor's segments as follows ($ in millions):
Period from January 1, 2002 through November 1, 2002 --------------------- North American Property $ 18 North American Casualty 2 International 10 Finite Risk (6) ------------------- Total underwriting loss $ 24 -------------------
4. RESERVES FOR LOSSES AND LAE RECONCILIATION OF LOSS RESERVES The following table represents a reconciliation of beginning and ending loss and LAE reserves for the period from January 1, 2002 through November 1, 2002 ($ in millions): P-8 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued Loss and LAE reserves at beginning of year, as reported $ 4,949 Less reinsurance recoverables on unpaid losses at beginning of year (1,256) --------- Net loss and LAE reserves at beginning of year 3,693 --------- Provision for losses and LAE for claims incurred: Current period 736 Prior years 55 --------- Total incurred 791 --------- Losses and LAE payment for claims incurred: Current period (114) Prior years (839) --------- Total paid (953) --------- Net loss and LAE reserves at end of year 3,531 Plus reinsurance recoverables on unpaid losses at end of year 1,249 --------- Loss and LAE reserves at end of year, as reported $ 4,780 ---------
Prior year development in the period from January 1, 2002 through November 1, 2002 was attributable mainly to the bond and credit, surplus lines and international liability lines of business. Both North American Property and North American Casualty experienced better than expected loss emergence which served to mitigate the worse than expected emergence from the lines mentioned above. ENVIRONMENTAL AND ASBESTOS RESERVES Predecessor continues to have exposure, through its reinsurance of primary insurance contracts written many years ago, to claims alleging injury or damage from environmental pollution or seeking payment for the cost to clean up polluted sites. In addition, Predecessor has received asbestos injury claims tendered under general casualty policies that it reinsures. 5. EMPLOYEE BENEFIT PLANS Employees of Predecessor participated in various employee benefit, stock incentive, and retirement plans administered by St. Paul. Predecessor reimbursed St. Paul for costs associated with these plans. The following summarizes underwriting expenses recorded by Predecessor in connection with each of these plans for the period from January 1, 2002 through November 1, 2002 ($ in millions): Retirement Plans $ 3.3 Post Retirement Plans (0.5) Variable Stock Option Plan (1.4) ----------- Total $ 1.4 -----------
In addition, St. Paul sponsored a stock-based incentive program, the Long-Term Incentive Plan ("LTIP"), which was exclusive to certain employees of Predecessor. Underwriting expenses (benefits) recorded by Predecessor in connection with the LTIP totaled $1.3 million in 2002. P-9 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued 6. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS A portion of Predecessor's business activities was conducted in rented premises. Predecessor also entered into leases for equipment, such as office machines and computers. Total rental expense was $6.8 million in 2002. Certain leases are non-cancelable, and Predecessor would remain responsible for payment even if the space or equipment were no longer utilized. On November 1, 2002, the minimum rents for which Predecessor would be liable under these types of leases are as follows: $5.3 million in 2003, $1.5 million in 2004, $0.6 million in 2005, $0.6 million in 2006, and $2.8 million thereafter. LEGAL MATTERS In the ordinary course of conducting business, Predecessor has been named as a defendant in various lawsuits. Some of these lawsuits attempt to establish liability under reinsurance contracts issued by Predecessor underwriting operations. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of Predecessor's operations in certain ways. It is possible that the settlement of these lawsuits may be material to Predecessor's results of operations and liquidity in the period in which they occur. However, St. Paul believes the total amounts that Predecessor, and its affiliates, will ultimately have to pay in these matters will have no material effect on Predecessor's overall financial position. 7. FOURTH QUARTER 2001 STRATEGIC REVIEW In December 2001, St. Paul announced the results of a strategic review of all of its operations, which included a decision to exit a number of businesses and countries. These decisions included the narrowing of product offerings and geographic presence relative to Predecessor's businesses. As part of that review, it was determined that Predecessor would no longer underwrite aviation or bond and credit reinsurance, or offer certain financial risk and capital markets reinsurance products. Predecessor would also substantially reduce the North American business underwritten in London. Predecessor would focus on several areas, including property catastrophe reinsurance, excess-of-loss casualty reinsurance, marine and traditional finite reinsurance. The following table presents the net premiums earned and underwriting results for 2002 for the businesses to be exited under these actions, including the allocation of St. Paul's corporate excess-of-loss reinsurance programs ($ in millions): Net premiums earned $ 277 Underwriting results (52)
8. REINSURANCE The primary purpose of the Predecessor's ceded reinsurance program, including the aggregate excess-of-loss coverages discussed below, is to protect its operations from potential losses in excess of acceptable levels. Reinsurers are expected to honor their obligations under ceded reinsurance contracts. In the event these companies are unable to honor their obligations, Predecessor will pay these amounts. P-10 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued Allowances have been established for possible nonpayment of such amounts due. Predecessor's underwriting results in 2002 were impacted by the St. Paul corporate aggregate excess-of-loss reinsurance program that was entered into each year effective January 1, 2001, 2000 and 1999 (hereinafter referred to as the "St. Paul corporate program"). Coverage under the St. Paul corporate program treaties was triggered when St. Paul's incurred insurance losses and LAE across all lines of business exceeded accident year attachment loss ratios specified in the treaty. Predecessor results also benefited from a separate aggregate excess-of-loss reinsurance treaty, exclusive to Predecessor each year effective 2001, 2000 and 1999 that were unrelated to the St. Paul corporate program. The combined impact of these treaties (together the "reinsurance treaties") is included in the following table ($ in millions):
Period from January 1, 2002 through November 1, 2002 ------------------- St. Paul corporate aggregate excess-of-loss reinsurance program: Ceded premiums written $ (4) ------------------- Ceded losses and LAE (9) Ceded premiums earned (4) ------------------- Net underwriting (detriment) benefit $ (5) ------------------- Predecessor aggregate treaty: Ceded premiums written $ (1) ------------------- Ceded losses and LAE (35) Ceded premiums earned (2) ------------------- Net underwriting (detriment) benefit $ (33) ------------------- Combined total: Ceded premiums written $ (5) ------------------- Ceded losses and LAE (44) Ceded premiums earned (6) ------------------- Net underwriting (detriment) benefit $ (38) -------------------
The amounts shown above include the impact of a reallocation of premiums and losses ceded in 2000 and 1999. This reallocation was necessary to reflect the impact of differences between St. Paul's actual 2002 experience on losses ceded to the corporate program in 2000 and 1999, by segment, and the anticipated experience on those losses in 2000 and 1999 when the initial segment allocation was made. St. Paul was not party to a corporate all-lines aggregate excess-of-loss treaty in 2002. Predecessor was party to a separate aggregate excess-of-loss reinsurance treaty, unrelated to the corporate treaty, in 2002. Coverage has not been triggered under that treaty in 2002; however, in 2002, Predecessor recorded ceded premiums written of $(1) million, ceded earned premiums of $(2) million, and ceded loss and loss adjustment expenses of $(35) million, for a net detriment of $33 million as a result of this treaty. Included in the net detriment for 2002 was a $20 million detriment due to the partial commutation of the P-11 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued 1999 and 2001 aggregate excess-of-loss reinsurance treaties. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and LAE is as follows (including the impact of the reinsurance treaties) ($ in millions):
Period from January 1, 2002 through November 1, 2002 --------------------- Premiums written: Assumed $ 1,056 Ceded 49 ------------------- Net premiums written 1,007 ------------------- Premiums earned: Assumed $ 1,160 Ceded 58 ------------------- Net premiums earned $ 1,102 ------------------- Insurance losses and LAE: Assumed $ 903 Ceded 112 ------------------- Total insurance losses and LAE $ 791 -------------------
9. SEGMENT INFORMATION Predecessor has four reportable segments, which consist of North American Property, North American Casualty, International and Finite Risk. These segments are consistent with the manner in which Predecessor's business has been managed. The North American Property segment consists of property reinsurance business underwritten for customers domiciled in the United States and Canada. Coverages offered included proportional, per-risk, excess-of-loss and surplus lines reinsurance, and catastrophe treaties. This segment also includes retrocessional reinsurance business and crop and agricultural reinsurance. The North American surplus lines business center has been aggregated with the North American Property segment as the aggregation is consistent with Predecessor's management structure and the business center meets the aggregation criteria required for external segment reporting. The North American Casualty segment consists of casualty reinsurance underwritten for customers domiciled in the United States and Canada. Casualty coverages offered included general workers' compensation, medical professional, non-medical professional, directors and officers, employment practices, umbrella and environmental impairment. The Accident and Health business center, which consists predominantly of North American Risks, is aggregated with the North American Casualty segment as the aggregation is consistent with Predecessor's management structure and the P-12 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued business center meets the aggregation criteria required for external reporting. In addition, Predecessor has one significant account which includes both property and casualty business, but is managed as a business center within the North American Casualty segment. For this reason, this business center, which meets the aggregation criteria for external segment reporting, has been aggregated with the North American Casualty segment. The International segment underwrites wrote property and casualty reinsurance for customers domiciled outside of North America. This segment also includes the results from marine and aerospace business due to the global nature of those exposures. The Finite Risk segment underwrites non-traditional reinsurance treaties for leading insurance companies worldwide. Non-traditional reinsurance combines limited traditional underwriting risk with financial risk protection and is generally utilized by large commercial customers who are willing to share in a portion of their insurance losses. Due to Predecessor's management structure, the Bond and Credit business center has been aggregated with the Finite Risk segment. This business center meets the aggregation criteria required for external segment reporting. Predecessor monitors and evaluates the performance of its segments based principally on their underwriting results. Assets are not specifically identifiable for these segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. GEOGRAPHIC AREAS The following summary presents financial data of Predecessor's operations based on their location for the period from January 1, 2002 through November 1, 2002 ($ in millions): U.S. $ 701 Non-U.S. 401 ------ Total net premium earned $1,102 ------
SEGMENT INFORMATION The summary below presents net premiums earned and underwriting results for Predecessor's reportable segments for the period January 1, 2002 through November 1, 2002 ($ in millions): Premium earned: North American Property $ 205 North American Casualty 451 International 206 Finite Risk 240 --------- Total net premiums earned $ 1,102 --------- Underwriting gain (loss): North American Property $ 33 North American Casualty (79) International 51 Finite Risk (13) --------- Total Underwriting gain (loss) $ (8) ---------
P-13 The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) Notes to Combined Statements, continued Each of Predecessor's segments generated a significant volume of reinsurance premiums through two reinsurance brokers. Total premiums written through these two brokers totaled $548 million for the period from January 1, 2002 through November 1, 2002. 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is an unaudited summary of Predecessor's quarterly results ($ in millions):
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- 2002: Net premiums written $ 463 $ 200 234 110 Net premiums earned 377 305 307 113 Underwriting gain (loss) 15 (6) (21) 4
* Fourth quarter of 2002 represents the period from October 1, 2002 through November 1, 2002. 11. SEPTEMBER 11, 2001 TERRORIST ATTACK - LEGAL MATTERS (UNAUDITED) As noted in Note 3, Predecessor and other insurers obtained a summary judgment ruling that the World Trade Center property loss is a single occurrence. Certain insureds, including the World Trade Center leaseholder, appealed that ruling, asking the court to determine that the property loss constituted two separate occurrences rather than one. In September 2003, the U.S. Circuit Court of Appeals for the Second Circuit ruled that under the terms of the policy form Predecessor used to underwrite property coverage for the World Trade Center, the terrorist attack constituted one occurrence. P-14 EX-23.1 2 y12928exv23w1.txt INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT EXHIBIT 23.1 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT The Board of Directors Platinum Underwriters Holdings, Ltd.: We consent to the incorporation by reference in the registration statements (No. 333-104257) on Form S-8 and (No. 333-113823) on Form S-3 of Platinum Underwriters Holdings, Ltd. and subsidiaries ("Platinum") of our reports dated February 25, 2005, with respect to the consolidated balance sheets of Platinum as of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for the years ended December 31, 2004 and 2003, and the period April 19, 2002 (date of inception) to December 31, 2002, and related financial statement schedules, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004, annual report on Form 10-K/A Amendment No. 1 of Platinum. /s/ KPMG LLP New York, New York September 20, 2005 EX-23.2 3 y12928exv23w2.txt INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT EXHIBIT 23.2 Independent Registered Public Accounting Firm's Consent The Board of Directors Platinum Underwriters Holdings, Ltd.: We consent to the incorporation by reference in the registration statements (No. 333-104257) on Form S-8 and (No. 333-113823) on Form S-3 of Platinum Underwriters Holdings, Ltd. ("Platinum") of our report dated March 21, 2003, relating to the combined statements of underwriting results and identifiable underwriting cash flows of The St. Paul Companies, Inc. Reinsurance Underwriting Segment (Predecessor) for the period from January 1, 2002 through November 1, 2002, which report appears in the December 31, 2004, annual report on Amended Form 10-K/A of Platinum. Our report contains an explanatory paragraph that states that the combined statements are not intended to be a complete presentation of Predecessor's or The St. Paul Companies, Inc.'s results of operations or cash flows. /s/ KPMG LLP Minneapolis, Minnesota September 20, 2005 EX-31.1 4 y12928exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER I, Gregory E. A. Morrison, certify that: 1. I have reviewed this Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004 (this "Report") of Platinum Underwriters Holdings, Ltd. (the "Registrant"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial Reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Designed such internal control over financial Reporting, or caused such internal control over financial Reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial Reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; d) Disclosed in this Report any change in the Registrant's internal control over financial Reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual Report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial Reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial Reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial Reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and Report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial Reporting. September 20, 2005 /s/ GREGORY E.A. MORRISON -------------------------------------- By: Gregory E.A. Morrison President and Chief Executive Officer EX-31.2 5 y12928exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Joseph F. Fisher, certify that: 1. I have reviewed this Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004 (this "Report") of Platinum Underwriters Holdings, Ltd. (the "Registrant"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial Reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Designed such internal control over financial Reporting, or caused such internal control over financial Reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial Reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; d) Disclosed in this Report any change in the Registrant's internal control over financial Reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual Report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial Reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial Reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial Reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and Report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial Reporting. September 20, 2005 /s/ JOSEPH F. FISHER --------------------------------------- By: Joseph F. Fisher Executive Vice President and Chief Financial Officer EX-32.1 6 y12928exv32w1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Gregory E. A. Morrison, President and Chief Executive Officer of Platinum Underwriters Holdings, Ltd., hereby certify to the best of my knowledge and belief that this Annual Report on Form 10-K/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that the information contained in this Annual Report on Form 10-K/A fairly represents, in all material respects, the financial condition and results of operations of Platinum Underwriters Holdings, Ltd. September 20, 2005 /s/ GREGORY E.A. MORRISON ---------------------------------------- By: Gregory E.A. Morrison President and Chief Executive Officer EX-32.2 7 y12928exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph F. Fisher, Executive Vice President and Chief Financial Officer of Platinum Underwriters Holdings, Ltd., hereby certify to the best of my knowledge and belief that this Annual Report on Form 10-K/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that the information contained in this Annual Report on Form 10-K/A fairly represents, in all material respects, the financial condition and results of operations of Platinum Underwriters Holdings, Ltd. September 20, 2005 /s/ JOSEPH F. FISHER ---------------------------------------- By: Joseph F. Fisher Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----