When Platinum Underwriters Holdings, Ltd. reported a 6.2 percent drop in first-quarter net premiums last week, CEO Michael Price attributed a small part of the drop to an intentional cut in the reinsurer’s crop book.
“Reduction in our crop portfolio reflects unusually competitive crop reinsurance market conditions for pro-rata accounts and our expectations regarding drought persistence,” Price commented during a first-quarter earnings conference call last week.
The main takeaway from the conference call was that Platinum’s net income jumped 62 percent—to $86.5 million from $53.3 million last year (when tornado losses impacted the bottom line). But the reinsurer’s chief executive also provided some notable commentary on drought conditions.
Revealing that Platinum wrote about $10 million of January 1 crop business, which was less than half of an expiring base of $26 million,” Price said factors beyond a competitive market factored into the change.
“We have had a drought last year [and] there is, from a statistical standpoint, some evidence that there’s serial correlation in droughts,” said Price, who is also a casualty actuary. In other words, he said that if you have a drought one year, then “the likelihood that you have one the next year is higher than the long-term average. ”
“We also know, given that we’re in April, that we have sustained drought conditions and we have an outlook published by the U.S. federal government that we can observe, which tells us that although there’s improvement anticipated, it’s still worse than the expectation was one year ago.”
The back-to-back occurrence of “severe” drought from one year to the next is uncertain he said. “But we would view this as an elevated risk environment and, ironically, that’s occurring at a time when terms and conditions available on the pro-rata business are less attractive to reinsurers than they have been in prior years.”
“So risk is higher in the past. Reward is lower,” he said, justifying the reinsurers decision to pull back from the pro-rata portion of the business, while also moving “a little bit farther away from the risk” on an excess-of-loss basis.
“We continue to be a participant in this market,” Price said, going on to comment on the crop market conditions.
“What I find interesting is that in 2003, when we were active in this market and it was attractive, no one else seemed to want to do this business. Today, it’s much less attractive and everybody that we know is somehow in this business.”
“We’re happy to let others take the lion’s share of the premium and risk right now,” he said.
In Platinum’s earnings press release and financial supplement, the crop change is reported within the Property and Marine segment, for which net premiums declined 12.8 percent in the quarter to $59.4 million. Casualty premiums fell 4.8 percent to $70.8 million.
Platinum’s overall combined ratio for the quarter was 45.4, with a lower level of weather losses and favorable development contributing to a 42.8 point drop from first-quarter 2012.
During the call, an analyst asked price whether last year’s drought had pumped up demand for crop reinsurance this year.
Price said he suspects that more dollars are being ceded into the crop reinsurance market “in part because of greater acreage under production as well as relatively high commodity prices.”
“Lots of people are trying to write crop reinsurance right now and, when there’s an appetite, generally primary companies are willing to fulfill the aspirations of reinsurers,” he concluded.