Platinum Scraps Finite Deal

Yesterday, speaking with analysts, executives said the time was needed to adequately evaluate and make a decision regarding the reinsurance deal they ultimately opted to unwind because it could be viewed as the kind of "finite" transaction that has drawn regulatory scrutiny.

Platinum Chief Executive Officer Gregory Morrison said the "current climate of heightened concern over the accounting for insurance and reinsurance contracts" had prompted the reinsurer to commute the reinsurance deal that would have otherwise erased $22 million of hurricane losses from Platinum's results.

"While this contract contained ample risk transfer and was reviewed with our auditors at its inception, the particular cession resulting from experience through Sept. 30 would not likely have caused an economic loss to our retrocessionaire," he said, later identifying the retrocessionaire as Omaha, Neb.-based Berkshire.

Mr. Morrison described the reinsurance as an aggregate excess-of-loss retrocessional agreement and did not refer to it as finite reinsurance. However, Michael Price, Platinum's president and chief underwriting officer, did use the term when distinguishing between finite products his company sells and the treaty it bought from Berkshire.

Generally, finite reinsurance is distinguished from traditional reinsurance in that the reinsurer's risk is more limited than it is in traditional contracts.

The Reinsurance Association of America describes finite reinsurance as "a term used to describe a broad spectrum of treaty reinsurance arrangements which provide coverage at lower margins than traditional reinsurance, in return for a lower probability of loss to the reinsurer."

"This reinsurance is often multi-year and financially oriented, and can provide a means of financial management beyond that usually provided by traditional reinsurance."

Other definitions highlight profit-sharing features and loss caps, as well as the possibility of refunding some portion of investment income to cedents in describing the mechanics of finite deals.

Mr. Price, noting that his firm had completed one finite transaction in the quarter (or $175 million in net premiums over the contract term) predicted that business would migrate from finite to traditional as the Securities and Exchange Commission and the New York attorney general step up inquiries into finite deals.

One recent arrangement involving insurance company accounting issues involved Brightpoint, a mobile telephone distributor, and American International Group. It led to a $10 million fine for the insurer after the Securities and Exchange Commission judged it to be an improper balance sheet smoothing operation. AIG admitted no wrongdoing in paying the penalty. A federal grand jury in Indianapolis is currently examining the transaction.

Mr. Price stressed that the agreements that his firm writes did not have features that regulators are concerned about. He identified these as insufficient risk transfer for the accounting treatment being used, retroactive coverage or coverage of known losses, and reliance on special-purpose entities or undisclosed side agreements.

"When we engage in the finite reinsurance business we're careful to avoid all of these problems," working with clients and auditors to conform to applicable accounting rules.

As for the Berkshire retrocession, while Mr. Price said that the contract purchased was not similar to what it sells, he also pronounced it free of the problems that regulators are looking into.

"I do want to be clear? We believe that that contract transferred ample risk. In fact it was not just barely meeting the risk-transfer test. It easily met and exceeded the standards for risk transfer" required for reinsurance accounting treatment.

But the "actual cession we contemplated for the third quarter itself would not have resulted in a loss to the reinsurer," he said.

"Our concern was the changing environment against which these kinds of cessions are going to be evaluated and our belief that we would rather publish pristine financial statements that are beyond this kind of unwelcome scrutiny," Mr. Price said.

For the third quarter, Platinum reported a net loss of $69.8 million, or $1.62 per share, compared to $37.8 million of income for third-quarter 2003. Hurricane losses had an after-tax net impact of $145 million of third-quarter 2004 results, Platinum reported.

Overall net premiums jumped 57 percent to $440.5 million, with property premiums accounting for $120.6 million, casualty accounting for $172.0 million, and $147.9 million coming from Platinum's finite segment. The statutory combined ratio for the quarter was 126.1 compared to 87.0 last year.

Through nine months, net income was $33.9 million, or 78 cents per share, compared to $95 million last year.