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WIKI ANALYSIS
Incorporated in 2001, Montpelier Re Holdings Ltd. (MRH) was formed by White Mountains Insurance Group, Ltd. and Benfield Holdings, Ltd. to take advantage of the enhanced insurance demand following the September 11 attacks. The company was started with $1.0 billion in capital: White Mountains contributed $200 million, Benfield invested $25 million, other private equity firms kicked in $625 million, and debt issued totaled $150 million. The company went public in October 2002. It primarily offers property catastrophe reinsurance, which is written on an excess-of-loss basis (coverage for catastrophe losses exceeding a limit, or "attachment point," mutually agreed upon). This limit is subject to a ceiling. It also provides specialty reinsurance coverage on aviation, marine, personal accident, and personal casualty.
Effective January 1, 2006, the company began writing collateralized property catastrophe retrocessional coverage to other reinsurance companies through a newly created company, Blue Ocean Re. which wrote $94.8 million (13% of the total gross written premiums) during 2006.
Montpelier's business was segregated into five operating segments:
Property Catastrophe (42% of the $727.5 million in gross written premium [GWP] in 2006)
Property Specialty (28% of GWP)
Other Specialty (17% of GWP)
Blue Ocean (13.0% of GWP)
Qualifying Quota Share, or QQS (0%) but the company discontinued underwriting QQS contracts as of January 2004.
Conservative securities portfolio helps buck the credit ratings trend
The company remains conservatively positioned with 90% of the portfolio invested in cash and fixed income securities with an average credit quality of AA and duration of 1.9 years. At the end of 3Q07 fair value of subprime securities were $19.0 million and Alt-A mortgage securities were $63.7 million and had an expected life of 1.9 years and 3.4 years respectively. These and all the mortgage-backed securities remain AAA rated. The fair value of these securities was based on inputs that are observable for the asset, either directly or indirectly (Level 2 inputs as defined in FAS 157). This has help MRH buck the trend of rating agency concerns. As a result, Fitch upgraded one notch the senior debt rating of Montpelier Re Holdings Ltd to BBB, long-term issuer default rating to BBB , insurer financial strength rating to A-, and a rating outlook of stable, reflecting Fitch's heightened comfort with Montpelier Re's risk management practices and risk profile.
Expansion into casualty lines poses additional underwriting risk
Also posing a risk to reserve adequacy is the company's expansion into casualty lines. The company has no track record in these lines and because they are longer-tailed (time from policy inception until claims are made), whether the company priced them profitably will not become apparent for some time. This concern is relatively minor at this time, however, as the bulk of the company's business remains in property lines.
Organic growth through new initiatives -- Lloyd's Syndicate 5151, Montpelier Europa AG
The company is willing to invest in its future growth. The company's approach presently is to incur up-front costs, which undoubtedly will impact financial results over the nearer-term, in order to build out revenue generating initivatives several years out.
Syndicate 5151 will help the company in diversifying its business in the U.S. The changes in capacity models and breaking agency metrics have encouraged the company to spread its operations geographically. This new initiative is intended to facilitate access to business through a broader range of distribution channels and to increase over time, the proportion of non catastrophe-exposed business, property specialty and other specialty class business that the company underwrites. The company plans to build business which has low correlation to its core reinsurance book in Bermuda, thus diversifying its business.
Establishment of Montpelier Europa AG, a Swiss company based in Zug, Switzerland, will help in accessing the reinsurance business of continental European regional insurance, which does not normally make its way to Bermuda or even London. This new development will help the company to change its operations structurally.
$100 million equity investment should aid MRH's ability to grow
Wilbur Ross, distressed securities investor, invested a $100 million in equity (6.9 million shares) in Montpelier Re. This investment, coupled with company's common stock offering, is enabling the company grow its business and take advantage in cat re market. Moreover, catastrophe reinsurers are not only subject by the rating agencies to increased capital requirements per dollar of premium written, but must diversify their risk geographically, constraining growth and, for many companies, limiting the benefits of the hardening cat re market. Ross' $100 million investment provided badly needed capital for Montpelier Re to increase writings in the cat re market.
Adjustments to risk profile intended to mute large swings in underwriting profitability
After losing 75% of its equity in 2005's hurricanes, Montpelier Re adjusted its risk profile to meet the more stringent capital requirements of the rating agencies and reduce it exposure to extremely large losses per dollar of capital. The company is targeting the 15% ROE over the next year through smooth positive and negative swings in that ROE. Management stated that running its 2005 book of business through its new risk profile yields a 55% reduction in overall net incurred losses and two-thirds reduction losses from Hurricane Katrina. We note that in its brief history, Montpelier has been very profitable. The company's profitability for a given year is quickly apparent as most of its lines are short-tailed (claims are usually made within a year of policy inception), leaving the company less likely than many of its peers to incur losses several years after writing a policy.
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