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Montpelier RE Holdings 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-32
  4. Ex-32
10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2007          
OR
o
  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 001-31468
 
 
     
Bermuda   98-0428969
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
 
Montpelier House
94 Pitts Bay Road
Pembroke HM 08
Bermuda
(Address of Principal Executive Offices)
 
Registrant’s telephone number, including area code:
(441) 296-5550
 
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 þ     No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of August 1, 2007, the Registrant had 102,858,444 common shares outstanding, with a par value of 1/6 cent per share.
 


 

 
MONTPELIER RE HOLDINGS LTD.
 
 
             
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 EX-31: CERTIFICATIONS
 EX-32: CERTIFICATIONS


Table of Contents

 
 
Item 1.   Financial Statements
 
MONTPELIER RE HOLDINGS LTD.
 
 
(In millions of U.S. Dollars, except share and per share amounts)
 
                 
    June 30,
    December 31,
 
    2007     2006  
    Unaudited        
 
Assets
               
Marketable securities, at fair value:
               
Fixed maturity investments — trading (amortized cost: $2,285.9 and $340.8)
  $ 2,274.9     $ 340.4  
Equity securities — trading (cost: $160.5 and $ — )
    211.9        
Fixed maturity investments — available for sale (amortized cost: $ — and $2,167.2)
          2,167.0  
Equity securities — available for sale (cost: $ — and $157.5)
          203.2  
Other investments — at fair value (cost: $25.5 and $23.1)
    30.9       27.1  
                 
Total investments
    2,517.7       2,737.7  
Cash and cash equivalents
    283.1       313.1  
Restricted cash
    72.3       35.5  
Securities lending collateral
    171.9       315.7  
Reinsurance recoverable on unpaid losses
    162.7       197.3  
Reinsurance recoverable on paid losses
    12.0       7.8  
Premiums receivable
    271.1       171.7  
Unearned premium ceded
    72.2       44.5  
Deferred acquisition costs
    41.6       30.3  
Accrued investment income
    22.0       22.6  
Unsettled sales of investments
    2.1       0.1  
Other assets
    21.7       22.5  
                 
Total Assets
  $ 3,650.4     $ 3,898.8  
                 
                 
Liabilities
               
Loss and loss adjustment expense reserves
  $ 958.3     $ 1,089.2  
Debt
    427.4       427.3  
Securities lending payable
    171.9       315.7  
Unearned premium
    331.0       219.2  
Reinsurance balances payable
    74.5       77.2  
Unsettled purchases of investments
    40.7        
Accounts payable, accrued expenses and other liabilities
    27.3       38.9  
                 
Total Liabilities
    2,031.1       2,167.5  
                 
Commitments and contingent liabilities (see Note 11)
           
                 
Minority interest — Blue Ocean
    78.7       238.4  
                 
Common Shareholders’ Equity
               
Common shares at 1/6 cent par value per share — authorized 1,200,000,000 shares; issued and outstanding 103,067,067 and 111,775,682 shares
    0.2       0.2  
Additional paid-in capital
    1,757.9       1,819.2  
Retained deficit
    (221.7 )     (376.1 )
Accumulated other comprehensive income, after tax
    4.2       49.6  
                 
Total Common Shareholders’ Equity
    1,540.6       1,492.9  
                 
Total Liabilities, Minority Interest and Common Shareholders’ Equity
  $ 3,650.4     $ 3,898.8  
                 
 
See Notes to Consolidated Financial Statements


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Table of Contents

MONTPELIER RE HOLDINGS LTD.
 
 
(In millions of U.S. Dollars, except per share amounts)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
          Unaudited        
 
REVENUES
                               
Gross premiums written
  $ 188.2     $ 296.2     $ 449.2     $ 521.1  
Reinsurance premiums ceded
    (21.6 )     (24.3 )     (93.3 )     (103.5 )
                                 
Net premiums written
    166.6       271.9       355.9       417.6  
Change in net unearned premiums
    (37.5 )     (120.6 )     (84.1 )     (134.9 )
                                 
Net premiums earned
    129.1       151.3       271.8       282.7  
Net investment income
    34.4       30.4       67.5       59.2  
Net realized and unrealized gains (losses) — trading securities
    (5.2 )     (1.3 )     10.1       (3.4 )
Net realized losses — available for sale securities
          (1.2 )           (5.9 )
Net foreign exchange gains (losses)
    1.9       6.6       (0.4 )     7.1  
Other revenue
    1.2       2.7       3.3       2.9  
                                 
Total revenues
    161.4       188.5       352.3       342.6  
                                 
EXPENSES
                               
Underwriting expenses:
                               
Loss and loss adjustment expenses
    50.2       65.4       109.8       116.3  
Acquisition costs
    19.8       29.9       38.3       63.8  
General and administrative expenses
    20.4       15.0       35.8       29.7  
Non-underwriting expenses:
                               
Interest and other financing expenses
    8.2       7.0       16.7       14.1  
Other non-underwriting expenses
    2.9       3.1       5.8       7.9  
                                 
Total expenses
    101.5       120.4       206.4       231.8  
                                 
Income before minority interest expense and income taxes
    59.9       68.1       145.9       110.8  
Minority interest expense — Blue Ocean
    (9.2 )     (10.5 )     (21.9 )     (13.4 )
Income taxes
                       
                                 
NET INCOME
    50.7       57.6       124.0       97.4  
                                 
Change in net unrealized gains and losses on available for sale securities held
    0.8       4.4       0.1       8.3  
Change in foreign currency translation
                      0.1  
Recognition of net unrealized gains and losses on available for sale securities sold
          1.2             5.9  
                                 
COMPREHENSIVE INCOME
  $ 51.5     $ 63.2     $ 124.1     $ 111.7  
                                 
Basic earnings per share
  $ .53     $ .62     $ 1.29     $ 1.07  
Diluted earnings per share
  $ .53     $ .62     $ 1.29     $ 1.07  
Dividends declared per common share and outstanding warrant
  $ .075     $ .075     $ .150     $ .150  
 
See Notes to Consolidated Financial Statements


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    Total
    Common
          Accum. Other
 
    Common
    Shares and
          Comprehensive
 
    Shareholders’
    Additional
    Retained
    Income,
 
    Equity     Paid-in Capital     Deficit     After Tax  
 
Balances at January 1, 2007
  $ 1,492.9     $ 1,819.4     $ (376.1 )   $ 49.6  
                                 
Net income
    124.0             124.0        
Cumulative effect adjustment of adopting FAS 157 and 159
                45.5       (45.5 )
Retirements of common shares and warrants
    (65.0 )     (65.0 )            
Other comprehensive income, after tax
    0.1                   0.1  
Amortization of Restricted Share Units and Director Share Plan Units
    3.7       3.7              
Dividends declared on common shares and outstanding warrants
    (15.1 )           (15.1 )      
                                 
Balances at June 30, 2007
  $ 1,540.6     $ 1,758.1     $ (221.7 )   $ 4.2  
                                 
 
                                 
    Total
    Common
          Accum. Other
 
    Common
    Shares and
          Comprehensive
 
    Shareholders’
    Additional
    Retained
    Income,
 
    Equity     Paid-in Capital     Deficit     After Tax  
 
Balances at January 1, 2006
  $ 1,057.7     $ 1,715.1     $ (648.3 )   $ (9.1 )
                                 
Net income
    97.4             97.4        
Issuances of common shares
    100.0       100.0              
Other comprehensive income, after tax
    14.3                   14.3  
Amortization of Restricted Share Units and Director Share Plan Units
    2.6       2.6              
Direct equity offering expenses
    (0.5 )     (0.5 )            
Dividends declared on common shares and outstanding warrants
    (15.9 )           (15.9 )      
                                 
Balances at June 30, 2006
  $ 1,255.6     $ 1,817.2     $ (566.8 )   $ 5.2  
                                 
 
See Notes to Consolidated Financial Statements


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MONTPELIER RE HOLDINGS LTD.
 
 
(In millions of U.S. Dollars)
 
                 
    Six Months Ended
 
    June 30,  
    2007     2006  
    Unaudited  
 
Cash flows from operations:
               
Net income
  $ 124.0     $ 97.4  
Charges (credits) to reconcile net income to net cash used for operations:
               
Net realized and unrealized (gains) losses — trading securities
    (10.1 )     3.4  
Net realized losses — available for sale securities
          5.9  
Minority interest expense — Blue Ocean
    21.9       13.4  
Amortization and depreciation
    (2.0 )     5.4  
Other operating items:
               
Net change in loss and loss adjustment expense reserves
    (130.9 )     (333.0 )
Net change in reinsurance recoverable on paid and unpaid losses
    30.4       95.3  
Net change in unearned premium
    111.8       131.4  
Net change in reinsurance balances payable
    (2.7 )     (34.3 )
Net change in unearned premium ceded
    (27.7 )     3.4  
Net change in deferred acquisition costs
    (11.3 )     (2.3 )
Net change in premiums receivable
    (99.4 )     (119.5 )
Net change in restricted cash
    (36.8 )      
Purchases of fixed maturities — trading*
          (912.2 )
Sales, maturities, calls and paydowns of fixed maturity investments — trading*
          598.0  
Other
    (9.3 )     36.9  
                 
Net cash used for operations
    (42.1 )     (410.8 )
                 
Cash flows from investing activities:
               
Purchases of fixed maturities — trading*
    (807.7 )      
Purchases of equity securities — trading*
    (28.1 )      
Purchases of fixed maturities — available for sale
          (1,094.4 )
Purchases of equity securities — available for sale
          (61.1 )
Purchases of other investments
    (2.5 )      
Sales, maturities, calls and paydowns of fixed maturity investments — trading
    1,074.7        
Sales of equity securities — trading
    39.2        
Sales, maturities, calls and paydowns of fixed maturity investments — available for sale
          1,082.8  
Sales of equity securities — available for sale
          20.8  
Change in securities lending collateral
    143.8       47.6  
Net acquisitions of capitalized assets
    (1.5 )     (5.6 )
                 
Net cash provided from (used for) investing activities
    417.9       (9.9 )
                 
Cash flows from financing activities:
               
Issuance of debt
          100.0  
Net proceeds from issuances of the Company’s common shares
          99.6  
Net proceeds from issuances of Blue Ocean common and preferred shares
          36.6  
Repurchase of the Company’s common shares and warrants
    (65.0 )      
Dividends paid on the Company’s common shares and outstanding warrants
    (15.1 )     (14.4 )
Dividends and distributions paid to Blue Ocean’s minority common shareholders
    (135.2 )      
Dividends to and repurchases from Blue Ocean’s minority preferred shareholders
    (46.4 )      
Change in securities lending payable
    (143.8 )     (47.6 )
                 
Net cash (used for) provided from financing activities
    (405.5 )     174.2  
                 
Effect of exchange rate changes on cash and cash equivalents
    (0.3 )     2.0  
                 
Net decrease in cash and cash equivalents during the period
    (30.0 )     (244.5 )
Cash and cash equivalents — beginning of period
    313.1       450.1  
                 
Cash and cash equivalents — end of period
  $ 283.1     $ 205.6  
                 
 
 
Prior to the adoption of FAS 159, all purchases and sales of trading securities were required to be presented as operating activities. As a result of the adoption of FAS 159, purchases and sales of trading securities are required to be presented according to their nature and purpose which, for the Company, is investing activities. Prior periods have not been revised to reflect this change.
 
See Notes to Consolidated Financial Statements


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MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of U.S. Dollars,
except share and per share amounts or as where otherwise indicated)
Unaudited
 
1.   Significant Accounting Policies
 
 
These interim unaudited consolidated financial statements include the accounts of Montpelier Re Holdings Ltd. (the “Company”) and its subsidiaries and affiliates and have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (the “U.S.”). The Company was incorporated under the laws of Bermuda in November of 2001.
 
The Company’s principal wholly-owned operating subsidiary, Montpelier Reinsurance Ltd. (“Montpelier Re”), is a Bermuda Class 4 insurer which provides global property and casualty reinsurance and insurance products. The Company also provides insurance, accounting and advisory services to affiliates and third parties through its wholly-owned subsidiaries Montpelier Agency Ltd. (“MAL”), Montpelier Capital Advisors Ltd. (“MCA”) and Montpelier Marketing Services (UK) Limited (“MMSL”).
 
The Company also has a significant investment in Blue Ocean Re Holdings Ltd. (“Blue Ocean”), a holding company that owns 100% of Blue Ocean Reinsurance Ltd. (“Blue Ocean Re”). Blue Ocean Re is a Bermuda Class 3 insurer which provides property catastrophe retrocessional protection. As of June 30, 2007 and December 31, 2006, the Company owned 42.2% of Blue Ocean’s outstanding common shares and 33.6% of Blue Ocean’s outstanding preferred shares. Blue Ocean is considered a “variable interest entity” as defined under Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46R, entitled “Consolidation of Variable Interest Entities — an interpretation of Accounting Research Bulletin No. 51 as amended”. In accordance with FIN 46R, Blue Ocean is currently consolidated into the financial statements of the Company. MAL provides Blue Ocean Re with underwriting, risk management, claims management, ceded retrocession agreement management, actuarial and accounting services and receives fees for such services.
 
On June 19, 2007, the Company announced that it had received approval from Lloyd’s for the commencement of trading on July 1, 2007 of a new syndicate to be known as Montpelier Syndicate 5151 (“Syndicate 5151”). Syndicate 5151 will underwrite primarily short tail lines, mainly property insurance and reinsurance, engineering and specialty casualty classes sourced from the London, U.S. and European markets. One of the early initiatives of Syndicate 5151 will be to accept business from our newly formed U.S. managing general agent, Montpelier Underwriting Inc. (“MUI”).
 
The Company currently operates through two business segments, Rated Reinsurance and Insurance Business and Collateralized Property Catastrophe Retrocessional Business. The Company’s Rated Reinsurance and Insurance Business segment consists of the operations of the Company and its wholly-owned subsidiaries. The Company’s Collateralized Property Catastrophe Retrocessional Business consists solely of the operations of Blue Ocean.
 
The unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. This report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission. In the opinion of management, these interim financial statements include all normally recurring adjustments considered necessary to fairly present the financial position, results of operations and cash flows of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements may not be indicative of financial results for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements


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Table of Contents

 
MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and the reported amounts of revenues and expenses during the period. Actual results could differ materially from those estimates. The major estimates reflected in the Company’s unaudited consolidated financial statements include, but are not limited to, loss and loss adjustment expense reserves, reinsurance recoverable on unpaid losses, estimates of written and earned premiums and the fair value of other investments.
 
 
The Company adopted Statement of Financial Accounting Standard (“FAS”) 157 entitled “Fair Value Measurements” as of January 1, 2007. FAS 157 defines fair value as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting the highest and best use valuation concepts. FAS 157 establishes a framework for measuring fair value in GAAP by creating a hierarchy of fair value measurements that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. FAS 157 further expands disclosures about such fair value measurements. FAS 157 applies broadly to most existing accounting pronouncements that require or permit fair value measurements (including both financial and non-financial assets and liabilities) but does not require any new fair value measurements. The Company elected to early adopt this Statement effective January 1, 2007.
 
The Company adopted FAS 159 entitled “The Fair Value Option for Financial Assets and Financial Liabilities” as of January 1, 2007. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 amends FAS 115 “Accounting for Certain Investments in Debt and Equity Securities” and applies to all entities with available-for-sale and trading securities effective January 1, 2008. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. The Company elected to early adopt this Statement effective January 1, 2007. As a result, the Company now reports unrealized gains and losses associated with all its marketable securities in net income. With the exception of trading securities held by Blue Ocean, the Company previously reported unrealized gains and losses associated with marketable securities as changes in other comprehensive income. As a result, the adoption of FAS 159 has and will continue to have a material impact on the Company’s net income and consolidated financial statements. The effect of the first remeasurement to fair value has been recorded as a cumulative-effect adjustment to the opening balance of retained earnings. See Note 4 for additional information.
 
The Company adopted FIN 48 entitled “Accounting for Uncertainty in Income Taxes” as of January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FAS 109 “Accounting for Income Taxes.” The Company did not report any changes to its reported results as a result of the adoption of FIN 48. The Company has taken an uncertain tax position in its determination that its non-U.S. operations are not subject to U.S. income tax. Management believes that the Company conducts substantially all its non-U.S. operations in a manner such that its offshore operations are not engaged in a trade or business in the U.S. and, as a result, are not subject to U.S. income tax. For further information see “Risk Factors” in Part II, Item 1A herein.
 
 
Restricted cash consists of cash and cash equivalent balances that are collateralizing Blue Ocean’s trust funds.
 
 
The Company participates in a securities lending program whereby certain of its fixed maturity investments are loaned to other institutions for short periods of time through a lending agent. The Company maintains control over


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is monitored and maintained by the lending agent.
 
 
As of June 30, 2007 and December 31, 2006, the Company owned 42.2% of the outstanding common shares and 33.6% of the outstanding preferred shares of Blue Ocean. The portion of Blue Ocean’s equity not owned by the Company is considered to be owned by Blue Ocean’s minority shareholders. The Company’s minority interest liability represents the equity of the minority shareholders of Blue Ocean and the Company’s minority interest expense represents the portion of income attributable to such minority shareholders for the periods presented.
 
2.   Loss and Loss Adjustment Expense Reserves
 
The following table summarizes the Company’s loss and loss adjustment expense (“LAE”) reserve activities for the three and six months ended June 30, 2007 and 2006:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
 
Gross loss and LAE reserves — beginning
  $ 1,005.5     $ 1,685.0     $ 1,089.2     $ 1,781.9  
Reinsurance recoverable on unpaid losses — beginning
    (183.7 )     (291.6 )     (197.3 )     (305.7 )
                                 
Net loss and LAE reserves — beginning
    821.8       1,393.4       891.9       1,476.2  
                                 
Losses and LAE incurred:
                               
Current year losses
    69.8       48.9       137.5       115.5  
Prior year losses
    (19.6 )     16.5       (27.7 )     0.8  
                                 
Total losses and LAE incurred
    50.2       65.4       109.8       116.3  
                                 
Losses and LAE paid:
                               
Current year losses
    (5.3 )     (10.8 )     (5.9 )     (20.3 )
Prior year losses
    (71.1 )     (231.2 )     (200.2 )     (355.4 )
                                 
Total losses and LAE paid
    (76.4 )     (242.0 )     (206.1 )     (375.7 )
                                 
Net loss and LAE reserves — ending
    795.6       1,216.8       795.6       1,216.8  
Reinsurance recoverable on unpaid losses — ending
    162.7       232.1       162.7       232.1  
                                 
Gross loss and LAE reserves — ending
  $ 958.3     $ 1,448.9     $ 958.3     $ 1,448.9  
                                 
 
 
The net favorable development during the three and six months ended June 30, 2007, for losses incurred during prior years primarily resulted from the following:
 
  •  Net estimated ultimate Property Specialty losses for prior years decreased by $11.4 million and $22.0 million during the three and six months ended June 30, 2007, respectively, primarily as a result of claims emergence on the direct and facultative book of business being lower than expected and lower than expected ultimate losses on proportional business. A significant portion of the Property Specialty favorable development


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

  recognized during the three months ended June 30, 2007, was a $5.8 million reduction in losses resulting from a fire claim that was settled for less than the reserve previously established.
 
  •  Net estimated ultimate Property Catastrophe losses for prior years decreased by $5.8 million and $3.3 million during the three and six months ended June 30, 2007, respectively, due mainly to decreases in projected losses for hurricanes Katrina, Rita and Wilma, as well as some smaller events such as U.S. tornadoes.
 
  •  Net ultimate Other Specialty losses for prior years decreased by $2.4 million during the three and six months periods ended June 30, 2007. The favorable development related to many classes of business within Other Specialty lines.
 
 
The net unfavorable development during the three and six months ended June 30, 2006, for losses incurred during prior years primarily resulted from the following:
 
  •  Net estimated ultimate Property Catastrophe losses for prior years increased by $21.8 million and by $22.9 million during the three and six months ended June 30, 2006, respectively. The adverse development in the second quarter was primarily driven by an increase in losses relating to our retrocessional book of business for the 2005 hurricanes.
 
  •  Net estimated ultimate Property Specialty losses for prior years decreased by $9.7 million and $17.5 million during the three and six months ended June 30, 2006, respectively. The majority of the decrease in the second quarter was due to a reduction in the expected ultimate losses for property risk excess claims.
 
  •  Net estimated ultimate Other Specialty losses for prior years increased by $5.5 million and decreased by $1.1 million during the three and six months ended June 30, 2006, respectively. The reserve increase experienced within the Other Specialty category for the three months ended June 30, 2006, related to a large claim that was reported during the period from an explosion in December 2005.
 
  •  Net estimated ultimate qualifying quota share losses for prior years decreased by $1.1 million and $3.5 million during the three and six months ended June 30, 2006, resulting from favorable commutations of such contracts during the periods.
 
3.   Reinsurance
 
In the normal course of business, the Company purchases reinsurance in an opportunistic manner in order to manage its exposures. All of the Company’s reinsurance purchases to date have represented prospective cover; that is, ceded reinsurance has been purchased to protect the Company against the risk of future losses as opposed to covering losses that have already occurred but have not been paid. The majority of these contracts are excess of loss contracts covering one or more lines of business. To a lesser extent the Company has also purchased quota share reinsurance with respect to specific lines of business. The Company also purchases industry loss warranty policies which provide coverage for certain losses incurred by the Company provided they are triggered by events exceeding a specified industry loss size. In addition, for certain pro-rata contracts the subject direct insurance contracts carry underlying reinsurance protection from third party reinsurers which the Company nets against gross premiums written.
 
The Company remains liable to the extent that any third-party reinsurer or other obligor fails to meet its obligations and with respect to certain contracts that carry underlying reinsurance protection, the Company would be liable in the event that the ceding companies are unable to collect amounts due from underlying third party reinsurers.
 
The Company records provisions for uncollectible reinsurance recoverable when collection becomes unlikely. Under the Company’s reinsurance security policy, reinsurers are generally required to be rated A- or better by A.M. Best at the time the policy is written. The Company considers reinsurers that are not rated or do not fall within


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the above rating threshold on a case-by-case basis when collateralized up to policy limits, net of any premiums owed. The Company monitors the financial condition and ratings of its reinsurers on an ongoing basis.
 
Earned reinsurance premiums ceded were $33.6 million and $41.1 million for the three months ended June 30, 2007 and 2006, respectively, and $65.6 million and $106.9 million for the six months ended June 30, 2007 and 2006, respectively. Total recoveries netted against loss and LAE were $(.8) million and $(6.9) million for the three months ended June 30, 2007 and 2006, respectively, and $6.0 million and $28.7 million for the six months ended June 30, 2007 and 2006, respectively. The negative reinsurance recovery for the three months ended June 30, 2006, was due to a reduction in the estimate of loss and LAE primarily related to hurricane Katrina. In addition to loss recoveries, certain of the Company’s ceded reinsurance contracts provide for recoveries of additional premiums, reinstatement premiums and for lost no-claims bonuses, which are incurred when losses are ceded to these reinsurance contracts.
 
The current A.M. Best ratings of the Company’s reinsurers related to reinsurance recoverable on paid losses at June 30, 2007, are as follows:
 
                 
Rating
  Amount     % of Total  
 
A++
  $       %
A+
    2.0       16.7  
A
    7.5       62.5  
A−
    2.4       20.0  
B+
    0.1       0.8  
Not Rated
           
                 
Total reinsurance recoverable on paid losses
  $ 12.0       100.0 %
                 
 
The current A.M. Best ratings of the Company’s reinsurers related to reinsurance recoverable on unpaid losses at June 30, 2007, are as follows:
 
                 
Rating
  Amount     % of Total  
 
A++
  $ 64.8       39.8 %
A+
    13.1       8.1  
A
    58.9       36.2  
A−
    13.2       8.1  
B+
    10.4       6.4  
Not Rated
    2.3       1.4  
                 
Total reinsurance recoverable on unpaid losses
  $ 162.7       100.0 %
                 
 
The Company does not believe that there are any amounts uncollectible from its reinsurers at this time.
 
The Company has also entered into a derivative transaction with Champlain Limited (“Champlain”), a Cayman Islands special purpose vehicle, which provides reinsurance-like protection. As the coverage responds to parametric triggers, whereby payment amounts are determined on the basis of modeled losses incurred by a notional portfolio rather than by actual losses that the Company incurs, this transaction is accounted for as a weather derivative in accordance with the guidance in Emerging Issues Task Force (“EITF”) Issue 99-2, “Accounting for Weather Derivatives”, and not as a reinsurance transaction. In accordance with the guidance provided by EITF 99-2, this transaction has been valued by applying the intrinsic value method, which results in no value adjustment in the absence of an industry loss event triggering recovery.


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.   Investments
 
During the first quarter of 2007, the Company adopted FAS 157 and FAS 159. As a result, for 2007 all of the Company’s marketable securities are carried at fair value, based on quoted prices in active markets for identical assets (Level 1 inputs as defined in FAS 157), with the net unrealized appreciation or depreciation on such securities being reported as net realized and unrealized gains (losses) on the Company’s statement of operations. This adoption had no impact on gains or losses associated with the Company’s other investments. Prior to the adoption of FAS 157 and FAS 159, the Company’s marketable securities available for sale were carried at fair value, based on quoted market prices, with the net unrealized appreciation or depreciation on such securities being reported as a separate component of shareholders’ equity, with changes therein reported as a component of other comprehensive income.
 
The table below shows the aggregate cost (or amortized cost) and fair value of the Company’s marketable securities, by investment type, at June 30, 2007:
 
             
    As of June 30, 2007
    Amortized
   
    Cost   Fair Value
 
Fixed maturity investments — trading:
           
U.S. government securities
  $ 281.9   $ 280.5
U.S. government-sponsored enterprise securities
    473.9     470.3
Corporate debt securities
    644.2     648.2
Mortgage-backed and asset-backed securities
    875.7     865.9
Other fixed maturity securities
    10.2     10.0
             
Total fixed maturity investments — trading
  $ 2,285.9   $ 2,274.9
             
 
             
    Cost   Fair Value
 
Equity securities — trading
  $     160.5   $     211.9
             
 
The table below shows the aggregate cost (or amortized cost) and fair value of the Company’s marketable securities, by investment type, at December 31, 2006:
 
             
    As of December 31, 2006
    Amortized
   
    Cost   Fair Value
 
Fixed maturity investments — trading:
           
U.S. government securities
  $   177.8   $ 177.7
U.S. government-sponsored enterprise securities
    73.6     73.4
Corporate debt securities
    85.4     85.3
Mortgage-backed and asset-backed securities
    4.0     4.0
             
Total fixed maturity investments — trading
  $ 340.8   $ 340.4
             
 
             
    Amortized
   
    Cost   Fair Value
 
Fixed maturity investments — available for sale:
           
U.S. government securities
  $ 251.3   $ 250.4
U.S. government-sponsored enterprise securities
    588.2     580.5
Corporate debt securities
    531.9     543.4
Mortgage-backed and asset-backed securities
    773.6     771.0
Other
    22.2     21.7
             
Total fixed maturity investments — available for sale
  $ 2,167.2   $ 2,167.0
             
 


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

             
    Cost   Fair Value
 
Equity securities — available for sale
  $ 157.5   $ 203.2
             
 
Other investments, consisting primarily of private placements, limited partnership interests and investments in derivative contracts, are generally recorded at fair value based on financial information received and other information available to management (Level 2 inputs as defined in FAS 157), including factors restricting the liquidity of the investments. The net unrealized appreciation or depreciation on these securities is reported as a separate component of shareholders’ equity, with changes therein reported as a component of other comprehensive income. The Company’s other investments as of June 30, 2007 and December 31, 2006, had a fair value of $30.9 million and $27.1 million, respectively. The Company’s largest holding is its investment in the common stock of Symetra Financial Corporation, a private placement acquired in 2004 at a cost of $20.0 million, which had a fair value of $24.0 million at June 30, 2007.
 
Other investments are routinely reviewed to determine if they have sustained an impairment in value that is considered to be other than temporary. This review involves consideration of several factors including (i) the time period during which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects and overall financial condition of the issuer, (iii) the significance of the decline, and (iv) the Company’s intent and ability to hold the investment for a sufficient period of time for the value to recover. The identification of potentially impaired investments involves significant management judgment. Unrealized depreciation in the value of other investments considered by management to be other than temporary is charged to income in the period it is determined. The Company did not recognize any impairment on its other investments during the periods presented herein.
 
Changes in the fair value of the Company’s investments for the three and six months ended June 30, 2007, consisted of the following:
 
                                         
Changes in Fair Value for the Three Months Ended June 30, 2007  
                            Changes in
 
                            Fair Value
 
    Net Realized and
                Total Changes in
    Reflected in
 
    Unrealized Gains
    Net Foreign
          Fair Value
    Other
 
    (Losses) on
    Exchange
          Reflected in
    Comprehensive
 
Description
  Trading Investments     Gains     Other Revenue     Earnings     Income  
 
Fixed maturity investments
  $ (16.1 )   $ 1.2     $     $ (14.9 )   $  
Equity securities
    10.9       0.9             11.8        
Other investments
          0.4       1.2       1.6       0.8  
 
                                         
Changes in Fair Value for the Six Months Ended June 30, 2007  
                            Changes in
 
                            Fair Value
 
    Net Realized and
                Total Changes in
    Reflected in
 
    Unrealized Gains
    Net Foreign
          Fair Value
    Other
 
    (Losses) on
    Exchange
          Reflected in
    Comprehensive
 
Description
  Trading Investments     Gains     Other Revenue     Earnings     Income  
 
Fixed maturity investments
  $ (8.5 )   $ 1.7     $     $ (6.8 )   $  
Equity securities
    18.6       1.0             19.5        
Other investments
          0.8       2.1       2.9       0.1  

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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.   Debt and Financing Arrangements
 
 
During 2003, the Company issued $250.0 million aggregate principal amount of senior unsecured debt (the “Senior Notes”). The Senior Notes bear interest at a rate of 6.125% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The Senior Notes are scheduled to mature on August 15, 2013. The Company may redeem the Senior Notes at any time at a “make-whole” redemption price; however, the Company has no current intention of doing so. The Senior Notes do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere. The unamortized carrying value of the Senior Notes at June 30, 2007 and December 31, 2006, was $249.3 million and $249.2 million, respectively.
 
The Company incurred and paid interest on the Senior Notes of $3.9 million for each of the three month periods ended June 30, 2007 and 2006, and $7.7 million for each of the six month periods ended June 30, 2007 and 2006.
 
 
In January 2006 the Company, through Montpelier Capital Trust III, participated in a private placement of $100.0 million of floating rate capital securities (the “Trust Preferred Securities”). The Trust Preferred Securities mature on March 30, 2036, are redeemable at the Company’s option at par beginning March 30, 2011, and require quarterly distributions of interest to the holders of the Trust Preferred Securities. The Trust Preferred Securities bear interest at 8.55% per annum through March 30, 2011, and thereafter at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. Montpelier Capital Trust III simultaneously issued all of its issued and outstanding common securities to the Company for a purchase price of $3.1 million. The Company’s investment of $3.1 million in the common shares of Montpelier Capital Trust III is recorded in other investments in the consolidated balance sheet.
 
Montpelier Capital Trust III used the proceeds from the sale of the Trust Preferred Securities and the issuance of its common securities to purchase junior subordinated debt securities, due March 30, 2036, in the principal amount of $103.1 million issued by the Company. The junior subordinated debt securities bear interest at the same rates as the Trust Preferred Securities discussed above.
 
The Company incurred and paid interest expense on the Debentures of $2.1 million for each of the three month periods ended June 30, 2007 and 2006, and $4.3 million for each of the six month periods ended June 30, 2007 and 2006.
 
 
In November 2006 Blue Ocean obtained a secured long-term loan of $75.0 million from a syndicate of lenders (the “Blue Ocean Debt”). The Blue Ocean Debt has an initial maturity date of February 28, 2008; however, Blue Ocean may extend the maturity date up to August 29, 2008. The Blue Ocean Debt bears interest on the outstanding principal amount at a rate equal to a base rate plus a margin of 200 basis points, which may be increased to 400 basis points, depending on certain conditions.
 
Blue Ocean incurred interest expense on the Blue Ocean Debt of $1.4 million and $2.8 million for the three and six month periods ended June 30, 2007, respectively. Blue Ocean paid $2.8 million in interest on the Blue Ocean Debt during the six months ended June 30, 2007.


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
In the normal course of business, Montpelier Re and Blue Ocean Re provide letters of credit to certain of their clients. The Company and Montpelier Re also maintain an unsecured revolving credit facility. The following table outlines these credit facilities as of June 30, 2007:
 
                         
    Credit Line     Usage     Expiry Date  
 
Secured operational Letter of Credit facilities:
                       
Syndicated facility: Tranche B
  $ 225.0     $ 146.1       Aug. 2010  
Syndicated 5-Year facility
  $ 500.0     $ 54.2       June 2011  
Syndicated 5-Year facility
  $ 250.0     $ 230.1       June 2012  
Bilateral facility A
  $ 100.0     $ 72.1       None  
Blue Ocean Re
  $ 250.0     $       None  
Lloyd’s standby facility
  £ 74.0     £ 73.9       Dec. 2012  
 
                         
    Credit Line   Usage   Expiry Date
 
Unsecured operational Revolving Credit facility:
                       
Syndicated 364-Day facility
  $ 50.0     $       June 2008  
 
In June 2007, Montpelier Re entered into a new 5-Year secured $250.0 million letter of credit facility and the Company and Montpelier Re entered into a new 364-Day unsecured $50.0 million revolving loan and letter of credit facility. The agreements governing these facilities contain covenants that limit the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain burdensome agreements. In addition, the agreements governing these facilities require the Company to maintain debt leverage of no greater than 30% and Montpelier Re to maintain an A.M. Best financial strength rating of no less than B++.
 
In June 2007, the Company, Montpelier Re and Montpelier Capital Limited (a wholly-owned subsidiary of the Company) entered into a secured £74.0 million standby letter of credit facility through December 31, 2012, which will be used to support business to be written by Syndicate 5151. The agreements governing this facility contain covenants that limit the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain other agreements. In addition, the agreements governing these facilities require the Company to maintain debt leverage of no greater than 30% and Montpelier Re to maintain an A.M. Best financial strength rating of no less than B++.
 
The letter of credit facilities outlined above are fully secured by investments and cash.
 
 
In the normal course of business, Blue Ocean Re establishes trust funds for the benefit of ceding companies. As of June 30, 2007, restricted assets associated with such trust funds consisted of cash and cash equivalents of $72.3 million and fixed maturity investments of $155.8 million.
 
6.   Derivative Contracts
 
As of June 30, 2007, the Company had entered into several derivative transactions: the catastrophe bond protection purchased from Champlain (See Note 3); the Catastrophe Bond Total Rate of Return Swap Facility (as described below); the foreign currency exchange agreements (as described below); and the equity forward and related share issuance agreement (see Note 8).
 
The Company has entered into a Catastrophe Bond Total Rate of Return Swap Facility (the “Facility”) under which the Company is entitled to receive contract payments in return for assuming mark-to-market risk on a portfolio of securitized catastrophe risks. The difference between the notional capital amounts of the catastrophe


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

bonds and their market value is marked to market over the terms of the swap agreements and, in addition to any resulting payments received, are included as other revenues. The counterparty’s exposure under the Facility is collateralized by a lien over a portfolio of the Company’s investment grade securities which equals the amount of the facility utilized, after adjustments for credit quality. As of June 30, 2007 and December 31, 2006, the Company had entered into several catastrophe bond total rate of return swap transactions having a combined notional capital amount of $69.7 million and $48.7 million, respectively.
 
The Company has also entered into foreign currency exchange agreements that represent an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. These agreements do not eliminate fluctuations in the value of the Company’s assets and liabilities denominated in foreign currencies; rather, they allow the Company to establish a rate of exchange for a future point in time. The foreign currency contracts are recorded as other investments at fair value. At June 30, 2007 and December 31, 2006, the Company was party to outstanding foreign currency exchange agreements having a gross notional exposure of $54.9 million and $64.6 million, respectively.
 
7.   Related Party Transactions
 
On May 1, 2007, the Company repurchased from White Mountains Insurance Group, Ltd. (“White Mountains”), 939,039 of the Company’s common shares and 7,172,375.5 of the Company’s warrants for a total purchase price of $65.0 million. As a result, White Mountains no longer has any ownership interest in the Company. As of December 31, 2006, White Mountains beneficially owned approximately 6.8% of the Company, assuming conversion of the warrants it held at that date. White Mountains currently provides the Company with investment advisory and management services.
 
Wilbur L. Ross, Jr., a Director of the Company, is Chairman and CEO of WL Ross & Co. LLC. Investment funds managed by WL Ross & Co. LLC owned 6.7% of the Company’s common shares and 9.8% of Blue Ocean’s common shares at June 30, 2007. Mr. Ross is also one of the five Directors of Blue Ocean.
 
During the three months ended June 30, 2007 and 2006, Blue Ocean Re incurred $2.3 million and $1.5 million in total fees (consisting of underwriting and performance fees), respectively, related to its Underwriting Agreement with MAL. During the six months ended June 30, 2007 and 2006, Blue Ocean Re incurred $6.6 million and $1.8 million in total fees (consisting of underwriting and performance fees), respectively, related to its Underwriting Agreement with MAL.
 
The Company ceded reinsurance premiums of $7.6 million and $7.8 million to Rockridge Reinsurance, Ltd. (“Rockridge”), an 11% owned, non-consolidated affiliate during the three and six months ended June 30, 2006, respectively. The premiums ceded by the Company represented 100% of the gross premiums written by Rockridge for these periods. During December 2006, Rockridge ceased its operations and returned 97% of its capital to investors and all of its unearned premium to the Company. The Company’s remaining capital will be returned when Rockridge is formally dissolved.


14


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   Shareholders’ Equity
 
The following table is a summary of the Company’s common shares issued and outstanding:
 
                 
    Six Months
    Twelve Months
 
    Ended
    Ended
 
    June 30,
    December 31,
 
    2007     2006  
 
Common shares outstanding — beginning of period
    111,775,682       89,178,490  
Issuances of common shares
          6,896,552  
Repurchases and retirements of common shares
    (939,039 )      
Director Share Plan issuances
    5,224       5,840  
Common shares issued (retired) under share issuance agreements
    (7,774,800 )     15,694,800  
                 
Common shares outstanding — end of period
    103,067,067       111,775,682  
                 
 
On May 1, 2007, the Company repurchased from White Mountains 939,039 of the Company’s common shares and 7,172,375.5 outstanding warrants for a total purchase price of $65.0 million. The common shares and warrants repurchased from White Mountains were retired. As a result of this transaction, the Company no longer has any warrants outstanding.
 
For the six months ended June 30, 2007 and the twelve months ended December 31, 2006, the Company issued 5,224 and 5,840 common shares, respectively, resulting from the conversion of Director Share Units (“DSUs”) to common shares.
 
In May 2007 the Company retired 7,774,800 common shares under the share issuance agreement and during 2006 the Company issued 15,694,800 common shares under the share issuance agreement, as further described below.
 
On May 25, 2006, the Company entered into a Purchase Agreement with WLR Recovery Fund, II, L.P. and WLR Recovery Fund III, L.P. for a private sale of 6,896,552 common shares at a price of $14.50 per common share. The first $50.0 million purchase of 3,448,276 common shares closed on June 1, 2006, and the second purchase of 3,448,276 common shares closed on June 28, 2006. The net proceeds after deducting estimated offering expenses of $0.4 million was approximately $99.6 million which has been used for general corporate purposes.
 
 
On May 31, 2006, the Company entered into two equity forward sale agreements under which the Company agreed to sell (subject to the Company’s right to elect cash settlement or net settlement) an aggregate of between 9,796,388 and 15,694,800 common shares to an affiliate of Credit Suisse Securities (USA) LLC (the “forward counterparty”) in exchange for proceeds of approximately $180 million. On March 1, 2007, the Company notified the forward counterparty of its election of net share settlement for the entire first equity forward sale agreement, which settled over 20 business days beginning March 8, 2007. In the course of the settlement, as the valuation price for each component was greater than the $11.75 forward floor price and less than the $18.465 forward cap price, no payments or deliveries were required to be made by us or the forward counterparty. As a result, there was no effect on the Company’s consolidated financial statements, fully converted book value per share or earnings per share resulting from the net share settlement.
 
During periods in which the Company’s average share price exceeds the forward cap price of $18.375 per share, the remaining equity forward sale agreement will have a dilutive impact on diluted earnings per share and, during periods in which the Company’s fully converted book value per share exceeds the forward cap price of $18.375 per share, the remaining forward sale agreement will have a dilutive impact on fully converted book value per share.


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In connection with, and at the same time as, entering into the equity forward sale agreements described above, the Company also entered into a share issuance agreement, dated May 31, 2006, with the forward counterparty. Under the terms of this share issuance agreement the Company was entitled to issue, for payment of the par value thereof, to the forward counterparty, up to 15,694,800 common shares, subject to the Company’s right to repurchase for cancellation an equal number of common shares for nominal consideration. As a result of the settlement of the first equity forward sale agreement, the Company repurchased and retired 7,774,800 of these shares on May 11, 2007.
 
Under the terms of the remaining share issuance agreement, the Company continues to have 7,920,000 common shares issued and outstanding at their par value of 1/6 cent per share. In view of the contractual undertakings of the forward counterparty in the share issuance agreement, which have the effect of substantially eliminating the economic dilution that otherwise would result from the issuance of the shares under the share issuance agreement, the Company believes that, under GAAP currently in effect, the common shares issued thereunder should not be considered outstanding for the purposes of computing and reporting earnings per share or fully converted book value per share.
 
 
The Company declared quarterly cash dividends of $.075 per common share and warrant outstanding for each of the three month periods ended June 30, 2007 and 2006, and declared quarterly cash dividends of $.15 per common share and warrant outstanding for each of the six month periods ended June 30, 2007 and 2006.
 
9.   Segment Reporting
 
The Company operates through two business segments, Rated Reinsurance and Insurance Business and Collateralized Property Catastrophe Retrocessional Business. The Company is a provider of rated global property and casualty reinsurance and insurance products. Blue Ocean is a provider of collateralized property catastrophe retrocessional reinsurance. Blue Ocean has recently ceased its writings and is in the process of returning its capital to shareholders. Barring a change in market conditions, Blue Ocean expects to substantially wind-up its operations this year.
 
During 2007, Blue Ocean paid $249.0 million in dividends and distributions to its common and preferred shareholders (of which the Company received $145.1 million) and repurchased $55.0 million of its preferred shares (of which the Company received $36.5 million).
 
The following table summarizes the identifiable assets by segment as of the periods indicated:
 
                 
    June 30,
    December 31,
 
    2007     2006  
 
Rated Reinsurance and Insurance Business
  $ 3,398.6     $ 3,388.6  
Collateralized Property Catastrophe Retrocessional Business
    251.8       510.2  
                 
Total
  $ 3,650.4     $ 3,898.8  
                 


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the statements of operations by segment for the three months ended June 30, 2007 and 2006 follows:
 
                                 
          Collateralized
             
    Rated
    Property
             
    Reinsurance
    Catastrophe
             
    and Insurance
    Retrocessional
    Consolidation/
       
Three Months Ended June 30, 2007
  Business     Business     Elimination     Total  
 
Gross premiums written
  $ 175.7     $ 12.5     $     $ 188.2  
                                 
Gross premiums earned
  $ 146.5     $ 16.2     $     $ 162.7  
Earned reinsurance premiums ceded
    (33.6 )                 (33.6 )
                                 
Net premiums earned
    112.9       16.2             129.1  
Loss and loss adjustment expenses
    (50.2 )                 (50.2 )
Acquisition costs
    (18.9 )     (0.9 )           (19.8 )
General and administrative expenses
    (20.1 )     (2.6 )     2.3       (20.4 )
                                 
Underwriting income
    23.7       12.7       2.3       38.7  
Net investment income
    30.2       5.0       (0.8 )     34.4  
Other revenue
    9.1             (7.9 )     1.2  
Interest and other financing expenses
    (6.4 )     (1.8 )           (8.2 )
Other non-underwriting expenses
    (2.9 )                 (2.9 )
                                 
Net income before investment gains and foreign
exchange(1)
    53.7       15.9       (6.4 )     63.2  
Net realized and unrealized losses on investments
    (4.9 )     (0.3 )           (5.2 )
Net foreign exchange gains
    1.9                   1.9  
                                 
Net income before minority interest
  $ 50.7     $ 15.6     $ (6.4 )   $ 59.9  
                                 
Minority interest expense — Blue Ocean
                            (9.2 )
                                 
Net income
                          $ 50.7  
Other comprehensive income items(2)
                            .8  
                                 
Comprehensive income
                          $ 51.5  
                                 
 
 
(1) Effective January 1, 2007, the Company elected to adopt FAS 159 for all of its marketable securities that were classified as available for sale at December 31, 2006. These marketable securities continue to be carried at fair value, based on quoted market prices; however, effective January 1, 2007, any unrealized gains or losses are now recorded as net realized and unrealized gains (losses) on investments in its consolidated statement of operation. Prior periods were not amended for this change.
 
(2) Relates to the Rated Reinsurance and Insurance Business segment only.
 


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                 
          Collateralized
             
    Rated
    Property
             
    Reinsurance
    Catastrophe
             
    and Insurance
    Retrocessional
    Consolidation/
       
Three Months Ended June 30, 2006
  Business     Business     Elimination     Total  
 
Gross premiums written
  $ 234.4     $ 61.8     $     $ 296.2  
                                 
Gross premiums earned
  $ 174.3     $ 18.1     $     $ 192.4  
Earned reinsurance premiums ceded
    (41.1 )                 (41.1 )
                                 
Net premiums earned
    133.2       18.1             151.3  
Loss and loss adjustment expenses
    (65.4 )                 (65.4 )
Acquisition costs
    (28.2 )     (1.7 )           (29.9 )
General and administrative expenses
    (14.7 )     (1.8 )     1.5       (15.0 )
                                 
Underwriting income
    24.9       14.6       1.5       41.0  
Net investment income
    27.6       3.6       (.8 )     30.4  
Other revenue
    10.3             (7.6 )     2.7  
Interest and other financing expenses
    (7.0 )                 (7.0 )
Other non-underwriting expenses
    (3.1 )                 (3.1 )
                                 
Net income before investment gains and foreign exchange
    52.7       18.2       (6.9 )     64.0  
Net realized and unrealized losses on investments
    (1.7 )     (0.8 )           (2.5 )
Net foreign exchange gains
    6.6                   6.6  
                                 
Net income before minority interest
  $ 57.6     $ 17.4     $ (6.9 )   $ 68.1  
                                 
Minority interest expense — Blue Ocean
                            (10.5 )
                                 
Net income
                          $ 57.6  
Other comprehensive income items(1)
                            5.6  
                                 
Comprehensive income
                          $ 63.2  
                                 
 
 
(1) Relates to the Rated Reinsurance and Insurance Business segment only.

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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
A summary of the statements of operations by segment for the six months ended June 30, 2007 and 2006 follows:
 
                                 
          Collateralized
             
    Rated
    Property
             
    Reinsurance
    Catastrophe
             
    and Insurance
    Retrocessional
    Consolidation/
       
Six Months Ended June 30, 2007
  Business     Business     Elimination     Total  
 
Gross premiums written
  $ 406.9     $ 42.3     $     $ 449.2  
                                 
Gross premiums earned
  $ 298.7     $ 38.7     $     $ 337.4  
Earned reinsurance premiums ceded
    (65.6 )                 (65.6 )
                                 
Net premiums earned
    233.1       38.7             271.8  
Loss and loss adjustment expenses
    (109.8 )                 (109.8 )
Acquisition costs
    (35.8 )     (2.5 )           (38.3 )
General and administrative expenses
    (35.3 )     (7.1 )     6.6       (35.8 )
                                 
Underwriting income
    52.2       29.1       6.6       87.9  
Net investment income
    57.4       11.8       (1.7 )     67.5  
Other revenue
    23.5             (20.2 )     3.3  
Interest and other financing expenses
    (13.0 )     (3.7 )           (16.7 )
Other non-underwriting expenses
    (5.8 )                 (5.8 )
                                 
Net income before investment gains and foreign
exchange(1)
    114.3       37.2       (15.3 )     136.2  
Net realized and unrealized gains on investments
    10.1                   10.1  
Net foreign exchange losses
    (0.4 )                 (0.4 )
                                 
Net income before minority interest
  $ 124.0     $ 37.2     $ (15.3 )     145.9  
                                 
Minority interest expense — Blue Ocean
                            (21.9 )
                                 
Net income
                          $ 124.0  
Other comprehensive income items(2)
                            0.1  
                                 
Comprehensive income
                          $ 124.1  
                                 
 
 
(1) Effective January 1, 2007, the Company elected to adopt FAS 159 for all of its marketable securities that were classified as available for sale at December 31, 2006. These marketable securities continue to be carried at fair value, based on quoted market prices; however, effective January 1, 2007, any unrealized gains or losses are now recorded as net realized and unrealized gains (losses) on investments in its consolidated statement of operations. Prior periods were not amended for this change.
 
(2) Relates to the Rated Reinsurance and Insurance Business segment only.
 


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                 
          Collateralized
             
    Rated
    Property
             
    Reinsurance
    Catastrophe
             
    and Insurance
    Retrocessional
    Consolidation/
       
Six Months Ended June 30, 2006
  Business     Business     Elimination     Total  
 
Gross premiums written
  $ 437.4     $ 83.7     $     $ 521.1  
                                 
Gross premiums earned
  $ 367.2     $ 22.4     $     $ 389.6  
Earned reinsurance premiums ceded
    (106.9 )                 (106.9 )
                                 
Net premiums earned
    260.3       22.4             282.7  
Loss and loss adjustment expenses
    (116.3 )                 (116.3 )
Acquisition costs
    (61.8 )     (2.0 )           (63.8 )
General and administrative expenses
    (29.2 )     (2.3 )     1.8       (29.7 )
                                 
Underwriting income
    53.0       18.1       1.8       72.9  
                                 
Net investment income
    54.0       6.9       (1.7 )     59.2  
Other revenue
    11.7             (8.8 )     2.9  
Interest and other financing expenses
    (14.1 )                 (14.1 )
Other non-underwriting expenses
    (7.9 )                 (7.9 )
                                 
Net income before investment gains and foreign exchange
    96.7       25.0       (8.7 )     113.0  
Net realized and unrealized losses on investments
    (6.4 )     (2.9 )           (9.3 )
Net foreign exchange gains
    7.1                   7.1  
                                 
Net income before minority interest
  $ 97.4     $ 22.1     $ (8.7 )   $ 110.8  
                                 
Minority interest expense — Blue Ocean
                            (13.4 )
                                 
Net income
                          $ 97.4  
                                 
Other comprehensive income items(1)
                            14.3  
                                 
Comprehensive income
                          $ 111.7  
                                 
 
 
(1) Relates to the Rated Reinsurance and Insurance Business segment only.

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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables set forth a breakdown of the Company’s gross premiums written by line of business and by geographic area of risks insured for the periods indicated:
 
 
                                 
    Three Months Ended June 30,  
    2007     2006  
 
Rated Reinsurance and Insurance Business
                               
Property Catastrophe
  $ 116.6       62.0 %   $ 127.7       43.1 %
Property Specialty
    34.0       18.1       65.3       22.0  
Other Specialty
    25.1       13.3       41.4       14.0  
                                 
Total Rated Reinsurance and Insurance Business
    175.7       93.4 %     234.4       79.1 %
                                 
Collateralized Property Catastrophe Retrocessional Business
    12.5       6.6       61.8       20.9  
                                 
Total Gross Premiums
  $ 188.2       100.0 %   $ 296.2       100.0 %
                                 
 
                                 
    Six Months Ended June 30,  
    2007     2006  
 
Rated Reinsurance and Insurance Business
                               
Property Catastrophe
  $ 267.9       59.7 %   $ 223.9       43.0 %
Property Specialty
    79.1       17.6       129.6       24.9  
Other Specialty
    59.9       13.3       83.9       16.1  
                                 
Total Rated Reinsurance and Insurance Business
    406.9       90.6 %     437.4       84.0 %
                                 
Collateralized Property Catastrophe Retrocessional Business
    42.3       9.4       83.7       16.0  
                                 
Total Gross Premiums
  $ 449.2       100.0 %   $ 521.1       100.0 %
                                 
 
 
                                 
    Three Months Ended June 30,  
    2007     2006  
 
Rated Reinsurance and Insurance Business
                               
USA and Canada
  $ 113.0       64.3 %   $ 168.0       71.7 %
Worldwide(1)
    27.5       15.7       32.4       13.8  
Japan
    15.5       8.8       21.6       9.2  
Western Europe, excluding the United Kingdom and Ireland
    4.1       2.3       2.0       0.9  
United Kingdom and Ireland
    3.6       2.0       2.4       1.0  
Worldwide, excluding USA and Canada(2)
    1.3       0.7       3.8       1.6  
Others (2.5% or less)
    10.7       6.2       4.2       1.8  
                                 
Total Rated Reinsurance and Insurance Business
  $ 175.7       100.0 %   $ 234.4       100.0 %
                                 
 


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                 
    Three Months Ended June 30,  
    2007     2006  
 
Collateralized Property Catastrophe Retrocessional Business
                               
Worldwide(1)
  $ 8.8       70.4 %   $ 40.3       65.2 %
Caribbean
    1.9       15.2              
Worldwide, excluding USA and Canada(2)
    1.1       8.8       2.2       3.6  
USA and Canada
    0.7       5.6       19.3       31.2  
                                 
Total Collateralized Property Catastrophe Retrocessional Business
  $ 12.5       100.0 %   $ 61.8       100.0 %
                                 
 
 
(1) “Worldwide” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area and do not specifically exclude the USA and Canada.
 
(2) “Worldwide, excluding USA and Canada” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area but specifically exclude the USA and Canada.
 
                                 
    Six Months Ended June 30,  
    2007     2006  
 
Rated Reinsurance and Insurance Business
                               
USA and Canada
  $ 210.0       51.6 %   $ 291.7       66.7 %
Worldwide(1)
    66.1       16.2       60.5       13.8  
Western Europe, excluding the United Kingdom and Ireland
    46.1       11.3       18.2       4.2  
Worldwide, excluding USA and Canada(2)
    20.6       5.1       17.1       3.9  
Japan
    18.1       4.5       25.2       5.8  
United Kingdom and Ireland
    17.1       4.2       5.0       1.1  
Others (2.5% or less)
    28.9       7.1       19.7       4.5  
                                 
Total Rated Reinsurance and Insurance Business
  $ 406.9       100.0 %   $ 437.4       100.0 %
                                 
 
                                 
    Six Months Ended June 30,  
    2007     2006  
 
Collateralized Property Catastrophe Retrocessional Business
                               
Worldwide(1)
  $ 20.6       48.7 %   $ 42.7       51.0 %
USA and Canada
    18.7       44.2       21.1       25.2  
Caribbean
    1.9       4.5       13.9       16.6  
Worldwide, excluding USA and Canada(2)
    1.1       2.6       6.0       7.2  
                                 
Total Collateralized Property Catastrophe Retrocessional Business
  $ 42.3       100.0 %   $ 83.7       100.0 %
                                 
 
 
(1) “Worldwide” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area and do not specifically exclude the USA and Canada.
 
(2) “Worldwide, excluding USA and Canada” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area but specifically exclude the USA and Canada.

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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
10.   Earnings Per Share
 
During 2007, the Company modified its method of calculating basic and diluted earnings per share. In determining the basic earnings per share numerator, dividends declared on outstanding warrants are deducted from net income. In the diluted earnings per share calculation, this same adjustment is made provided that the result is more dilutive than if the Company were simply to include the average number of warrants outstanding during the period to the diluted earnings per share denominator (as computed using the treasury stock method). Prior periods have been revised to reflect this approach, resulting in a reduction in basic and diluted earnings per share of $.01 for the three months ended June 30, 2006 and a reduction in basic earnings per share of $.01 for the six months ended June 30, 2006. There was no change to diluted earnings per share for the six months ended June 30, 2006.
 
The following tables outline the Company’s calculations of basic and diluted earnings per share for the three and six month periods ending June 30, 2007 and 2006:
 
                 
    Three Months Ended June 30,  
    2007     2006  
 
Basic earnings per share:
               
Net income
  $ 50.7     $ 57.6  
Less: dividends declared on outstanding warrants
          (0.5 )
                 
Earnings per share numerator
  $ 50.7     $ 57.1  
Average common shares outstanding
    105,971,680       95,411,591  
Less: average common shares issued under share issuance agreement(1)
    (10,511,600 )     (3,933,333 )
                 
Basic earnings per share denominator
    95,460,080       91,478,258  
Basic earnings per share
  $ .53     $ .62  
                 
                 
                 
                 
Diluted earnings per share:
               
Earnings per share numerator
  $ 50.7     $ 57.1  
Average common shares outstanding
    105,971,680       95,411,591  
Dilutive effect of share obligations under benefit plans(2)
    366,378       79,263  
Dilutive effect of the equity forward share agreement(1)
    2,198        
Less: average common shares issued under share issuance agreement(1)
    (10,511,600 )     (3,933,333 )
                 
Diluted earnings per share denominator
    95,828,656       91,557,521  
Diluted earnings per share
  $ .53     $ .62  
                 
 


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                 
    Six Months Ended June 30,  
    2007     2006  
 
Basic earnings per share:
               
Net income
  $ 124.0     $ 97.4  
Less: dividends declared on outstanding warrants
    (0.5 )     (1.0 )
                 
Earnings per share numerator
  $ 123.5     $ 96.4  
Average common shares outstanding
    108,874,901       92,295,346  
Less: average common shares issued under share issuance agreement(1)
    (13,103,200 )     (1,966,666 )
                 
Basic earnings per share denominator
    95,771,701       90,328,680  
Basic earnings per share
  $ 1.29     $ 1.07  
                 
                 
Diluted earnings per share:
               
Earnings per share numerator
  $ 123.5     $ 96.4  
Average common shares outstanding
    108,874,901       92,295,346  
Dilutive effect of share obligations under benefit plans(2)
    181,049       81,539  
Less: effect of common shares issued under share issuance agreement(1)
    (13,103,200 )     (1,966,666 )
                 
Diluted earnings per share denominator
    95,952,750       90,410,219  
Diluted earnings per share
  $ 1.29     $ 1.07  
                 
 
 
(1) See Note 8 for a discussion of the Company’s equity forward share agreement and share issuance agreement.
 
(2) Represents the dilutive effects of Restricted Stock Units (“RSUs”) and DSUs. The average number of RSUs outstanding have been reduced by the amount of unrecognized compensation cost for the periods presented using the treasury stock method.
 
11.   Commitments and Contingent Liabilities
 
 
Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of investments, cash and cash equivalents and reinsurance recoverable. The investment portfolio is managed in a diversified manner with restrictions on the allowable holdings of a single issue or issuer. The Company believes that there are no significant concentrations of credit risk within its investment portfolio other than concentrations in government and government-sponsored enterprises. The Company did not own an aggregate investment in a single entity, other than the U.S. government and U.S. government-sponsored enterprises, in excess of 10% of the Company’s shareholders’ equity at June 30, 2007 and 2006. U.S. government-sponsored enterprises do not have the full and complete support of the U.S. government and, therefore, the Company faces credit risk in respect of these holdings.
 
The Company underwrites the majority of its business through brokers and credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of reinsurance and insurance balances to the Company. Concentrations of credit risk with respect to reinsurance recoverable are described in Note 3.

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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The Company and its subsidiaries, in common with the insurance and reinsurance industry in general, are subject to litigation and arbitration in the normal course of its business. The Company was not involved in any material pending litigation or arbitration proceedings at June 30, 2007.
 
 
During 2007, the Company, through MCA, committed to invest $10.0 million in a U.S. private equity fund. As of June 30, 2007, $2.4 million of this amount had been funded.
 
12.   Statutory Requirements
 
Montpelier Re is registered under The Insurance Act 1978 (Bermuda), Amendments Thereto and Related Regulations (the “Act”) as a Class 4 insurer. Under the Act, Montpelier Re is required to annually prepare and file statutory financial statements and a statutory financial return. The Act also requires Montpelier Re to maintain a minimum share capital of $1.0 million and to meet a minimum solvency margin equal to the greater of $100.0 million, 50% of net premiums written or 15% of the loss and loss adjustment expense reserves. For all periods presented herein, Montpelier Re satisfied these requirements.
 
Blue Ocean Re is registered under the Act as a Class 3 insurer. Under the Act, Blue Ocean Re is required to annually prepare and file statutory financial statements and a statutory financial return. The Act also requires Blue Ocean Re to meet minimum capital and surplus requirements equal to the greater of $1.0 million, 20% of the first $6.0 million of net premiums written and 15% of the net premiums written in excess of $6.0 million or 15% of the reserve for loss and loss adjustment expenses. For all periods presented herein, Blue Ocean Re satisfied these requirements.
 
Montpelier Re and Blue Ocean Re are also required to maintain minimum liquidity ratios, which were met by Montpelier Re and Blue Ocean Re for all periods presented herein.
 
The Act limits the maximum amount of annual dividends or distributions paid by Montpelier Re to the Company without the prior notification to, and in certain cases the approval of, the Bermuda Monetary Authority of such payment.
 
The Bermuda Companies Act 1981 (the “Companies Act”) limits the Company’s ability to pay dividends to shareholders.
 
13.   Share-Based Compensation
 
The Montpelier Long-Term Incentive Plan (the “LTIP”) is the Company’s primary long-term incentive plan for key employees of the Company and its subsidiaries. At the discretion of the Board’s Compensation and Nominating Committee (the “Committee”), incentive awards, the value of which is based on the Company’s common shares, may be made to plan participants. Currently, the Company’s share-based incentive awards under the LTIP consist of awards of performance shares, RSUs and DSUs.
 
 
Since 2005, performance shares have been a significant element of the Company’s LTIP awards in terms of prospective value. Each performance share represents the fair value of a common share. At the end of a performance period, which is generally the three-year period following the date of grant, a plan participant may receive a harvest of between zero and 200% of the performance shares granted depending on the achievement of specific performance criteria relating to the operating and financial performance of the Company over the period. At the discretion of the Committee, any final payment in respect of such a grant may take the form of cash, common shares or a combination of both.


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For all currently outstanding performance share awards, the primary performance target for a 100% harvest ratio of performance shares is the achievement of an underwriting return on an internally generated risk-based capital measure of 16% over the period. Additionally, the performance of certain members of senior management is further measured by reference to the ratio of the actual return on equity to the return on risk-based capital.
 
The following table summarizes the Company’s performance share activity for the three and six months ended June 30, 2007 and 2006:
 
                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
    Performance
    Accrued
    Performance
    Accrued
    Performance
    Accrued
    Performance
    Accrued
 
    Shares     Expense     Shares     Expense     Shares     Expense     Shares     Expense  
 
Beginning of period
    744,000     $ 1.7       567,000     $ 0.4       572,000     $ 1.1       400,000     $  
Payments
                                               
New awards
                            172,000             167,000        
Cancellations
    (400,000 )                       (400,000 )                  
Expense recognized
          1.5             0.2             2.1             0.6  
                                                                 
End of period
    344,000     $ 3.2       567,000     $ 0.6       344,000     $ 3.2       567,000     $ 0.6  
                                                                 
 
On April 2, 2007, 400,000 performance shares previously issued under the 2005-2007 period were cancelled without payment as there was no expected payout related to this performance period due to the adverse financial effects of the severe hurricanes that occurred during 2005.
 
The following table summarizes performance shares outstanding and the accrued performance share expense at June 30, 2007, for each performance cycle:
 
                 
    Performance
       
    Shares
    Accrued
 
    Outstanding     Expense  
 
Performance cycle:
               
2006 — 2008
    172,000     $ 2.7  
2007 — 2009
    172,000       0.5  
                 
Total at June 30, 2007
    344,000     $ 3.2  
                 
 
If 100% of the outstanding performance shares had been vested on June 30, 2007, the total additional compensation cost to be recognized would have been $5.4 million based on current accrual factors (share price and payout assumptions).
 
 
Since 2006, RSUs have also been a significant element of the Company’s LTIP awards in terms of prospective value. RSUs are phantom restricted shares which vest ratably in equal tranches, typically over three-to-five year periods, subject to the employee remaining employed by the Company at the applicable vesting date. RSUs are payable in common shares at the end of the RSU term. Holders of RSUs are not entitled to voting rights but are entitled to receive cash dividends.


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MONTPELIER RE HOLDINGS LTD.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table outlines the Company’s RSU activities for the three and six months ended June 30, 2007 and 2006:
 
                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
          Unamortized
          Unamortized
          Unamortized
          Unamortized
 
          Grant
          Grant
          Grant
          Grant
 
          Date
          Date
          Date
          Date
 
    Restricted
    Fair
    Restricted
    Fair
    Restricted
    Fair
    Restricted
    Fair
 
    Shares     Value     Shares     Value     Shares     Value     Shares     Value  
 
Beginning of period
    898,332     $ 9.3       452,500     $ 6.7       456,000     $ 3.0           $  
Granted
    30,000       0.5                   481,000       8.5       452,500       7.9  
Paid
                                               
Forfeitures
    (27,000 )           (17,000 )           (35,668 )           (17,000 )      
Expense recognized
          (1.8 )           (1.2 )           (3.5 )           (2.4 )
                                                                 
End of period
    901,332     $ 8.0       435,500     $ 5.5       901,332     $ 8.0       435,500     $ 5.5  
                                                                 
 
In determining the initial grant date fair value of RSUs, the Company assumes a 3% forfeiture rate. Actual forfeitures are periodically compared to assumed forfeitures for reasonableness.
 
As of June 30, 2007, 125,167 of the total outstanding RSUs were vested. Vested RSUs remain outstanding until the completion of the full anniversary period of the RSU award, continue to receive cash dividends and are subject to cancellation in the event of a termination for cause.
 
The following table summarizes RSUs outstanding and the unamortized grant date fair value of such RSUs at June 30, 2007, for each vesting period:
 
                 
          Unamortized
 
    RSUs
    Grant Date Fair
 
    Outstanding     Value  
 
Vesting period:
               
2006 — 2008
    439,332     $ 2.0  
2007 — 2009
    432,000       5.5  
2007 — 2011
    30,000       0.5  
                 
Total at June 30, 2007
    901,332     $ 8.0  
                 
 
 
All non-management directors are eligible to voluntarily participate in the Director Share Plan. Eligible directors who elect to participate receive, in lieu of a portion of their annual cash retainer, a number of DSUs of the same dollar value based on the value of common shares at that date. DSUs comprise a contractual right to receive common shares, or an equivalent amount of cash, upon termination of service as a director. In addition, while the DSUs are outstanding, they are credited with dividend equivalents. The Company incurred an expense of $0.1 million for each of the six months ended June 30, 2007 and 2006, in connection with the Director Share Plan.


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
The following is a discussion and analysis of our results of operations for the three and six months ended June 30, 2007 and 2006 and our financial condition as of June 30, 2007. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission.
 
This discussion contains forward-looking statements within the meaning of the United States (the “U.S.”) Federal securities laws, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, that are not historical facts, including statements about our beliefs and expectations. These statements are based upon current plans, estimates and projections. Forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and various risk factors, many of which are outside the Company’s control, that could cause actual results to differ materially from such statements. See “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission and as amended herein in Part II, Item 1A. 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.
 
Important events and uncertainties that could cause the actual results, future dividends or future common share repurchases to differ include, but are not necessarily limited to: market conditions affecting our common share price; the possibility of severe or unanticipated losses from natural or man-made catastrophes; the effectiveness of our loss limitation methods; our dependence on principal employees; our ability to execute the business plan for Montpelier Syndicate 5151 effectively, including the integration of those operations into our existing operations; increases in our general and administrative expenses due to new business ventures, which expenses may not be recoverable through additional profits; the cyclical nature of the reinsurance business; the levels of new and renewal business achieved; opportunities to increase writings in our core property and specialty reinsurance and insurance lines of business and in specific areas of the casualty reinsurance market; the sensitivity of our business to financial strength ratings established by independent rating agencies; the estimates reported by cedants and brokers on pro-rata contracts and certain excess of loss contracts where the deposit premium is not specified in the contract; the inherent uncertainties of establishing reserves for loss and loss adjustment expenses, particularly on longer-tail classes of business such as casualty; our reliance on industry loss estimates and those generated by modeling techniques; unanticipated adjustments to premium estimates; changes in the availability, cost or quality of reinsurance or retrocessional coverage; changes in general economic conditions; changes in governmental regulation or tax laws in the jurisdictions where we conduct business; our ability to assimilate effectively the additional regulatory issues created by our entry into new markets; the amount and timing of reinsurance recoverables and reimbursements we actually receive from our reinsurers; the overall level of competition, and the related demand and supply dynamics in our markets relating to growing capital levels in the reinsurance industry; declining demand due to increased retentions by cedants and other factors; the impact of terrorist activities on the economy; and rating agency policies and practices.
 
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.
 
 
 
We ended the second quarter of 2007 with a fully converted book value per share of $16.04, an increase of 0.2% for the past three months, 4.8% for the past six months and 25.9% for the past twelve months, inclusive of dividends.
 
During the second quarter of 2007, our operations provided $0.48 to our fully converted book value per share which was offset by a decrease of $0.52 resulting from our repurchase of 939,039 common shares and 7,172,375.5


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warrants to acquire common shares from White Mountains Insurance Group, Ltd. for a total purchase price of $65.0 million. We believe that this repurchase of common shares and warrants will provide an attractive return to our shareholders over time.
 
Comprehensive income for the second quarter of 2007 was $51.5 million compared to $63.2 million for the second quarter of 2006. Our GAAP combined ratio was 70.0% for the 2007 second quarter as compared to 72.9% for the second quarter of 2006.
 
Comprehensive income for the first six months of 2007 was $124.1 million compared to $111.7 million for the first six months of 2006. Our GAAP combined ratio was 67.7% for the first six months of 2007 as compared to 74.3% for the first six months of 2006.
 
 
We manage certain quantifiable key risks using internally developed and third party vendor models. Below we show our exposures as of recent dates for three of the internal measures we use.
 
I. Gross Reinsurance Treaty Zonal Contract Limits
 
We track our gross reinsurance treaty contract limits exposed to a single natural perils occurrence within defined major catastrophe zones. This measure includes all contracts limits assumed through property reinsurance treaties, other specialty reinsurance treaties and event-linked insurance derivatives, but excludes limits relating to individual risk insurance business and the benefit of any reinsurance protections the Company has purchased. As of June 1, 2007, our largest single zonal concentration was European windstorm (consisting of the United Kingdom, Ireland, Germany, France, the Benelux countries, Switzerland, Denmark, Norway and Sweden) at $1,327 million on a gross basis. Our largest U.S. single zonal concentration was Florida/Northeast Clash which was $1,189 million on a gross basis.
 
II. Single Event Probable Maximum Net Loss
 
For certain defined natural catastrophe region and peril combinations, we track the average of our modeled single event net loss for the worst 1% of our simulated distribution, which is approximately the equivalent of a simulated 1 in 250 year event. The modeled net loss estimate from a single event includes contributions from our entire portfolio of insurance policies, reinsurance protections the Company has purchased and event-linked derivative securities, but excludes any potential benefit arising from reinstatement premiums. As of June 1, 2007, our single largest peak zone was European windstorm at $682 million.
 
III. Enterprise-Wide Risks
 
We measure enterprise-wide risk using a simulated annual aggregate operating result approach. This approach estimates a net operating result over simulated annual return periods including contributions from certain variables such as aggregate premiums, losses, expenses, and investment results. Based on our April 1, 2007 in force portfolio, the average of our modeled net operating loss for the worst 1% of our simulated annual periods, which is approximately the equivalent of a simulated 1 in 250 year event, was $623 million.
 
Our catastrophe and enterprise-wide risk management metrics entail significant estimates, judgments and uncertainties. Please see our “Risk Factors” in Part II, Item 1A herein.
 
 
Pricing in most insurance and reinsurance markets is generally cyclical in nature. In 2006 we saw significant price increases in U.S. peak property zones, particularly on business exposed to hurricanes and earthquakes. These increases were a result of the catastrophic hurricanes that occurred in 2004 and 2005. The large industry losses caused by these events led to an increase in perceived catastrophe risk by market participants, catastrophe modeling firms and rating agencies which directly and indirectly led to increased prices.
 
Outside of property business in U.S. peak zones, pricing during 2006 was mixed as we observed instances of upward price movement and, more frequently, price decreases.


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We expect a downward trend in virtually all insurance and reinsurance markets to continue due to increasing competition from the private sector and, for catastrophe prone business, the impact of certain governmental initiatives that have occurred or may occur.
 
In anticipation of a weakening underwriting environment over the course of 2007, particularly with respect to our core short-tail lines, we allocated more capacity to January renewals in 2007 than in 2006, reversing the approach we adopted in 2006 when we held back capacity at the January renewal period and deployed more capacity mid-year. For that reason, we wrote significantly less premium during the second quarter of 2007, versus the comparable 2006 period, and we expect to write less premium during the balance of 2007 than in 2006.
 
The most significant decline for us has been in the writing of collateralized property catastrophe retrocessional business in Blue Ocean. This was the first segment to show significant increases following the 2005 catastrophes and likewise, its pricing has deteriorated most rapidly. In the second quarter of 2007, Blue Ocean wrote minimal business and for the remainder of the year we anticipate Blue Ocean will write no business.
 
Although current rate levels remain healthy overall, competition continues to increase and we anticipate our total 2007 premium volume to decline versus that in 2006.
 
 
On June 19, 2007, we announced that we had received approval from Lloyd’s for the commencement of trading on July 1, 2007 of a new syndicate to be known as Montpelier Syndicate 5151 (“Syndicate 5151”). Syndicate 5151 will underwrite primarily short tail lines, mainly property insurance and reinsurance, engineering and specialty casualty classes sourced from the London, U.S. and European markets. Stamp capacity for 2007 is set at £47 million, but is planned to increase to £143 million in 2008, subject to market conditions. Stamp capacity is a measure of the amount of premium a syndicate is authorized to write by Lloyd’s and is the basis on which it must pay subscriptions and contributions.
 
One of the early initiatives of Syndicate 5151 will be to accept business from our newly formed U.S. managing general agent, Montpelier Underwriting Inc. (“MUI”). 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 that we underwrite.
 
A significant source of the funds to be provided to Lloyd’s is a $117.8 million capital distribution we received from Blue Ocean during the 2007 second quarter.
 
On May 25, 2007, it was announced that our wholly-owned subsidiary, Montpelier Capital Advisors, Ltd. (“MCA”), will serve as sub-adviser to the Pioneer Diversified High Income Trust, a publicly traded closed-end fund (the “Pioneer Fund”) offering investors event-linked bonds, known as catastrophe bonds. The Company will not be an investor in the Pioneer Fund and expects to earn a limited amount of fee income in future periods as its sub-advisor.
 
On July 23, 2007, the Company announced that it is forming Montpelier Europa AG, a Swiss company based in Zug, Switzerland, to provide marketing services to Syndicate 5151. Montpelier Europa AG will also support the Company’s existing regional marketing effort in respect of certain established lines of business. Montpelier Europa AG is expected to commence operations on September 1, 2007, and will focus its efforts on Continental Europe and the Middle East. The United Kingdom, France and the Benelux countries will continue to be serviced out of the Company’s existing marketing office in London.
 
Due to the nature and timing of these new initiatives, they are not expected to have a significant impact on our consolidated revenues for 2007. However, we are in the process of building an infrastructure to support these activities which will cause our general and administrative expenses for the remainder of 2007 to increase.


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Book Value Per Share
 
The following table presents our book value per share and fully converted book value per share:
 
                                 
    June 30,
    March 31,
    Dec. 31,
    June 30,
 
    2007     2007     2006     2006  
 
Common Shareholders’ Equity
  $ 1,540.6     $ 1,559.6     $ 1,492.9     $ 1,255.5  
                                 
Book value per share denominators (thousands of shares):
                               
Common shares outstanding
    103,067       111,778       111,776       107,876  
Common shares subject to share issuance agreements(1)
    (7,920 )     (15,695 )     (15,695 )     (11,800 )
                                 
Book value per share denominator
    95,147       96,083       96,081       96,076  
Common share obligations under benefit plans
    920       929       474       478  
                                 
Fully converted book value per share denominator
    96,067       97,012       96,555       96,554  
                                 
Book value per share
  $ 16.19     $ 16.23     $ 15.54     $ 13.07  
                                 
Fully converted book value per share
  $ 16.04     $ 16.08     $ 15.46     $ 13.00  
                                 
Change in fully converted book value per share from March 31, 2007(2)
    0.2 %                        
Change in fully converted book value per share from December 31, 2006(2)
    4.8 %                        
Change in fully converted book value per share from June 30, 2006(2)
    25.9 %                        
 
 
(1) Under the terms of the remaining share issuance agreement, we continue to have 7,920,000 common shares issued and outstanding. In view of the contractual undertakings of the forward counterparty in the share issuance agreement, which have the effect of substantially eliminating the economic dilution that would otherwise result from the issuance such shares, we do not consider these shares outstanding for purposes of this computation.
 
(2) Computed as the internal rate of return of the change in fully converted book value per share, as adjusted for dividends declared.
 
We believe that fully converted book value per share and the change in fully converted book value per share adjusted for dividends are measurements which are important to investors and other interested parties who benefit from having an objective and consistent basis for comparison with other companies within the industry.


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Consolidated Results of Operations
 
Our consolidated financial results for the three and six months ended June 30, 2007 and 2006 are as follows:
 
                                 
    Three Months
    Six Months
 
    Ended
    Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
    ($ in millions)  
 
Gross premiums written
  $ 188.2     $ 296.2     $ 449.2     $ 521.1  
Reinsurance premiums ceded
    (21.6 )     (24.3 )     (93.3 )     (103.5 )
                                 
Net premiums written
    166.6       271.9       355.9       417.6  
Change in net unearned premiums
    (37.5 )     (120.6 )     (84.1 )     (134.9 )
                                 
Net premiums earned
    129.1       151.3       271.8       282.7  
Net investment income
    34.4       30.4       67.5       59.2  
Net realized and unrealized gains (losses) — trading securities
    (5.2 )     (1.3 )     10.1       (3.4 )
Net realized losses — available for sale securities
          (1.2 )           (5.9 )
Net foreign exchange gains (losses)
    1.9       6.6       (.4 )     7.1  
Other revenue
    1.2       2.7       3.3       2.9  
                                 
Total revenues
    161.4       188.5       352.3       342.6  
                                 
Underwriting expenses:
                               
Loss and loss adjustment expenses — current year losses
    69.8       48.9       137.5       115.5  
Loss and loss adjustment expenses — prior year losses
    (19.6 )     16.5       (27.7 )     0.8  
Acquisition costs
    19.8       29.9       38.3       63.8  
General and administrative expenses
    20.4       15.0       35.8       29.7  
Non-underwriting expenses:
                               
Interest and other financing expenses
    8.2       7.0       16.7       14.1  
Other non-underwriting expenses
    2.9       3.1       5.8       7.9  
                                 
Total expenses
    101.5       120.4       206.4       231.8  
                                 
Income before minority interest expense
    59.9       68.1       145.9       110.8  
Minority interest expense — Blue Ocean
    (9.2 )     (10.5 )     (21.9 )     (13.4 )
                                 
Net income
    50.7       57.6       124.0       97.4  
                                 
Other comprehensive income items
    0.8       5.6       0.1       14.3  
                                 
Comprehensive income
  $ 51.5     $ 63.2     $ 124.1     $ 111.7  
                                 
                                 
Loss and loss adjustment expense ratio
    38.8 %     43.2 %     40.4 %     41.2 %
Acquisition costs ratio
    15.4 %     19.8 %     14.1 %     22.6 %
General and administrative expense ratio
    15.8 %     9.9 %     13.2 %     10.5 %
                                 
GAAP combined ratio
    70.0 %     72.9 %     67.7 %     74.3 %
                                 
 
 
We operate through two business segments, Rated Reinsurance and Insurance Business and Collateralized Property Catastrophe Retrocessional Business. The Company is a provider of rated global property and casualty reinsurance and insurance products. Blue Ocean is a provider of collateralized property catastrophe retrocessional reinsurance. Blue Ocean has ceased writing business and is currently in the process of returning capital to its shareholders.


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During 2007, Blue Ocean paid a total of $249.0 million in dividends and distributions to its common and preferred shareholders (of which the Company received $145.1 million) and repurchased a total of $55.0 million of its preferred shares (of which the Company received $36.5 million).
 
Rated Reinsurance and Insurance Business
 
Underwriting results for our Rated Reinsurance and Insurance Business segment for the three and six months ended June 30, 2007 and 2006 are as follows:
 
                                 
          Six Months
 
    Three Months Ended
    Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
    ($ in millions)  
 
Gross premiums written
  $ 175.7     $ 234.4     $ 406.9     $ 437.4  
                                 
Gross premiums earned
  $ 146.5     $ 174.3     $ 298.7     $ 367.2  
Earned reinsurance premiums ceded
    (33.6 )     (41.1 )     (65.6 )     (106.9 )
                                 
Net premiums earned
    112.9       133.2       233.1       260.3  
Loss and loss adjustment expenses — current year losses
    (69.8 )     (48.9 )     (137.5 )     (115.5 )
Loss and loss adjustment expenses — prior year losses
    19.6       (16.5 )     27.7       (0.8 )
Acquisition costs
    (18.9 )     (28.2 )     (35.8 )     (61.8 )
General and administrative expenses
    (20.1 )     (14.7 )     (35.3 )     (29.2 )
                                 
Underwriting income
  $ 23.7     $ 24.9     $ 52.2     $ 53.0  
                                 
                                 
Loss and loss adjustment expense ratio
    44.5 %     49.1 %     47.1 %     44.6 %
Acquisition costs ratio
    16.7 %     21.2 %     15.4 %     23.8 %
General and administrative expense ratio
    17.8 %     11.0 %     15.1 %     11.2 %
                                 
GAAP Combined ratio
    79.0 %     81.3 %     77.6 %     79.6 %
                                 
 
Gross premiums written during the second quarter of 2007 were $175.7 million, a decrease of 25% compared to the second quarter of 2006. This significant decrease in premiums written is largely the result of the Company allocating more capital to the January 1, 2007 renewals than in 2006 which resulted in a heavier weighting of premiums being written in the first quarter of 2007 than in 2006. Gross premiums written during the first half of 2007 were $406.9 million, a decrease of 7% compared to the first half of 2006. This decrease in premiums written is primarily the result of the impact of recent changes to Florida legislation. Under the new legislation, state sponsored entities will significantly increase their assumption of property catastrophe risk in Florida, a significant market.
 
Underwriting income for the second quarter of 2007 was $23.7 million, which includes $30.5 million of net losses incurred due to the United Kingdom and Australian floods. Based on our portfolio mix, we expect the majority of the loss to come from the United Kingdom floods as opposed to Australia. These losses were offset in part by $19.6 million of favorable reserve development on prior year losses. Underwriting income for the first half of 2007 was $52.2 million, which includes the second quarter 2007 losses described above as well as $35.0 million of net losses relating to Windstorm Kyrill recorded during the first quarter of 2007. These losses were offset in part by $27.7 million of favorable reserve development on prior year losses.


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The following tables summarize our Rated Reinsurance and Insurance Business gross premiums, by line of business, for the three and six months ended June 30, 2007 and 2006:
 
                                 
    Three Months Ended June 30,  
    2007     2006  
    ($ in millions)  
 
Property Catastrophe
  $ 116.6       66.4 %   $ 127.7       54.5 %
Property Specialty
    34.0       19.4       65.3       27.9  
Other Specialty
    25.1       14.2       41.4       17.6  
                                 
Total Gross Premiums
  $ 175.7       100.0 %   $ 234.4       100.0 %
                                 
Total Gross Premiums (excluding reinstatement premiums)
  $ 174.8             $ 226.5          
                                 
 
                                 
    Six Months Ended June 30,  
    2007     2006  
    ($ in millions)  
 
Property Catastrophe
  $ 267.9       65.8 %   $ 223.9       51.2 %
Property Specialty
    79.1       19.5       129.6       29.6  
Other Specialty
    59.9       14.7       83.9       19.2  
                                 
Total Gross Premiums
  $ 406.9       100.0 %   $ 437.4       100.0 %
                                 
Total Gross Premiums (excluding reinstatement premiums)
  $ 403.2             $ 428.9          
                                 
 
We allocated more capacity to January renewals in 2007 than in 2006 and, as a result, we will write less mid-year renewals this year. For this reason, the amount of gross premiums written during the three months ended June 30, 2007, versus the same period in 2006, is not directly comparable.
 
During the six months ended June 30, 2007, our volume of gross premiums written decreased, as compared to the same period in 2006, mainly as a result of the following:
 
  •  A decline in Property Catastrophe premiums from recent legislation in Florida,
 
  •  A slight reduction in Property Catastrophe premiums written in order to reduce our gross and net exposures to U.S. peak zones, and
 
  •  A decline in casualty (Other Specialty) business written as rates have been declining and terms and conditions have weakened. Casualty business includes medical malpractice, specialized errors and omissions business and public liability and catastrophe and/or clash layers for general liability and retrocessional accounts, predominantly on an excess of loss basis.
 
During the six months ended June 30, 2007, our mix of gross premiums written also changed significantly, as compared to the same period in 2006, mainly as a result of a significant increase in excess of loss (Property Catastrophe) business written resulting from a repositioning of the portfolio towards a lower concentration of proportional treaty (Property Specialty) business.
 
Looking ahead to future periods, it remains difficult to predict the amount of annual premiums we will write. However, we do expect premium volumes to fall this year in many areas of our business.
 
Various factors will continue to affect our appetite and capacity to write risk. These include the impact of increasing frequency and severity assumptions used in our models and the corresponding pricing required to meet our return targets, evolving industry-wide capital requirements, increased competition, and other considerations. In addition, our mix of business will significantly affect our ultimate premium volume. For example, as noted above, we have replaced a substantial amount of our proportional treaty business with excess of loss business which will generate less premium per dollar of risk but has a higher expected profit margin. The level of reinstatement premiums received in future periods will also be dependent upon the volume of catastrophic losses that occur.


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The following table summarizes our earned reinsurance premiums ceded for the three and six months ended June 30, 2007 and 2006:
 
                                 
    Three Months
  Six Months
    Ended
  Ended
    June 30,   June 30,
    2007   2006   2007   2006
    ($ in millions)
 
Earned reinsurance premiums ceded
  $ 33.6     $ 41.1     $ 65.6     $ 106.9  
Earned reinsurance premiums ceded as a % of gross premiums earned
    20.7 %     21.4 %     19.4 %     27.4 %
 
In the normal course of our business, we purchase reinsurance in an opportunistic manner in order to manage our exposures. As a result, the amount and type of reinsurance that we enter into is dependent on a variety of factors, including the cost of a particular reinsurance cover and the nature of our gross premiums written during a particular period.
 
All of our reinsurance purchases to date have represented prospective cover; that is, ceded reinsurance purchased to protect us against the risk of future losses as opposed to covering losses that we have already occurred but have not paid. The majority of these contracts are excess of loss contracts covering one or more lines of business. To a lesser extent we have also purchased quota share reinsurance with respect to specific lines of business. We also purchase industry loss warranty policies which provide coverage for certain losses provided they are triggered by events exceeding a specified industry loss size.
 
During the three and six months ended June 30, 2006, we ceded earned reinsurance premiums to Rockridge Reinsurance, Ltd. (“Rockridge”), of $2.0 million and $3.6 million, respectively. During 2006, Rockridge ceased its operations and is in the process of returning its capital to shareholders.
 
Excluding any reinstatement premiums ceded related to catastrophes that may occur during 2007, we anticipate that our earned reinsurance premiums ceded for 2007 will be lower than in 2006.
 
In addition to the reinsurance described above, we also purchased fully-collateralized reinsurance-like coverage for losses sustained from qualifying hurricane and earthquake event loss events. We acquired this protection from Champlain Limited (“Champlain”), a Cayman Islands special purpose vehicle, which financed this coverage through the issuance of $90.0 million in catastrophe bonds to investors under two separate bond tranches, each of which matures on January 7, 2009. The first $75.0 million tranche covers large earthquakes affecting Japan and/or the U.S. The remaining $15.0 million coverage provides second event coverage for a U.S. hurricane or earthquake. Both tranches respond to parametric triggers, whereby payment amounts are determined on the basis of modeled losses incurred by a notional portfolio rather than by actual losses incurred by us. For that reason, this transaction is accounted for as a weather derivative, rather than a reinsurance transaction. With the exception of the accrual of contract costs associated with this instrument (which are included in other operating expenses), since no catastrophic event has occurred that would trigger a recovery, this transaction did not have an effect on our balance sheet at June 30, 2007.
 
 
Net premiums earned decreased during the three and six months ended June 30, 2007 as compared to 2006, and are expected to be lower for the remainder of 2007, mainly due to the decrease in gross premiums written as discussed above, partially offset by the expected decrease in outwards reinsurance purchased in 2007, as compared to 2006.


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Table of Contents

Loss and Loss Adjustment Expenses
 
The following table summarizes our net loss and loss adjustment expenses for the three and six months ended June 30, 2007 and 2006:
 
                                 
          Six Months
 
    Three Months Ended
    Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
    (millions)  
 
Loss and loss adjustment expenses — current year losses
  $ 69.8     $ 48.9     $ 137.5     $ 115.5  
Loss and loss adjustment expenses — prior year losses
    (19.6 )     16.5       (27.7 )     0.8  
                                 
Loss and loss adjustment expenses
  $ 50.2     $ 65.4     $ 109.8     $ 116.3  
                                 
 
Net loss and loss adjustment expenses relating to current year losses were $69.8 million and $48.9 million for the three months ended June 30, 2007 and 2006, respectively. The increase in current year losses in 2007, as compared to the 2006 period, is primarily the result of $30.5 million in net losses relating to the United Kingdom and Australian floods. We did not incur any individually significant catastrophic losses during the second quarter of 2006.
 
During the second quarter of 2007, we recorded $19.6 million of favorable loss development relating to prior year losses. During the second quarter of 2006, we recorded $16.5 million of unfavorable loss development relating to prior year losses.
 
Negative reinsurance recoveries of $(0.8) million and $(6.9) million, respectively, were included in loss and loss adjustment expenses for the three months ended June 30, 2007 and 2006, respectively. The negative reinsurance recovery for the three months ended June 30, 2006, was due to a reduction in the estimate of loss and loss adjustment expenses primarily related to hurricane Katrina.
 
Net loss and loss adjustment expenses relating to current year losses were $137.5 million and $115.5 million for the six months ended June 30, 2007 and 2006, respectively. The increase in current year losses in 2007, as compared to the 2006 period, is primarily the result of the second quarter 2007 losses described above, as well as $35.0 million of net losses relating to Windstorm Kyrill recorded during the first quarter of 2007. We did not incur any individually significant catastrophic losses during the first half of 2006.
 
Reinsurance recoveries of $6.0 million and $28.7 million, respectively, were netted against loss and loss adjustment expenses for the six months ended June 30, 2007 and 2006, respectively. The majority of our reinsurance recoveries in 2007 were from quota share protections related to 2006 and 2007 business. The majority of our reinsurance recoveries in 2006 related to the U.S. hurricanes which occurred during 2004 and 2005.
 
During the first half of 2007, we recorded $27.7 million of favorable loss development relating to prior year losses. During the first half of 2006, we recorded $0.8 million of unfavorable loss development relating to prior year losses.
 
The following table summarizes our net loss and loss adjustment expense ratios for the three and six months ended June 30, 2007 and 2006:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
 
Net loss and loss adjustment expense ratio — current year
    54.0 %     32.3 %     50.6 %     40.9 %
Net loss and loss adjustment expense ratio — prior year
    (15.2 )%     10.9 %     (10.2 )%     0.3 %
                                 
Net loss and loss adjustment expense ratio
    38.8 %     43.2 %     40.4 %     41.2 %
                                 


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The net favorable development we experienced during the three and six months ended June 30, 2007, relating to losses incurred in prior years, primarily resulted from the following:
 
  •  Net estimated ultimate Property Specialty losses for prior years decreased by $11.4 million and $22.0 million during the three and six months ended June 30, 2007, respectively, primarily as a result of claims emergence on our direct and facultative book of business being lower than expected and lower than expected ultimate losses on our proportional business. A significant portion of the Property Specialty favorable development recognized during the three months ended June 30, 2007, was a $5.8 million reduction in losses resulting from a fire claim that was settled for less than the reserve previously established.
 
  •  Net estimated ultimate Property Catastrophe losses for prior years decreased by $5.8 million and $3.3 million during the three and six months ended June 30, 2007, respectively, due mainly to decreases in our projected losses for hurricanes Katrina, Rita and Wilma, as well as some smaller events such as U.S. tornadoes.
 
  •  Net ultimate Other Specialty losses for prior years decreased by $2.4 million during the three and six months periods ended June 30, 2007. The favorable development related to many classes of business within our Other Specialty lines.
 
The net unfavorable development we experienced during the three and six months ended June 30, 2006, relating to losses incurred in prior years, primarily resulted from the following:
 
  •  Net estimated ultimate Property Catastrophe losses relating to prior years increased by $21.8 million and by $22.9 million during the three and six months ended June 30, 2006, respectively. The adverse development in the second quarter was primarily driven by an increase in losses relating to our retrocessional book of business for the 2005 hurricanes.
 
  •  Net estimated ultimate Property Specialty losses for prior years decreased by $9.7 million and $17.5 million during the three and six months ended June 30, 2006, respectively. The majority of the decrease in the second quarter was due to a reduction in the expected ultimate losses for property risk excess claims.
 
  •  Net estimated ultimate Other Specialty losses for prior years increased by $5.5 million and decreased by $1.1 million during the three and six months ended June 30, 2006, respectively. The reserve increase experienced within the Other Specialty category for the three months ended June 30, 2006, related to a large claim that was reported during the period from an explosion which occurred in December 2005.
 
  •  Net estimated ultimate qualifying quota share losses for prior years decreased by $1.1 million and $3.5 million during the three and six months ended June 30, 2006, which resulted in favorable commutations of such contracts during the respective periods.
 
The following tables present information regarding our gross and net loss and loss adjustment expense reserves by line of business for the six months ended June 30, 2007 ($ in millions):
 
 
                                         
    Gross
    Change in
    Gross
    Estimated
    Gross
 
    Reserves at
    Prior Years
    Losses Paid
    Ultimate
    Reserves at
 
    December 31,
    Estimates
    During
    Losses During
    June 30,
 
    2006     During 2007     2007     2007     2007  
 
Property Specialty
  $ 372.9     $ (22.2 )   $ (72.5 )   $ 31.9     $ 310.1  
Property Catastrophe
    388.6       (6.2 )     (112.1 )     85.0       355.3  
Other Specialty
    327.7       (2.9 )     (62.1 )     30.2       292.9  
                                         
Total
  $ 1,089.2     $ (31.3 )   $ (246.7 )   $ 147.1     $ 958.3  
                                         
 


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Table of Contents

                         
                Gross Loss and Loss
 
          Gross Case
    Adjustment Expense
 
    Gross IBNR at
    Reserves at
    Reserves at
 
    June 30, 2007     June 30, 2007     June 30, 2007  
 
Property Specialty
  $ 107.7     $ 202.4     $ 310.1  
Property Catastrophe
    183.3       172.0       355.3  
Other Specialty
    183.6       109.3       292.9  
                         
Total
  $ 474.6     $ 483.7     $ 958.3  
                         
 
Net Loss and Loss Adjustment Expense Reserves
 
                                         
    Net
    Change in
    Net
    Estimated
    Net
 
    Reserves at
    Prior Years
    Losses Paid
    Ultimate
    Reserves at
 
    December 31,
    Estimates
    During
    Losses During
    June 30,
 
    2006     During 2007     2007     2007     2007  
 
Property Specialty
  $ 271.6     $ (22.0 )   $ (47.4 )   $ 29.8     $ 232.0  
Property Catastrophe
    302.9       (3.3 )     (96.4 )     78.6       281.8  
Other Specialty
    317.4       (2.4 )     (62.3 )     29.1       281.8  
                                         
Total
  $ 891.9     $ (27.7 )   $ (206.1 )   $ 137.5     $ 795.6  
                                         
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
 
Net Loss Ratios:
                               
Property Specialty
    21.6 %