Montpelier Re Holdings Ltd. (MRH): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
We downgrade our recommendation on Montpelier to Neutral from Outperform due to a dismal second quarter results. Bottom line in the quarter missed the Zacks Consensus Estimate and was lower than the year-ago quarter earnings due to decline in the underwriting income that also led to deterioration in combined ratio.. Net investment income also continued to decline. However, the quarter witnessed solid contribution from Lloyd's and Collateralized Re segments as well as the benefit of prior-period development. Montpelier remains well positioned due to its increased exposure in the property catastrophe lines of business, augmenting capital flexibility, and strong competitive position. Moreover, the company remains committed to enhancing its shareholder value. It continuously engages in share buybacks. It also scores strongly with credit rating agencies.

Overview:

Montpelier Re Holdings Ltd. (MRH) was formed in 2001 by White Mountains Insurance Group Ltd. and Benfield Holdings Ltd., to take advantage of the enhanced insurance demand, following the Sep 11 terrorist attack. Headquartered in Pembroke, Bermuda, Montpelier, through its subsidiaries in the U.S., U.K. and Switzerland, provides customized and innovative reinsurance and insurance solutions to the global market. The company went public in Oct 2002. Montpelier started with $1.0 billion in capital. White Mountains, a property and casualty insurance and reinsurance company, contributed $200 million, Benfield invested $25 million, other private equity firms kicked in $625 million, and debt issued totaled $150 million. Benfield, which merged with Aon Re Global to form Aon Benfield in Dec 2008, is a premier reinsurance intermediary and capital advisor.

The company operates through four reportable segments and it had changed the names of its two reportable segments. These segments are Montpelier Bermuda, Montpelier at Lloyd's, MUSIC Run-Off and Collateralized Reinsurance. Montpelier at Lloyd's was previously known as Montpelier Syndicate 5151 and Collateralized Reinsurance as Blue Capital Segment.

Montpelier Bermuda (accounted for 59.9% of net premium written in 2013) focuses on writing large, short-tail U.S. and international catastrophe treaty reinsurance, on both an excess-of-loss and proportional basis. It specializes in insurance and facultative reinsurance business as well as specialty lines such as aviation, personal accident catastrophe, workers' compensation and political violence/terrorism. Its insurance and reinsurance products include Property Treaty, Specialty Casualty & Other Classes and Property Direct and Facultative. Prior to 2007, Montpelier Bermuda was the company's only operating platform and it continues to be its primary operating platform.

Montpelier at Lloyd's (35.6%) underwrites a book of property insurance and reinsurance, engineering, marine hull, cargo and specie and a limited amount of specialty casualty business with a view of capturing business that would not normally find its way to Bermuda underwriters. Syndicate 5151 primarily focuses on non-catastrophe exposures, while remaining within its core competency of underwriting short-tailed accounts.

MUSIC (Run-Off) (0.1%) - On Dec 31, 2011, Montpelier closed the MUSIC Sale Selective Insurance Group for $54.9 million. However, Montpelier retained, reinsured or otherwise indemnified Selective for all business written by MUSIC, with an effective date on or prior to Dec 31, 2011. Hence, this segment is not considered as "discontinued operation".

This segment used to write insurance risks that do not conform to normal underwriting patterns for standard lines. Generally, MUSIC targets smaller commercial property and casualty risks that are not subject to extreme competitive pressures. Since its inception, MUSIC has ceded 75% of its business to Montpelier Re.

Collateralized Reinsurance (4.4%), launched in 2012, is an asset management platform offering a range of catastrophe reinsurance-linked investment products to institutional and retail investors. Blue Capital consists of the assets and operations of Blue Water Re Ltd. ("Blue Water Re"), Blue Water Master Fund Ltd. (the "Master Fund ), Blue Capital Management Ltd. ("BCML ) and Blue Capital Insurance Managers Ltd. ("BCIML").

As on Jun 30, 2014, the company held total assets of $4.28 billion, up 14% from 2013 end-level and shareholder equity of $1.67 billion, up 1.6% from 2013 end-level. Debt balance was $399.2 million, unchanged from 2013 end-level.

Source: Company

Prior to 2007, Montpelier operated from Bermuda. In 2007, it expanded its underwriting platform to include operations located in the U.S., U.K. and Switzerland.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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