On Jul 5, 2013, we downgraded our recommendation on
Montpelier Re Holdings Ltd.
) to Neutral from Outperform due to its mixed performance in the
last reported quarter as well as increasing expenses that are
taking a toll on margin expansion. The property and casualty
insurer carries a Zacks Rank #3 (Hold).
Why the Downgrade?
Montpelier's expenses have been rising over the last few years.
Expenses in the last reported quarter escalated 4.8% primarily
due to higher loss and loss adjustment expense, and higher
insurance and reinsurance acquisition costs. Higher expenses have
affected operating margin as well. Operating margin declined 550
basis points year-over-year in the first quarter. If expenses
continue to accelerate, operating margin will be hugely affected
Montpelier has substantial exposure to losses resulting from
natural and man-made disasters and other catastrophic events.
Exposure to cat activities will always remain a concern because
of its uncertainty of occurrences as well as its magnitude of
In the last reported quarter, Montpelier's operating earnings
lagged the year-ago numbers. The Zacks Consensus Estimate of 65
cents for the second quarter reflects a year-over-year decline of
Despite the hurdles, Montpelier remains well positioned to
deliver solid numbers going forward, given its increased exposure
in the property catastrophe lines of business. In addition,
focusing on underwriting operations, augmenting capital
flexibility, and strengthening its competitive position augur
well going forward. Besides focusing on enhancing shareholder
value, it also scores strongly with the ratings agencies. The
company also benefits from tax exemptions in Bermuda.
Other Stocks to Consider
Though we currently remain on the sidelines for Montpelier,
American Safety Insurance Holdings Ltd.
Hilltop Holdings Inc.
) look attractive. All these stocks carry a Zacks Rank #1 (Strong
AMER SAFETY INS (ASI): Free Stock Analysis
HILLTOP HLDGS (HTH): Free Stock Analysis
MONTPELIER RE (MRH): Free Stock Analysis
ALLEGHANY CORP (Y): Free Stock Analysis
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