S&P Affirms Montpelier Re Ratings; Outlook Stable

November 1, 2011

Standard & Poor’s Ratings Services has affirmed its ‘BBB’ long-term counterparty credit rating on Montpelier Re Holdings Ltd. and its ‘A-‘ counterparty credit and financial strength ratings on the core operating subsidiary, Montpelier Reinsurance Ltd. The outlook is stable.

Montpelier announced the sale of its U.S. excess and surplus insurance platform MUSIC to Selective Insurance Group Inc. for approximately $55 million in cash consideration. S&P noted that MUSIC provided some premium diversification to Montpelier, but did not provide any earnings diversification. Gross written premiums (GWP) from MUSIC represented only 7 percent of the 2010 GWP of the entire group.

Nonetheless, the report also pointed out that “Montpelier continues to seek diversification through its Lloyd’s Syndicate 5151. However, the group may moderately increase its concentration of property-catastrophe exposure if market conditions warrant in January 2012 and subsequent treaty renewal seasons based on Montpelier’s view of price adequacy.”

Credit analyst Jason S. Porter added: “As a result of the sale, our ratings on the group are unaffected, but we are restating our outlook to coincide with the prospective profile of Montpelier without the MUSIC platform.”

For the first nine months of 2011, GWP for the group increased about 3 percent to $634 million, but net written premiums decreased 6 percent to $542 million due to increased retrocessional utilization, reflecting new, privately placed sidecars. Operating results were volatile for the first three quarters of 2011 due to the large and frequent catastrophe events including earthquakes in Japan and New Zealand, tornados in the U.S., flooding in Denmark, wildfires in Texas, and Hurricane Irene. The combined ratio for the first nine months of 2011 was 135.5 percent compared with 84.8 percent in the same period of 2010.

Explaining the stable outlook, S&P said it doesn’t “expect Montpelier to increase its tolerance for property-catastrophe risk, and instead focus on building non-correlated business through the Syndicate 5151 platform. However, actual property-catastrophe exposures may increase within the company’s risk tolerances, reflecting improved market conditions.

“The property-catastrophe writings add potential volatility to operating results, but are consistent with our ‘A-‘ financial strength rating. Depending on the company’s relative exposure to property-catastrophe risk or the mix of non-correlated exposures related to its long-term diversification strategy, we expect the enterprise risk management function to evolve and address the variability in risk exposures.”

S&P added that for 2011, it expects “GWP to increase in the low single-digit range and risk-adjusted capitalization to remain strong. Assuming a catastrophe loss ratio of about 20 percent in the fourth quarter, we expect the combined ratio for full-year 2011 to be less than 125 percent. We also do not expect Montpelier to appear as a negative outlier among its short-tail product-line peers or to breach its risk tolerances regarding future catastrophe losses. In Syndicate 5151, we do not expect writings from newer lines of business to increase earnings volatility.

“The company’s competitive position is strong, but is a limiting factor to any increase in our ratings. Because of this and developing initiatives to diversify into less-volatile lines of business, we won’t likely raise the ratings during the next 12 to 24 months. However, we may lower the rating if the company fails to maintain a strong competitive position or to meet our expectations for the combined ratio, competitive position, or earnings volatility.

Source: Standard & Poor’s

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