S&P Affirms Montpelier Re Ratings; Outlook Stable

Standard & Poor’s Ratings Services announced that it has affirmed its “A-” counterparty credit and financial strength ratings on Montpelier Reinsurance Ltd. and its ‘BBB’ counterparty credit rating on Montpelier Re Holdings Ltd., both with a stable outlook.

“The ratings on Montpelier reflect its market position and scale within the Bermuda reinsurance market, strong operating performance, and strong financial flexibility,” said S&P. “Its capital adequacy is also viewed as a strength to the rating. Offsetting these positive factors are Montpelier’s limited track record, concentrated management team, and high risk for catastrophe losses.”

S&P explained the stable outlook as “based on the view that Montpelier is expected to maintain strong earnings through 2004 and capital in excess of that required for the rating.” The rating agency also noted an additional factor, namely its expectation that Montpelier will “maintain underwriting discipline (including slowing writings in 2005 and declining more business) as the property market continues to soften (exposures are expected to decrease in 2005).”

This the first time any rating agency has actually referred to “underwriting discipline” in other than general terms, and cited it as a specific factor in establishing ratings criteria. The fact that S&P did so also underlines the now widely recognized fact that rates in the property sector are under pressure, and can be expected to decline.

“Montpelier is expected to post a combined ratio of less than 80 percent in 2004,” said S&P. “Montpelier’s modest reinsurance protection (utilization expected to be up to 10 percent in 2004) further supports the need for excess capital and strong earnings.

The rating agency also listed the following as “Major Rating Factors:

— Strong competitive position. Montpelier’s competitive position is viewed as strong based on its market position and scale. Montpelier ranks as a Top 10 (based on total equity) reinsurer within the Bermuda reinsurance market. Montpelier’s market position is also supported by its competitive advantage in not having to cope with legacy issues related to balance-sheet integrity.

— Strong operating performance. Montpelier’s operating performance is viewed as strong. In 2003, Montpelier had net income of $407 million, a substantial increase from $152 million in 2002. The combined ratio was 50 percent in 2003, also significantly better than the 67 percent in 2002. The combined ratio through the first quarter of 2004 was 50 percent, with net income of $109 million. Montpelier reduced its gross written premium in the first quarter of 2004 by 9 percent compared with the first quarter of 2003.

— Strong financial flexibility. MRH’s financial flexibility is viewed as strong. In support of nonstandard notching, interest coverage was well-above levels required for the rating at 27x as of the first quarter of 2004, while debt leverage was low at 12 percent. Interest coverage is expected to remain above 10x, and debt leverage is expected to remain less than 20 percent, both of which support nonstandard notching.

— Strong capitalization. Montpelier’s capital adequacy (including an exposure-based charge for property catastrophe risks) was 181 percent at year-end 2003, which is strong. Montpelier’s equity base of $1.6 billion at year-end 2003 supports the rating by establishing Montpelier’s market presence, and it also mitigates concerns about the company’s status as a new operation. Standard & Poor’s expects Montpelier to manage capital according to its probabilistic risk exposure but expects capital adequacy to remain above 160% in support of the current rating.

— Limited track record. Montpelier started operations in late 2001 and has gone through three renewal seasons, but the company is still viewed as having a limited track record. The management team that has not been tested through difficult market cycles while at Montpelier. The company is expected to grow its exposure modestly in 2004 despite the softening market, as Montpelier continues to capture new business.

— Concentrated management team. Montpelier has a concentrated management team, though this risk has been decreasing in 2004 as new employees fill-in key underwriting positions.

— High risk to catastrophic losses. Montpelier is a short-tail property writer, with this line expected to remain roughly 75 percent of business. Within these short-tail property writings are a substantial amount of property catastrophe writings (near 35 percent of total writings).”