Montpelier Increases Dividend - Analyst Blog

Insurance and reinsurance solutions provider Montpelier Re Holdings Ltd. (MRH) has declared an increase in its quarterly dividend by 11% to 10 cents per share.The increased dividend will be paid on January 14, 2010, to shareholders of record as of December 31, 2010.

On the basis of increased annual dividend of 40 cents, the stock of Montpelier Re has a dividend yield of approximately 2.1%. Management has been increasing the dividend for the past two years.

The continuous dividend payment since 2003 is supported by Montpelier's strong capital and continuous cash flow generation.  Also low levels of debt in its capita structure –16% at the end of 2009, 20% each at the end of 2008 and 2007 provide inherent strength.

In its brief history (formed in 2001), Montpelier has been very profitable. The company's profitability for a given year is quickly apparent as most of its lines are short-tailed (claims are usually made within a year of policy inception), leaving the company less likely than many of its peers to incur losses several years after writing a policy.

Montpelierhas produced solid returns in 2006 and 2007, which enabled the company to withstand some of the extreme challenges exhibited during 2008. Though it has experienced significant investment losses in 2008, the company's risk management initiatives implemented in recent years and the strength of its balance sheet limited the impact of these challenges to a manageable level. The company's operating income in 2009 was approximately three times its operating income in 2008.

Montpelierhas expanded its underwriting reach beyond Bermuda. It has transformed from a Bermuda “monoline” property catastrophe reinsurer to a global diversified catastrophe specialist with expansion in the US and the UK.

Though investments in newer operating platforms will undoubtedly impact financial results over the near term by incurring upfront costs, these new operating platforms have already begun to be accretive to overall returns. The segment – Lloyd's Syndicate 5151 commenced underwriting on July 1, 2007 and has operations in the U.K., Switzerland and the U.S. The Lloyd's platform provides it with global licenses and a strong brand rated “A+”. For MUSIC, the launch was in July 2008 with a focus on small account excess and surplus lines of insurance. This expansion in the U.S. provides access to business opportunities that are not available in Bermuda or London. Going forward, we expect a steady stream of new opportunities at Lloyd's and its US operations.

On the capital management front, Montpelieris committed to rewarding shareholders directly through cash dividends and share repurchases. During the third quarter earnings conference call, management professed to look forward to gifting investors again in 2011. With expectations of a further deterioration in rates, approaching high single-digit percentage points, repurchasing shares seems a more viable investment alternative than reinvesting in underwriting activities.

We maintain a Neutral recommendation on the shares of Montpelierfor the long term. The stock carries Zacks #3 Rank (near-term “Hold” recommendation), indicating no clear directional pressure on the shares. The company competes with PartnerRe Ltd. (PRE), AXIS Capital Holdings Ltd. (AXS), RenaissanceRe Holdings Ltd. (RNR), to name  a few.

 
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