Montpelier Upgraded to Outperform - Analyst Blog

We are upgrading our recommendation on the shares of Montpelier Re Holdings (MRH) to Outperform following favorable third quarter earnings, which were well ahead of the Zacks Consensus Estimate, driven by higher premiums written coupled with lower share count.

Montpelier is experiencing growth from its Lloyds and U.S. operations where it expanded its business to break free of its image of Bermuda “monoline” property catastrophe reinsurer. 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 with “A+” rating. For Montpelier U.S. Insurance Co. ("MUSIC"), the launch was in July 2008 with a focus on small account excess and surplus lines insurance.

Though investments in newer operating platforms will undoubtedly impact financial results over the near term through upfront costs, these new operating platforms have already begun to become accretive to overall returns. Both Syndicate 5151 and MUSIC reported a growth of 40% and 63%, respectively, in net premiums written in the third quarter of 2010. 

However, Montpelier is facing a weakness in its commercial property book. Its ability to sustain the level of price improvements seen earlier in 2009 is becoming more challenging as a result of the stressed economic conditions.

Looking forward to 2011, with expectations of further rate deterioration approaching high single-digit percentage points, reinvesting in underwriting activities will face a tougher acceptance threshold. With share repurchase being a compelling investment alternative, Montpelier is aggressively engaging in buyback activity.

Montpelier's financial performance has been strong while developing the expanded operating platform. The company is rated "A-" (excellent) by A.M. Best and "A-" (strong) by Standard & Poor's. It reflects the company's strong financial position and its superior claims-paying ability. Montpelier has achieved over 15% compounded annual growth in book value per share since 2005.

Bermuda-based Montpelier competes with PMI Group Inc. (PMI) and ProAssurance Corp. (PRA). Both the companies carry a Zacks # 3 Rank, which implies a Hold recommendation over the short term (1−3 months). For the long term (6+ months), we rate these two companies Neutral.

 
MONTPELIER RE (MRH): Free Stock Analysis Report
 
PMI GROUP (PMI): Free Stock Analysis Report
 
PROASSURANCE CP (PRA): Free Stock Analysis Report
 
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