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Montpelier Re Holdings Ltd. (MRH)

Q1 2009 Earnings Call Transcript

April 28, 2009 8:30 am ET

Executives

Jonathan Kim – SVP, General Counsel and Secretary

Chris Harris – President and CEO

David Sinnott – EVP and Chief Underwriting Officer

Mike Paquette – EVP and CFO

Operator

Greetings ladies and gentlemen, and welcome to the Montpelier Re Holdings Limited first quarter 2009 conference call. (Operator instructions). It is now my pleasure to introduce your host, Mr. Jonathan Kim, General Counsel and Secretary of Montpelier Re. Thank you, Mr. Kim, you may begin.

Jonathan Kim

Thank you and good morning. Welcome to Montpelier Re's first quarter 2009 earnings conference call and webcast. A press release setting out our results, together with a detailed financial supplement have been posted to the company's website at www.montpelierre.bm. This call is being webcast live and will be available for replay until May 06, 2009.

Our speakers today are our Chris Harris, President and CEO; David Sinnott, Chief Underwriting Officer; and Mike Paquette, Chief Financial Officer. Chris and David will give their commentary on the quarter, and then Mike will present an overview of the financial results. We will then be pleased to take your questions.

During our discussions this morning, we may make forward-looking statements. Any such statements are based on the company’s current plans, estimates, and expectations. Actual results could differ materially from those projected in any forward-looking statements as a result of certain risk factors disclosed previously and from time-to-time in Montpelier's filings with the U.S. Securities and Exchange Commission. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

I would now like to turn the proceedings over to Chris. Chris?

Chris Harris

Good morning, ladies and gentlemen. The Montpelier Group produced a solid result in quarter one 2009 with positive contribution from both underwriting and investment operations. We grew fully converted book value per share by 3.2% for the quarter. We increased shareholders equity by $80 million, and we grew that written premium by plus 7% versus the prior year or plus 10% adjusting for reinstatement premium impact.

As I noted last quarter, we expected to benefit from twin tailwinds of improved rate and improved access to business from our broader operating platform. We have seen encouraging signs in both of these areas. On the rate front, our overall renewal price index shows a plus 5% improvement year-to-date versus a 9% decline for the same period last year. Stronger rate levels and a broader business mix allowed us to grow net written premiums even though we reduced our overall catastrophe risk profile.

Additionally, the London and U.S. platforms continued to mature with those operations now accounting for 28% of quarter one premium versus only 17% last year. We completed two capital transactions during the quarter. First, we raised 32 million of equity capital in connection with the termination of our variable forward agreement. Second, we repurchased 21 million of senior debt.

In both cases, we believe we bolstered our shareholders equity at an opportune time at favorable economics. With the variable forward exercise, we raised 32 million of capital at a 24% premium to the prior day closing price while the debt repurchase resulted in an immediate $6 million gain. We are very well positioned for the remainder of 2009 and we believe our current capital base is adequate to support our underwriting needs.

One last note, I would like to remind listeners that Montpelier Re will be hosting an Investor Day in New York next Thursday, May 7. At that meeting, we will provide more details on underwriting segments and more commentary on our outlook for 2009. A live webcast will be available on our website, but we look forward to see many of you there in persons.

With that, I will turn it over to David.

David Sinnott

Thank you, Chris and good morning ladies and gentlemen. We were pleased with the underwriting performance in the first quarter of 2009. Trading conditions are improving in the majority of the classes we underwrite and we continue to see a steady stream of new opportunities at Lloyd’s and in our U.S. operations.

Additionally, the frequency of large individual risk losses that adversely impacted the results a year ago did not feature in this quarter. Montpelier Re Group registered 251 million of gross written premium during the first quarter of 2009 versus 257 million in the prior year, a decrease of 2%. This reduction is mainly attributable to a decline in the property catastrophe segment, which reflects our decision as reported last quarter to reduce gross exposures at January 1 in anticipation of the lasting of certain outwards reinsurance protections.

The negative impact on gross premium volume of these cuts was offset to some extent by gains in the property and other specialty treaty segments outside of Bermuda and price increases on renewal business in the majority of classes underwritten. As anticipated in last quarter's call, these actions had a beneficial impact on our net position as net written premiums increased from 222 million in the prior year to 238 million, a gain of 7% aided by a reduction in seeded premiums of approximately 22 million.

In light of the prevailing cost of that repression [ph] as compared with pricing on our direct reinsurance book, we believed the decision to bring down our gross exposures in conjunction with less reinsurance purchase will result in better portfolio economics. Turning to the current pricing environment, the general pattern of rate when we observed at January 1 carried forward to the April 1 renewals, albeit outside of Japan, the flow of submissions is comparatively light. The cumulative premium weighted renewal price index year-to-date including April was 105, with U.S. CAT expose business continuing to show the most market improvements year-to-year.

Recalling from last quarter, the January 1 renewals represented an inflection point in the market as we witnessed a reversal of 22 consecutive funds of price reductions at that time. In the property treaty arena, rate improvements continue to be strongest on loss affected business and accounts exposing peak zone capacity regions. We see a similar pattern in the direct and facultative property book though a number of non-CAT accounts have began to show signs of strengthening as well.

The specialty treaty book is showing positive price movement and rates are now stable on a portfolio basis, so the casualty segment remains relatively weak. Despite these healthy indicators, buyers are generally adopting aggressive negotiation staff as they are faced with weakening economic fundamentals and limited ability to pass through higher insurance and reinsurance costs to their customer base. We believe this factor will continue to make for interesting renewal discussions for this foreseeable future.

It is appropriate to make some specific remarks on the Japanese book, which is our largest block of business transacted at April 1. As anticipated, conditions were more favorable on catastrophe business as wind and earthquake covers registered real price increases in the region of 5% to 10%. Still our underwriting decisions were tempered by concerns surrounding the adequacy of pricing for windstorm exposure and by the modest deterioration in the yen dollar exchange rate year-to-year, the combination of which compelled us to hold the line on dollar-denominated exposure.

Additionally, we continued to move towards scaling back over proportional participations in concentrating our business with fewer (inaudible). Prospectively, we see favorable dynamics for continued rate strengthening in our core catastrophe line, the next major test of which will occur at June 1 with the renewal of our Florida count and certain trees impacted by Hurricane Ike.

In the Florida market, it is increasingly likely that we will see some reduction in the state reinsurance scheme which coupled with the potential exit of state farm should have positive implications for demand. Outside of catastrophe business, we remain encouraged by the flow of new business opportunities in our other platforms and are well positioned to take advantage of improving market conditions.

In particular, we have steadily grown a quality book of engineering business in Syndicate 5151 and are gaining broader acceptance as a market for both brokered and direct facultative reinsurance through our U.S. agencies. Lastly, we have a number of interesting program opportunities in the pipeline which we hope to share more specifics on in the quarters to come.

At this point, I would like to turn the discussion over to Mike Paquette who will comment on the quarterly financial results.

Mike Paquette

Thank you, David. We ended the quarter with the fully converted book value per share of $16.37, an increase of 3.2% from year-end inclusive of dividends. Operating income for the 2009 first quarter was 47 million or $0.54 per share and comprehensive income was 51 million or $0.59 per share.

During the current quarter, we recorded a precautionary $10 million loss from European windstorm cloud and experienced a $7 million individual risk loss. We also had net favorable loss reserve development of $50 million during the quarter and our net loss estimate from Hurricane Ike remained unchanged from year-end.

General and administrative expenses for the first quarter of 2009 were up only slightly from the first quarter of last year as our fixed expenses associated with our new operations have leveled off consistent with our expectations. Net investment income for the first quarter of 2009 was 19 million, up slightly from the fourth quarter of 2008, but down from the 24 million reported for the first quarter of 2008. We expect that our investment income will further increase next quarter as we have rebalanced our portfolio away from cash into higher yielding asset classes.

Our consolidated investment return for the 2009 first quarter was just under 1% with our fixed income and equity portfolios performing well relative to their benchmark. Our highly liquid fixed income portfolio has an average duration of 1.9 years and an average credit quality of AA plus. Our equity and alternative investments currently represent approximately 8% and 3% of our total investments respectively.

As Chris mentioned, during the quarter, we executed two significant capital transactions. The first was an early termination of our variable forward arrangement which provided us with 32 million of equity capital. The somewhat complicated mechanics of the transaction resulted in an increase to our dilutive shares outstanding of 2 million shares, coupled with corresponding decrease to our total shares outstanding of 5.92 million shares. We view the transaction is having the same economic effect as a fresh issuance of 2 million common shares at $16 per share.

The second was a repurchase of 21 million of our outstanding 2013 Senior Notes or 15 million resulting in an immediate $6 million gain and a 1 million annual interest savings going forward. Both transactions created shareholder value and contributed to the $80 million increase in our shareholders equity during the quarter. From a total capital perspective, we remain comfortable with our current level of 1.8 billion which includes $332 million in debt.

And with my summary concluded, I will now turn to the operator for any questions you might have for us.

Question-and-Answer Session

Operator

(Operator instructions). We show no further questions at this time. Mr. Kim, please proceed with your closing remarks.

Jonathan Kim

Thank you. That concludes the proceedings from the company's point of view. So, it only remains for me to thank you all very much for your participation and we hope you would join us again at our second quarter earnings call.

Operator

This concludes today's conference. Thank you for your participation.

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Source: Montpelier Re Holdings Ltd. Q1 2009 Earnings Call Transcript

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