Montpelier Re Holdings' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Montpelier Re (MRH)

Montpelier Re Holdings Ltd. (NYSE:MRH)

Q1 2013 Earnings Conference Call

April 25, 2013 09:00 ET

Executives

Jonathan Kim - General Counsel and Secretary

Christopher Harris - President and Chief Executive Officer

Mike Paquette - Chief Financial Officer

Chris Schaper - President, Montpelier Re Bermuda

Analysts

Amit Kumar - Macquarie

Ryan Byrnes - Langen McAlenney

Dan Farrell - Sterne Agee

Sarah Dewitt - Barclays

Vinay Misquith - Evercore

Operator

Greetings ladies and gentlemen and welcome to the Montpelier Group’s first quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As reminder this conference is being recorded.

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 - General Counsel and Secretary

Thank you. Good morning and welcome to Montpelier Re’s first quarter 2013 earnings conference call and webcast. A press release setting out our results including 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 through May 9th.

Our speakers this morning are Christopher Harris, our President and CEO; and Mike Paquette, our Chief Financial Officer. Also with us are Chris Schaper, President of Montpelier Re Bermuda; Richard Chattock, Chief Underwriting Office of our Lloyd Syndicate; Jason Pratt, our Chief Investment Officer; and Bill Pollett, our Chief Corporate Development and Strategy Officer and Treasurer.

Chris Harris will give his commentary on the quarter and then Mike will present an overview of our financial results. We will then be pleased to take your questions. Please note that 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 the most 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 Harris. Chris?

Christopher Harris - President and Chief Executive Officer

Good morning ladies and gentlemen. Thank you for joining us. Montpelier kicked off 2013 with a very successful first quarter. Our focus remains on growing book value per share plus dividend and we achieved solid growth of 5.6% based on this measure with well balanced contributions from underwriting investments and capital management. Our underwriting teams executed very well with both our Bermuda and Lloyd’s platforms delivering strong profitability and an overall combined ratio of 62%.

For the first quarter overall net written premiums including all managed premiums were up 3%, within the property and individual risk segment we saw a healthy increase in net written premium as we allocated more capacity to marine and large commercial property classes in response to improving market conditions.

Net written premium for property re-insurance increased by 2% well other specialty re-insurance decreased by 7% in the quarter due to reductions within the engineering, aerospace and specialty, casualty lines. There were no large losses in excess of $10 million during the quarter. The current accident quarter net loss ratio was 43% which represents a slight improvement versus Q1 of last year driven primarily by a business shift away from a way from individual risk casualty resulting from the run-off of Montpelier MUSIC operations.

Prior year reserve releases improved the quarterly result by $18 million, the releases were concentrated within the property catastrophe class with net reductions of $17 million largely arising from Sandy and various 2011 catastrophe events. The IBNR to total reserve ratio increased slightly to 60% at quarter end.

Our April 1st, property reinsurance renewals were dominated by Japan and risk adjusted pricing was close to be unchanged for most of these programs. We maintain similar year-over-year exposures in yen but the decrease in U.S dollar terms due to exchange rate movements for that currency pair.

As shown on page six of the financial supplement U.S wins remains our peak zonal PML at the one and 250 year return period. Year-to-date we have spent approximately 52 million on share repurchases and we retain significant flexibility to match our capital base to the best market opportunities. Solid investment performance and excellent underwriting execution contributed to a good start to 2013 for Montpelier as we enter the mid year renewal cycle our focus remains on utilizing a consistent approach to risk selection and providing great service to our business partners.

And with that I will turn it over to Mike to provide more details on the financials.

Mike Paquette - Chief Financial Officer

Thank you, Chris. We ended the quarter with a fully converted book value per common share of $27.49 an increase of 5.6% after taking into account our common dividend. Our operating income for the quarter was $66 million or $1.18 per common share and our net income was $92 million or $1.65 per common share each expressed after preferred share dividends. Net premiums written increased by 3% in the quarter, earned premiums were flat in the quarter but were up 7% when adjusting for the MUSIC premium we assumed last year in accordance with the term of our sale.

We did not incur any significant catastrophe losses during the quarter and we benefited by $18 million of favorable prior year loss reserve movements. The combined ratio for the quarter was 62%. Our acquisition costs are trending down as we expected. The decrease reflects the absence of Ceding commissions associated with the MUSIC premium we assumed in 2012.

Our operating expenses remained flat at $20 million, incentive compensation expenses were $7 million up slightly from a year ago mainly as a result of an increase in outstanding restricted share units. Our total investment return for the quarter was 0.7% and our net investment income was $16 million. Our fixed maturities at quarter end at an average duration of 2.7 years net of associated short positions and an average credit quality of AA-. Our equity and alternative investments comprised 2% and 6% of our ending shareholders equity respectively. The non-controlling interest now shown on our financial statements reflects the capital recently invested within our Blue Capital operations as well as the earnings thereon that is owned by third parties.

During the quarter we repurchased 1.5 million common shares at an average cost per share of $24.60. Thus far in the second quarter we have repurchased 600,000 additional shares at an average cost per share of $25.75. Our shareholder’s equity is currently $1.7 billion and our total capital is $2.1 billion.

I will now turn the discussion over to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) our first question is from Amit Kumar at Macquarie.

Amit Kumar - Macquarie

Thanks and good morning and congrats on the quarter. I guess three quick questions, first of all just going back to the discussion on capital management and you’ve noted that you’ve bought some shares in Q2 to-date. How should we think about the pace of capital management for the rest of the quarter?

Christopher Harris

Okay. Thanks Amit and good morning and thank you for the comments. This is Chris Harris here. Yeah I think at the beginning of the year I said we felt like for the year we would probably look to buyback our earnings for the year plus a little bit. We obviously lagged behind that in Q1 I think that was a couple of factors that play there but one was certainly we had a very long black out period for the first month plus of the year. So we are probably a little bit slower than we anticipated. I think if you look at Q2 to-date so far we have been a little bit more active and all else equal I expect we would probably be a little more active in Q2 than we were in Q1. But I think in overall target for the year of looking at our earnings for the year I think that’s still reasonable.

Amit Kumar - Macquarie

Got it. Thanks. And second question relates to a Blue Capital. How should we think about that and I’m referring to I guess page four of the supplement. How should we think about those premiums for the remainder of the year?

Christopher Harris

Okay, thanks, Amit. I think first it’s important to kind of a to back up and remember that Blue Capital the segment there on it’s own is actually just a piece of all of our overall partnership businesses much of that premium income runs through the normal Bermuda segment. The Blue Capital piece itself represents more of the collateralized product and I think in terms of I don’t really want to give premium projections or guidance for that segment on it’s own but I think you can look at our overall property catastrophe premium and kind of use that as a gage because Blue Capital will role into that bucket for the full year.

Amit Kumar - Macquarie

Got it. And then and I guess related question and I’ll stop here. There has been a lot of discussion on third-party capital entering the market place and we’ve actually heard completely divergent to use in terms of the impact on pricing at the upcoming renewals ranging from a tougher renewals from some companies to some other companies saying that pricing is actually flat. Can you sort of share your review of what do you think the upcoming renewals will look like especially with the very active third-party capital? Thanks.

Christopher Harris

Okay. Yeah, yeah thanks Amit this is Chris again and I’ll turn it over to Chris Schaper to let him make some comments on the upcoming renewals but I think from a high level. I mean certainly we are seen some of the non traditional players have an impact in the market. I think it’s making for kind of a more complex market and I say that meaning that one we are seen an increase in supply but we are also seen an increase in the types of competitors. I think some of the competitors coming in have specialties are focusing on one particular segment of the market or particular type of product. And I think ultimately that makes for more complex market. But from Montpelier’s point of view I think that plays to our strength as an organization I mean ultimately you have to be good at sourcing risk, pricing risk and managing risk and I think that fits with our strengths and I like the fact that we have long established relationships and we are able to access business from a number of different areas and I think we are going to have work harder to find attractive opportunities but I think there is still out there. And Chris I don’t know if you want to.

Chris Schaper

Yeah, sure. Hi, Amit, its Chris Schaper. Yeah I just had maybe just a couple of comments to what Chris Harris said I mean certainly there is supply issue there is also demand issue and some of the existing some of the existing insurers are looking for additional capacity at this time period. And there is also some new companies that have come into the fold relative to Florida specifically and so they are looking for new capacity as well. So as much as there is added supply there is also some added demand also. We still think the way we view it is that it does come down to being able to offer product. Montpelier having both rated product as well as our collateralized product actually plays quite well within this market and we are able to operate very effectively as a result of that. We also view that legacy portfolios mater and the relationships matter and so if you have proper products and you have the proper portfolios and relationship set up you actually can operate very effectively in this market and really in the end the businesses the underwriting operations that are prepared are the ones that are going to have success.

Amit Kumar - Macquarie

Got it. Thanks.

Christopher Harris

Okay. Yeah Amit and I again I would just reiterate right we have been managing our own book as well as partnership capital for the last 10 years now. So, I do think this is a new gig for us and the entire process is well integrated into our overall operation. So, I think that does give us an advantage.

Amit Kumar - Macquarie

I’ll stop here, thanks for the answers.

Christopher Harris

Thank you.

Operator

Our next question comes from Ryan Byrnes at Langen McAlenney

Ryan Byrnes - Langen McAlenney

Hey good morning everybody.

Christopher Harris

Good morning, Ryan.

Ryan Byrnes - Langen McAlenney

Quickly, yeah thank you, just quickly want to talk about the reserve releases, you had mentioned obviously the prop cat book, you say was mainly from Sandy, just wanted to get the break-down of the reserve releases and the I guess, why you are, I guess why are you so confident that to start reserving, sorry releasing reserves from that loss?

Christopher Harris

Okay, thanks Ryan this is Chris again. In my commentary, I said the reserves rose largely from Sandy and the 2011 catastrophe events, something that would say a fair statement that it was spread among all of those events. If you look at Sandy specifically, I think there is a couple of things going on there; one we were one of the earliest markets to report a loss there. So, I think we may have had a little bit higher level of conservatism given there was more uncertainty at the time.

I think we’ve seen a couple of things happen there, one we’ve had a few specific clients where we had precautionary reserves up and at this point we think we enough information that they are not going to attach their programs. So that’s resulted in a release and I think in general just across the - the group of ceding companies, we haven’t seen a lot of creep in the estimates over the last four, I guess almost six months at this point. So that probably gives us a little bit level of confident, a little bit higher level of confidence. But now I would say overall we haven’t - we haven’t had any change and I think our reserving philosophy and I think, our track record has been that we’ve been, a little conservative and certainly that was the case for the 2011 events in aggregate and after a couple of quarters that looks to be the case for Sandy. But, we’ll continue to watch it very closely.

Ryan Byrnes - Langen McAlenney

Okay great. And then yesterday when we heard from one of your competitors talking about kind of the mid-year, I guess, catastrophe renewals. And you know that they were a little more positive that I think the people were expecting, but they also I still surprised they mentioned that, that some of them kind of already had orders, already for binding, I was little surprised kind of over a month advanced that dialogues are already that that far along. Just want to see if you are seeing that as well, or I guess, where you guys are, I guess in the process of working on those renewals?

Chris Schaper

Hey Ryan this is Chris Schaper. Yeah just a couple of comments on that, first half its part as the different structures that are out there, there are quarter share structures and there are excess-of-loss structures. And what we’re seeing relative to excess-of-loss structures are just a few data points so far. So it’s very early in the stage relative to excess-of-loss. Some who maybe commenting that they’ve got a portion of their book kind of set maybe writing quarter share business where you kind of have the longer lead time and you maybe signing up quick more quickly on that type of business. But as far as cat excess-of-loss there are very few data points right now that are in the present market.

Ryan Byrnes - Langen McAlenney

Yeah sure that’s great. Thanks for that color there. And then just my last question here is this could be on capital management. Just maybe talk about just philosophy obviously kind of multiples have raised in the last couple of months, I just want to see how you guys view buyback versus dividend - more dividends or I guess special dividends obviously as your multiple continues to improve just want to see what your philosophy is there?

Christopher Harris

Okay, thanks Ryan this is Chris Harris again. Yeah on capital management, our philosophy has been very consistent over time. We try and look at everything in terms of a risk reward framework of how we can grow our book value per share most effectively over time. So certainly we are sensitive to valuation, in terms of whether we’re looking at repurchases or where we deploy for underwriting opportunities or, more aggressive investment portfolio. We continue to look closely at that and, as you noted our multiple has improved, but at this point, still a slight discount to book value and at that level we would certainly see, share repurchases as more attractive than a special dividend or dividend increase at these levels.

Ryan Byrnes - Langen McAlenney

Okay. Great. Thanks for the answer guys.

Christopher Harris

Thanks.

Operator

(Operator Instructions) Your next question comes from Dan Farrell at Sterne Agee.

Dan Farrell - Sterne Agee

Hi. Good morning.

Christopher Harris

Good morning, Dan.

Dan Farrell - Sterne Agee

Just on the your acquisition ratio was a bit lower than recent trend. Can you just talk about what moved that down a bit?

Christopher Harris

Sure. Thanks, Dan. Really one big driver there is the Run-Off of MUSIC if you remember we had a sale there at the end of 2011 but if you look at the first quarter of 2012 there were still some earned premium coming in from MUSIC and that had a relatively high acquisition ratio with that that’s gone away. So that really helps the comparison for the year-over-year quarter and then also you’ve seen some benefit from just a general partnership businesses that we run on the property catastrophe side where some of that business works as an offset to our acquisition cost ratio.

Dan Farrell - Sterne Agee

Okay. Thank you. And then just on the individualized business can you just talk about opportunities and trends there?

Christopher Harris

Okay. Yeah, yeah thanks and I did, I did mention in my script that was one area in the first quarter where we saw some growth opportunities again it’s not, it’s not coming off a particularly large base but that was an area where we saw some opportunities and it was really concentrated in two segments. One was Marine where I think you saw a number of industry losses in 2012 and we thought that gave us some opportunities at the beginning of ’13 both in terms of slightly better rate but also you know able to deploy some more lines with the few more clients there and then within the large commercial property segment similar I think on the heels of some of the lose activity in 2012. We saw in improved market conditions there they weren’t dramatic changes but on the margin we saw some more attractive opportunities and we chose to deploy some more capital there.

Dan Farrell - Sterne Agee

Okay, great. Thank you very much.

Operator

Our next question comes from Sarah Dewitt at Barclays.

Sarah Dewitt - Barclays

Hi. Good morning. Following up on the midyear renewals not to beat a dead horse here but I was wondering if you would be willing to give your view on where you think pricing will actually come in because we’ve heard a lot of different views one company saying down 10% or more and another company saying they already down some business at flat so be curious what your expectation is and then my second question is just on the outlook for premium growth for the rest of the year. I wanted to hear your thoughts and how we should be thinking about that and what your appetite is to right more business at the current price given some of the increase demand that you referenced?

Christopher Harris

Okay. Thanks, Sarah. Thank you for your question. Although you are you probably be disappointed in my answers because in the first one I don’t really want to give any guidance on what we think the pricing maybe I mean as I said before I think there are a number of factors that play and we are certainly prepared, we are prepared for competitive market but I think we do have long standing relationships there and we feel we will be able to deploy some capacity at attractive rates but so I would just say we are prepared to react but I’m not going to speculate on the what the market change might be and similarly for premium outlook for the full year. I’m not going to give guidance there but as I said before we use kind of a risk reward framework for all of our decisions and depending on what we see is the underwriting opportunities versus repurchase versus investments will allocate capital appropriately and if that means we see some rate reductions then likely we would run a little bit lower PML in this year but we’ll cross that bridge when we come to it.

Sarah Dewitt - Barclays

Okay. Maybe just looking at another way is there a threshold where prices were down at certain percent that you wouldn’t write more any more business that we should be thinking about?

Christopher Harris

No. I think it’s very difficult to have a set percentage because there is a, there is a wide variety of types of contracts in the market right and I know there is a little some of these questions have kind of shined a spotlight on Florida but remember our the property catastrophe portfolio that we write is very broad and very well spread geographically so Florida is just a portion of that. We’re certainly looking at a number of other regions as well and I think within any particular region that is always a spread between what we think are the better contract and the worst contracts and I mean if you see some compression that just puts more pressure or more your ability to differentiate between contracts becomes more important.

Sarah Dewitt - Barclays

Okay great. Thanks for the answers.

Operator

Our next question comes from Vinay Misquith at Evercore.

Vinay Misquith - Evercore

Hi good morning. Just on the June 1 renewals just a clarification we've historically seen the altered markets coming on the higher layers and I know you guys like to write lower layers and I see most of the range was like to write the lower layers. Could you help us understand the competitive dynamic and so the price variability you think on lower layers should be impacted for you versus the higher layer I think which would be the alternative capital?

Christopher Harris

Okay, yeah, thanks Vinay I’ll let – I like Chris comment on that, but I guess similar to what I said before I mean we’re not really going to comment specifically on individual clients or program.

Vinay Misquith - Evercore

Sure, great.

Chris Schaper

Yeah, but maybe a couple of items I mean may be just to provide a little bit of clarity on that. The reality is that there are a number of companies within Florida each company has it's own program and then within those program there are individualized layers. And the Florida market is has always been a dynamic market and firms are growing their businesses some firms are remaining static. So the programs change have a potential to change year-over-year and as a result of that as those programs change rates can change along with it there could be more exposure in there, there can be different attachment points. And because of that the actual rate changes are going to modify based off of some of those specifics. So because of those issues because it is a dynamic market it's not as if purely the lower layers are all going to get cut or the upper layers are going to get cut or it's going to be cut through the program. It just kind of depends on how it all comes together in fact some layers will – may go up in rate where other layers may go down. So, the dynamics of that market actually create an issue in terms of literally speculating on what the changes maybe.

Christopher Harris

And I think it's probably fair to say too that size of client can have an impact I mean if you look historically Montpelier has had very strong relationships with some of the smaller regional companies and so I think we've had very strong relations there historically and I think you’ve seen probably non-traditional markets have a bigger impact on some of the larger may be less persistence buyers in the market.

Vinay Misquith - Evercore

Okay that's helpful alright. Thank you.

Operator

There are no further questions at this time. Mr. Kim, please proceed with your closing remarks.

Jonathan Kim - General Counsel and Secretary

Thank you, operator. That concludes our proceedings this morning. Once again I would like to thank you all very much for your participation and I invite you to join us again at our second quarter 2013 earnings call.

Operator

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

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