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Montpelier Re Holdings Ltd. (NYSE:MRH)

Q2 2013 Earnings Call

July 26, 2013 08:00 AM ET

Executives

Christopher Harris - President and CEO

Mike Paquette - CFO

Chris Schaper - President of Montpelier Re Bermuda

Richard Chattock - Chief Underwriting Office of our Lloyd Syndicate

Jason Pratt - CIO

Bill Pollett - Chief Corporate Development, Strategy Officer and Treasurer

Analysts

Ryan Burns - Jenney

Amit Kumar - Macquarie

Ron Bobman - Capital Returns

Operator

Greetings ladies and gentlemen and welcome to the Montpelier Group’s Second 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

Thank you. Good morning and welcome to Montpelier Re’s second 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 August 8.

Our speakers this morning are Christopher Harris, President and CEO; and Mike Paquette, 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, 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 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 Harris. Chris?

Chris Harris

Good morning ladies and gentlemen. Thank you for joining us. In a quarter marked by several industry catastrophe events and increasingly competitive market conditions, our insurance teams turned in a strong operating performance. We executed well across all the platforms delivering strong profitability with 69% combined ratio.

The quarterly loss ratio of 34% included the benefit of $48 million of prior period reserve related. The loss ratio for the current accident quarter was 68%. There were three notable items impacting the run rate loss ratio this quarter. First, approximately $12 million in adjustments negatively impacted the quarterly earned premium. These were a combination of loss sensitive premium adjustments and updated estimates for certain proportional contracts.

Second, we bought $26 million in net losses for current quarter catastrophe event inclusive of the Oklahoma tornados and European and Canadian floods.

And third, we booked a $13 million provision for larger individual risk losses.

The prior year releases, $48 million were distributed across all major reporting classes. Within that total approximately $14 million of releases were generally offset by corresponding movement elsewhere on the income statement relating to negative premium adjustments or foreign exchange movement. Of the remaining release the largest contributor was a reduction of $21 million related to natural catastrophe events. The reduction was spread across a number of events, but approximately half related to Sandy and the Tohoku earthquake.

Additionally we benefitted by $6 million from the settlement of several outstanding claims during the quarter for amounts less than their carried reserves. The total IBNR to reserve ratio ended the quarter at 63%, up slightly from 60% last quarter.

Overall we experienced a competitive rating environment in the second quarter with a 5% decrease in our internal renewal price index. However we did see a diversion in rate level trends among various lines of business. Property catastrophe reinsurance market conditions became increasingly competitive over the course of the second quarter. Our renewal price index showed overall decreases of 12% for US business and 3% for international business for the April to July period.

Casualty specialty RPIs also decreased by 2% for the same period. However, within the property specialty and individual risk segments RPIs were plus 5% and plus 2% respectively as we continued to see the benefit of stronger original rates in these lines. Excluding the impact of reinstatement premiums, net written premium including all managed premiums decreased 4% versus the prior year quarter.

As shown on page six of the supplement US hurricane remains our largest PML as of June 1st at 396 million which is close to unchanged versus January 1. Year-to-date, we have spent approximately 121 million on share repurchases and we retained flexibility to match our capital base to the best market opportunities. Solid underwriting results have contributed to a good start to 2013 for month failure with an operating ROE of 7.8% year-to-date. Book value per share plus dividend has increased 4.3% year-to-date lagging operating ROE due to the impact of unrealized investment losses this quarter.

While the market conditions are challenging, we remain well positioned to continue executing our focused, underwriting and capital management strategy throughout the remainder of 2013. And with that I will turn it over to Mike to provide more details on the financials.

Mike Paquette

Thank you, Chris. We ended the quarter with a fully converted book value per share of $27.03 a decrease of 1.3% after taking into account our common dividend. Our operating income for the quarter was $50 million or $0.93 per common share and our net loss was $27 million or $0.52 per common share each expressed after preferred share dividend. Our net income includes $77 million of net investments and foreign exchange losses.

Net premiums written decreased 6% in the quarter, earned premium decreased 5% in the quarter. The loss ratio for the quarter was 34% which includes a $16 million net loss from European and Canadian floods and a $10 million net loss from the U.S. tornados. Offsetting these current year CAP loss events was $48 million of favorable prior year loss reserve movements as Chris described earlier. Our acquisition cost continue to trend down. The decrease represents the absence of Ceding commissions associated with the MUSIC premium we assumed in 2012.

Our operating expenses in the quarter were $20 million down slightly from a year ago, incentive compensation expenses were $7 million down $3 million from a year ago as a result of the 2012 incentive accrual being provided at a higher projected level than that of the current period. Our total investment return for the quarter was -1.8% and our net investment income was $17 million.

During the quarter, we experienced $7 million of net released investment gains and $68 million of net unrealized losses. The net unrealized losses related entirely to our fixed maturity investments and with the result of an abrupt increase in market interest rates experienced during May and June.

Our fixed maturities at quarter end at an average duration of 3.4 years net of associated short positions and an average credit quality of AA minus. Our equity and alternative investments comprised 7% and 5% of our ending shareholders equity respectively. The non-controlling interest shown on our financial statements reflects the third party capital deployed within our growing Blue Capital operations as well as the earnings thereon.

During the quarter we repurchased just over 3 million common shares at an average cost per share of $25.35. Thus far in the third quarter we have repurchased approximately 300,000 shares at an average cost per share of $25.73. Our shareholder’s equity is currently $1.6 billion and our total capital is $2 billion.

I will now turn it over to the operator for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Brett Sheriffs of KBW. Please go ahead.

Brett Sheriffs - KBW

I noticed in the supplement an increase in some of the geographic locations, the tree limits increased, I was wondering if you could kind of dive into that and talk about what’s going on there.

Chris Harris

When you look in there, obviously we are trying to show you, in terms of the PMLs and the limits one segment of the curve at one point in time and that does move around and really what you are seeing there is the impact of shifts of in our reinsurance program, a lot of our reinsurance program, we tend to buy outwards protection between May and July and more of it’s shifted to later in the year this year. We also bought more protection at lower return period, so you’re kind of seeing more PML benefit but less limit benefit. So you’re really just seeing a shift around in those numbers but kind of the net PML position is relatively unchanged.

Brett Sheriffs - KBW

I was also wondering if you could touch on the outlook for future capital raises out of Blue Capital this fall. Is that something you guys will be in the market for?

Chris Harris

Thanks Brett. We don’t tend to comment on forward-looking items. I mean, I will say to-date we’ve certainly been pleased with how Blue Capital is operated. I think, as I said in my comments, the team has executed very well, both for Montpelier Re as well as for Blue Capital. So, I think we’ve been pleased with how the company has gone so far and we’ll evaluate that as we get closer to one-one.

Brett Sheriffs - KBW

And then just lastly a quick one, could you provide anymore color on the large individual risk loss in the quarter?

Chris Harris

I mean, I just made a comment on my script. Again, we’re not going to comment on individual clients. But I just wanted to note it if you’re looking at the run rate loss ratio for the quarter, we did have a little bit more lumpiness in individual risk losses this quarter than we’ve had in the last couple. So, relates to a couple of claims together, which are 13 million. And again I think its well within the longer term trends that we’ve seen there. I just called it out because you’ll see some lumpiness from that.

Operator

The next question comes from Ryan Burns of Jenney. Please go ahead.

Ryan Burns - Jenney

Just had a first question about your expense ratio, and just trying to figure out how the leverage works with the kind of music, I guess, the portfolio almost gone at this point. I guess I’m a little surprised to see expense ratio remain a little bit elevated. Just wanted to see how I should view that going forward.

Chris Harris

Thanks. I’ll turn it now over to Mike Paquette.

Mike Paquette

Sure Ryan. Last year at this time we had about $8 million of earned premium coming through with music and there were of course acquisition cost associated with that, in this quarter we don’t have really any. And that’s one thing you need to filter out. But the other is that our earned premium is down this quarter for a couple of one-off reasons as Chris mentioned in his script, and that’s basically driving the spike in the ratio that you see this quarter. Many of those items that adjusted are earned did not attract an acquisition cost, so you’re seeing an unusually low earned premium versus a normal run rate acquisition cost, which is spiking the ratio this quarter.

Ryan Burns - Jenney

Great, thanks for that one. And then quickly just with the, I guess, the reserve releases. It sounded a bunch of them came from recent cat losses, just wanted to see the granularity there on the Sandy losses; because that was only a couple of quarters ago. Just want to see why, is it in from the (cedents) or just trying to figure out why those are being released already?

Chris Harris

Thanks for the question. I tried to give a little more color in my script. I mean, of the 21 million that came from catastrophe losses, about half was Sandy and of that was split about half and half. So, you are really looking at about $4 million to $5 million of Sandy release. And it’s just been, we haven’t seen the level of creep in (cedent) loss estimates for Sandy that we have for some other events at this point, and we’ve had a few individual risk claims settle as well. So, we just have a little bit more clarity on that number sooner. So, it’s been, in this case, it’s been favorable, so we have recognized that at this point.

Ryan Burns - Jenney

And then obviously this quarter as a whole there were one of the higher I guess overall reserve releases. Was there anything done differently this quarter than I guess historic quarters with deeper dive-in in the reserve portfolio or just this one quarter was larger?

Chris Harris

No, I think it’s just one quarter that had a few anomalies. As Mike commented on some of the premium adjustments and I mentioned it in my script as well. So you had a chunk of those releases that were really had little economic impact on the result for the quarter because they were offset by either premium adjustments or foreign exchange movements.

And then for the remainder, the majority was driven by changes in our catastrophe loss estimates. And we tend to review those on a quarterly basis. So, there was nothing strange there. I would say the only thing I might point out is that we did have a couple of commutations or settlements of some older year claims and that was about 6 million benefited from those lump together. So that maybe was a little bit out of the ordinary. But again it was driven by specific event rather than any change in our reserving methodology.

Operator

(Operator Instructions). We have a question from Amit Kumar of Macquarie. Please go ahead.

Amit Kumar - Macquarie

Two quick questions, first of all just going back to the discussion on reserve releases from Storm Sandy. I am trying to figure if that could possibly repeat down the road. What are the paids running at, i.e., just based on the review, do you feel that probably where you stand today when you look at all the numbers and all the information, the chances of additional releases down the road would likely be lower, is that a fair statement or could that vary?

Chris Harris

I think obviously reserving for any catastrophe event is a difficult process, particularly as a reinsurer you are another step removed from the process. So I think it's very difficult to comment on how that might move one way or another. I guess what I would point out is I don't think we've changed our approach that we have taken over the last five or six years on how we reserve catastrophes, and our track record has been good in that area. So I can't comment on what might happen to those numbers, but I can say our underlying process hasn't changed and it will be driven more by specific changes and see the loss estimates at this point rather than anything else.

Amit Kumar - Macquarie

Got it, that's helpful. The other question is going back to the discussion on Blue Capital. How should we think about that going forward and even for 2014 in terms of, and again broadly, your share and the allocation, the lines, as well as, again as you go into January 1, 2014, how could that potentially change if you don't have an active hurricane season? Thanks.

Chris Harris

And again I think if you step back and look at how we approach the property catastrophe business, Montpelier has a great track record of capital partnerships dating back almost a decade at this point. And I am continued to be very pleased with how we're executing in the current marketplace. And I think having additional pools of capital will be helpful for us as we compete in the property catastrophe market. I think it's important from enabling us to respond to clients demands. I mean we have seen in some cases clients looking for different types of cover, looking for more one shop protection, potentially looking to place a portion of their program on a collateralized basis. And I think as an organization Montpelier has more tools to respond to their needs at this point and again one of the benefits we have is we have very short lines of communication where a very nimble under-writing operation and we can respond to those needs very quickly and deploy capital to where we think the best opportunities are and to help meet the client needs.

And I think one of the things we saw through the second quarter, it was a competitive rating period, so we also saw in the margin, we did start to see demand grow for the first time in a while, we saw clients looking to buy a little bit more limit in a few cases. And as you continue to see the primary markets get healthier I think we could potentially benefit from those increases and original rates. Not just on our own individual risk and property specialty business, but longer term I think that helps spare more growth in the catastrophe business.

Amit Kumar - Macquarie

Okay, and final question I had was on capital management and I'm not sure if this was asked. I think it is running a tad lower than the net income for the first six months. How do you think about capital management for the remainder of the year as well as for the remaining third quarter?

Chris Harris

I mean our philosophy on capital management hasn't changed, I mean we always think about in the same way, within a risk reward framework of how we can best deploy our capital, whether that's under-writing opportunities, investment opportunities or capital management opportunities. I think we bought back a significant amount of shares in Q2 and I think if you look for the rest of the year I would expect the pace to probably slow, just given one that we’ve bought back more than our earnings year-to-date. And two, the valuation has increased as we've gone through the year as well.

Operator

The next question comes from Ron Bobman of Capital Returns. Please go ahead.

Ron Bobman - Capital Returns

Hi, good morning, Chris. I had a question; I was wondering if you could remind me how do you decide which business gets written by Blue Capital and which business gets written on the Montpelier balance sheet?

Chris Harris

Yes, Ronald, I will turn that over to Chris Schaper to provide a little bit more detail there. Chris?

Chris Schaper

Thanks for the question. Yes, just in terms of how it works. We have separate underwriting capabilities relative to both of the enterprises. So we have a separate underwriter portfolio manager for Blue Capital, and we have a separate underwriter portfolio manager for Montpelier rated business and as a result when the business comes in both those underwriters are underwriting separately for their respective capital bases. And that’s essentially how it operationally works.

From a broader sense, Blue Capital was set up as an enterprise that was focusing on traditional insurance or re-insurance business. And so focus there is on regional oriented clients. And Montpelier Re similarly is focusing on the similar clients. And so, both enterprises focus on similar clients. They have different streams in terms of their underwriting process and based on those the analysis that comes through it is determined, each one of them separately determines how they construct their portfolio.

Ron Bobman - Capital Returns

So candidly, both agencies may submit a quote on a piece of business to the same broker for the same account?

Chris Schaper

It’s a general market, and so the business flows in from the brokers to our separate underwriting staffs and they make their assessments accordingly.

Operator

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

Jonathan Kim

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

Operator

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

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