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Montpelier Re Holdings Ltd. (NYSE:MRH)

Q1 2010 Earnings Conference Call

April 28, 2010 8:00 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

Analysts

Jay Gelb – Barclays Capital

Keith Alexander – JP Morgan

Amit Kumar – McQuarrie

Dan Johnson – Citadel Investment Group

Dean Evans – KBW

Ian Gutterman – Adage Capital

John Deysher – Pinnacle

Keith Alexander – JPMorgan

Operator

Greetings ladies and gentlemen, and welcome to the Montpelier Group’s First Quarter 2010 conference 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 a 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 your presentation sir.

Jonathan Kim

Thank you and good morning. Welcome to Montpelier Re's first quarter 2010 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 for one month.

Our speakers today are our Christopher Harris, President and CEO; David Sinnott, Chief Underwriting Officer; and Mike Paquette, Chief Financial Officer. Also with us are Jason Pratt, Chief Investment Officer and Bill Pollett, Treasurer. Chris and David with 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.

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. Chris?

Chris Harris

Good morning, ladies and gentlemen. In a quarter marked by high levels of catastrophe activity, we produced net income of $10 million and growth in book value of 1.5%. Property catastrophe reinsurance is a core expertise for Montpelier and we expect earnings volatility in a quarter such as this. However the positive quarterly result highlights the balance of our global catastrophe portfolio and the growing importance of our other segment.

Contributions from the other specialty and individual risk segments along with solid investment results dampen the impact of the Chile loss and led to an overall profit for the quarter. Our Chilean net loss of $94 million was within our previously estimated range. The loss is concentrated with a small number of cedants within our direct, excessive loss property catastrophe portfolio. These Cat excel treaties constitute 80% plus of our expected loss.

We also anticipate some loss from our cold spot retro portfolio, by cold spot I am referring to retro participation which protects regions outside of the US, Europe and Japan. We do not participate on any Chilean proportional treaties. The only other loss item of note in the quarter was $7 million individual risk loss unrelated to Chile. Excluding the impact of reinstatements we grew net written premium by 5% for the quarter.

We continued to find good opportunities to deploy catastrophe capacity with preferred clients at attractive terms. US wins remains our peak PML risk and we maintained essentially a flat PML versus the prior year. Outside of property catastrophe, growth was driven primarily by the individual risk segments. In particular, direct and facultative property, Lloyd's marine and MUSIC E&S all grew off relatively modest basis.

On the capital management front, we started 2010 with capital at the high end of what we required to support our underwriting plans for the year and we indicated that we considered share repurchases a compelling option. After repurchasing a $171 million or 10% of year end outstanding shares, during the quarter at a discounts of fully converted book value per share, our balance sheet remains strong on all key measures and our capital is near to our target level as we prepare to enter the 2010 US hurricane season.

With that I will turn it over to David, to discuss the underwriting outlook.   

David Sinnott

Thank you Chris and good morning ladies and gentlemen. As Chris noted in his remarks, the first quarter of 2010 was marked by wide spread activity from natural catastrophes. Although the Chilean earthquake loss is significant from Montpelier Re. It is in line with our expectation for events for this scale and emanates from a relatively small and predictable area of the portfolio. Being largely an earnings event, we do not expect this loss to alter trading conditions for the better, but rather see the current rates softening persisting for the balance of the year.  

Still we remain broadly encouraged by existing price levels in most business lines and pleased with the progress in our new initiatives. Briefly recapping business production for the quarter, net premiums written were aided by new business generation in the specialty treaty in individual risk units. The growth in the later arena being driven primarily by the marine team at Syndicate 5151 and MUSIC. This growth more than offset the negative pricing pressure we continued to experience in all lines.  

Additionally some accounts in our property catastrophe account benefited from upward pricing adjustments resulting from loss activity in the prior year. In the catastrophe line we continued to see ample opportunity to reposition capacity on the better price programs and in certain other segments to selectively entertain new business. Some specific commentary is warranted on the property specialty account which is off 52% from the first quarter of 2009.  

Most of the negative variance around $15 million related to two non-recurring items being a reclassification of a sizable pro-rata account into another profit center and the recognition in the first quarter of 2009 of significant upward premium adjustments on two treaties, which did not repeat in the current quarter. Only approximately $3 million of the quarter-to-quarter movement in this segment is tied to business attrition.  

Ceded reinsurance matched last year’s tally during the current quarter. We anticipate renewing the majority of our in-force contracts go at current price levels do not precede buying more outwards protection in 2010. More recently in Japan, the largest block of business renewing at April 1, prices reduced on both earthquake and windstorm protections by 5 to 7%, in so doing giving back the gains achieved at last year’s renewal.

This price erosion led to additional exposure cuts in our book beyond what was required to keep dollar denominated exposures level in the phase of a year-to-year strengthening in the yen.  

Our US dollar exposure to windstorm and earthquake reduced 20% and 15% respectively reflecting our dissatisfaction with current rate levels and desire to further concentrate capacity with core clients. Turning to general market conditions, our assessment of current price levels is not too dissimilar to what we reported last quarter in the wake of the January 1 renewals.  

While outside of Japan, the business flow was fairly modest until midyear, our cumulative pricing have not moved dramatically in the interim, with most accounts yielding between 5 and 10% off expiring in exposure adjusted terms. Conditions are somewhat more competitive in our direct property account versus last quarter, where the Chilean earthquake loss has thus had little impact on March behavior. Additionally we continued to see more leaning towards self insurance among large international buyers with a few European cedants taking significantly larger co-participation at April 1. We expect this pattern will continue in this segment of our account until we observe a turn in underlying insurance rates.  

On the whole re-insurers are still acting fairly disappointed in most areas and we see little disruption to the market situation on the horizon. Looking forward to the midyear renewals, a number of US cedants have signaled a desire to purchase additional limits which we hope will keep rate reductions in that market from accelerating. In our Florida book specifically we anticipate some challenging negotiations with clients as many will undoubtedly push hard for relief on reinsurance cost in an effort to improve their financial positions.  

In spite of its difficulties we still believe Florida is an attractive, catastrophe reinsurance market and foresee at anticipated price levels of similar size commitment as in 2009, with counterparty credit taking on heightened important in the risk selection process. With my remarks concluded, I will now hand the discussion over to Michael Paquette who will comment on the financials.  

Michael Paquette

Thank you David. Our fully converted book value per share increased by 1.5% in the quarter to $21.36. We had an operating loss of $23 million or $0.31 per share, the comprehensive income of $5 million or $0.07 per share due primarily to net realized and unrealized investment gains. Net written premiums grew by 10% for the quarter compared to the first quarter of 2009, or 5% excluding the impact of a $11 million of reinstatement premiums.  

Continued growth in the company’s Lloyd’s and US operation more than offset rate pressure in Bermuda. Earned premiums grew by 19% for the quarter or 10% excluding reinstatement premium. The loss ratio on the quarter was 91% which includes the net impact of $94 million loss from the Chilean earthquake. This was partially offset by 15 points or 24 million in favorable prior year reserve development predominantly related to short tail risk across many lines of business.  

General and administrative expenses for the first quarter of 2010 were nearly flat from the first quarter of 2009. Higher variable expenses resulting from a larger number of restricted share units outstanding partially offset by below target 2010 incentive accrual or negated by savings from ongoing fixed expense initiatives. Borrowing any unforeseen events, we expect our fixed general and administrative expenses for the full-year to fall below 2009 level.  

Variable compensation expense will fluctuate with underwriting results. Net investment income for the quarter was $19 million essentially flat versus a year ago. Our consolidated net investment return was 1.6% a satisfactory result. We continued to be mindful of interest rates, inflation and credit risks. Our fixed income portfolio remains short, well diversified and of high quality as evidenced by an average duration of 2.5 years and an average credit quality of AA plus.  

We reduced our equity holdings and redeployed the proceeds in the fixed maturity. As a result our equity and alternative investments now collectively represent less than 10% of our total investments. In addition Symetra, a $23 million private placements that went public during the quarter is now presented as an equity security rather than another investments. Our shareholders equity decreased by $170 million during the quarter, to $1.58 billion as a result of $171 million of share repurchases. The average price of the share repurchases was $18.65, a 13% discount to our current fully converted book value per share.  

Our total capital of $1.9 billion which includes $332 million in debt is strong relative to our underwriting plans for 2010. With my summary concluded, I will not turn to the operator for any questions that you might have for us.  

Question-and-Answer Session

Operator

(Operator Instructions) The first question that we have comes from Jay Gelb with Barclays Capital. Please go ahead.

Jay Gelb – Barclays Capital

Thanks, good morning. Have a couple of questions for you. First on capital management, Montpelier has completed the existing authorization I believe. Can you talk about what the plans are for deploying future capital and then if you could also touch base on the decision to take out the Roth shares at a premium, I think that'll be helpful. And then if you can give us a bit more clarity on the overall G&A expense for 2010 versus 2009. I know you said below on the fixed cost but any additional insight on that you can give us in terms of what degree will be helpful? Thanks.

Chris Harris

Okay, thanks, Jay. Yes, I will start with the expenses first and I think you'll see some more information coming out on that in our 10-Q and I think probably going forward in our supplement we'll split out the fixed G&A and the variable G&A, which might help you – give you a little bit more detail on where those numbers are going. But to think, as I said last quarter in terms of the fixed G&A, we see that being flat or slightly down 2010 versus 2009 and that was true in the first quarter numbers. In terms of just looking at the fixed element, we were down about $1.5 million Q1 versus Q4 of last year. So we seem to be in line with that run rate and then obviously the variable component, there's a lot more variability there and that will fluctuate up and down based on our projected results for the year.

Then on the capital management front again, I think we said early on that we felt like we were going into 2010 with capital at the high end of what we required for our underwriting plan. We feel like we were fairly aggressive about executing share repurchases in the first quarter of the year. We think we were able to buy back a significant percentage of outstanding shares at very attractive levels and we're comfortable with where we stand kind of heading into the 2010 hurricane season. Clearly, it's always an ongoing evaluation you have to do kind of weighing the attractiveness of the reinsurance and insurance opportunities we see versus continued buybacks. But I think at this point we're pretty close to the target level that we want to be and probably future repurchases would come out of any earnings we might have over the next couple of quarters.

Again, you mentioned, the Roth transaction in particular. I guess we looked at that as part of our overall capital management strategy that enabled us to execute fairly significant amount of repurchases in a quick manner. We felt that was good execution for us. In terms of to buy that amount of shares on the open market would take a very long time in terms of blackout periods and other things and we feel that it would have taken us probably four months to execute something like that and likelihood of having an impact of pushing up our price anyway. So we felt like it was a -- we had an opportunity to buy out those shares and we took it.

Did I get all three of them Jay or –

Jay Gelb – Barclays Capital

Yes, thanks, Chris.

Chris Harris

Okay, thanks.

Operator

The next question we have comes from Keith Alexander with JP Morgan.

Keith Alexander – JP Morgan

Hi good morning

Chris Harris

Good morning, Keith.

Keith Alexander – JP Morgan

If we could just take a moment to talk about the acquisition expense ratio, I was wondering does the year-over-year decrease reflect changes to mix or other factors?

David Sinnott

I'll take that one, Keith. You may recall we had some noise in our DAC ratio in the first quarter of 2009. It was a couple of adjustments on some larger contracts that we had. So you're going to see a decrease in the absolute amount of DAC amortization in this quarter than with the higher level of earned premium, it's shown as a dramatic decrease in the acquisition cost. But this quarter doesn't have any noise in it, I think it's more – had to do with that adjustment than mix. So I think you could feel fairly comfortable in using where we are now going forward.

Keith Alexander – JP Morgan

Okay, great and then moving on to CAT, is there any development risk for Chile and does the company have any exposure to deepwater horizon?

Chris Harris

Okay, thanks Keith, this is Chris and I'll talk about Chile and then I'll let David address deepwater horizon. I think I tried to lay out in my comments how we went about looking at Chile. We feel like most of our exposure there is concentrated in the excessive loss property catastrophe portfolio. So there we are able to put a range around it in terms of looking at contract limits that are exposed and certainly to date our information indicates that the losses will be concentrated in that property CAT book and some of the cold spot retro between those two classes that will be about 90% of our loss from Chile. I mean there's always potential that you can pick up some exposure from other classes outside of that but we certainly haven't seen evidence of that to this point.

We do write some risk excess treaty business and at this point we've gone through there and we do have an IBNR provision up for that book but we think it's unlikely that we would get any large losses from there. And then again on our own direct and facultative reinsurance book that we write, we did not have much direct exposure in Chile and at this point we've gone through all of those exposures and while we have a small amount of IBNR up, we don't see any direct losses at this point. So it'll be – we felt like it's relatively well contained within the catastrophe portfolio.

Keith Alexander – JP Morgan

Okay, and horizon?

David Sinnott

Yes, on Horizon we do have some potential exposure to that loss coming through our reinsurance account, which could be as much as $20 million. At this point, it's premature to make any definitive statements. The nature of the loss, where it concentrates, how the incidence is going to fall on various market participants is complicated. You've got a PD component, you have a liability component and how those various financial interests respond to this particular loss, will take some time to settle out but on an absolute downside basis that's the number that we're looking at.

Keith Alexander – JP Morgan

What do you base that number on in terms of total industry loss?

Chris Harris

I mean again I think as David said, it'll be complicated based on where that loss falls to various participants but it's really a range. I mean it could be zero loss to us. It could be $20 million at the max and in general we're going to be attaching a little bit higher up. So as the size of that industry loss gets bigger, it'll be more likely for us to pickup exposure.

Keith Alexander – JP Morgan

Okay, and then for my last question, for the investment portfolio what are your current reinvestment rates and are you anticipating any increase in exposure to equities. I know you reduced them significantly in the quarter but given your current capital position I thought maybe you might make a change.

Chris Harris

Okay, yes, I'll let Mike address that because we did sell some equity this quarter as well.

Mike Paquette

Well, take your yield question first and I don't have a specific answer for you there with the exception of, our market yield right now is just over 4% and as you can see on page eight of our supplement that the yield, the worst is about 3.4%. So if you were to use a number within that range as a proxy for the balance of the year, that's probably not too far off if you're looking for some sort of indicator there. As it relates to equities, we did lighten up a little bit this quarter and we're pretty comfortable with where we are right now. We do have a short duration portfolio and we do have some room there. So we may choose to go back into equities but we have no current plans to do so. I think we're pretty comfortable with where we are with our risk assets being at or below 10% of the total portfolio.

Operator

The next question we have comes from Amit Kumar with McQuarrie.

Amit Kumar – McQuarrie

Thanks and good morning. I guess two big picture questions and one numbers question. Just going back on your comment regarding the Chilean loss and it having no sort of meaningful impact maybe just sort of expand on that a bit more, is that the size of the loss or do you think there is so much of excess capacity, which is not moving the market or I guess what I'm trying to ask is what would it take for the market to turn at this juncture?

Chris Harris

Okay, I think you're referring to maybe the comment in David's script and I'll let him address that.

Amit Kumar – McQuarrie

Yes.

David Sinnott

Yes, I think while the -- if you look at the split of the loss and how it falls to the reinsurance market, I mean clearly a substantial proportion of the Chilean market is going to hit the reinsurance market. But given the size of the capital base in the reinsurance sector and where profitability has concentrated with reinsurance business, you're going to be looking at a loss that’s substantially larger than that to take capital out of the business and give rise to a market turn. As to the size of the loss and I mean as Chris mentioned, as I mentioned it's emanating from those segments of the portfolio that we would expect it to. And so from that standpoint, it's in line with our expectations with respect to where it concentrates and the magnitude of it.

Chris Harris

I think you'll see some localized pricing impacts. I mean we certainly think -- if you look forward to July 1st with some of the Latin American, a big chunk of the Latin American market coming up for renewal and probably in Australia as well (inaudible), first you'll see some localized pricing reaction but we just haven't seen evidence. If we look at the Japanese renewal and some of the other business we've seen, just no other more widespread evidence of any price impact.

Amit Kumar – McQuarrie

Okay, that's helpful. And I guess connected to that is obviously the discussion on the Florida markets and the hurricane CAT fund, citizens and the local companies, which are obviously having a lot of problems. Can you just sort of give your thoughts on how do you see this situation evolving since we're obviously very close to the hurricane season?

David Sinnott

Okay, I'll lead off with some remarks. As I mentioned in my commentary not withstanding some of the problems that we've seen with the Florida companies and there's a raft of problems that they're contending with. But I think if we look at the current economics of that segment of our business notwithstanding those issues we would see a similar size commitment to that marketplace assuming that nothing dramatic happens with the price levels. And if we see price levels coming – deviating substantially from the general pattern that we've observed thus far this year, then we may have to take some different decision.

I think it's likely that while our bet in the aggregate will be a similar size to last year it’s likely that it will be concentrated somewhat more with counter parties whom we regard as the better credits; however, that's very much going to be a price dependent consideration. One scenario could be that reinsurers (fly to) quality, that is what to try to do what we may end up doing which is concentrate the bets with fewer counter parties. And if that happens you could very well see a disparity in pricing emerge between those that proceed to be the more stable versus those whose viability is more open to question. And it could be – if that disparity gets wide enough that – it may still be worth reinsuring some of the more questionable credits if you can satisfy yourself you're getting paid enough margin to run that credit exposure.

The disparity would have to be pretty wide in my view. And I think it’s unlikely that you will see it develop but it’s something that we will monitor on a case-by-case basis. As respect, the CAT fund, more exposure will be coming out into the marketplace in the form of increased private demand with the reduction in tickle, but that doesn't necessarily translate into dollar per dollar increase in reinsurance demand because the substantial portion of that tickle exposure is bought by citizens, which doesn't buy open market reinsurance and others have elected not to buy the tickle coverage.

So I don’t know that we’re going to see much corrective in the way of coming from the demand side of the equation bearing in mind that a lot of the Florida companies are experiencing significant financial distress and are looking very carefully at their reinsurance budgets. Hence my statement in the narrative about our expectation that some of these negotiations are going to be pushing pretty hard on price.

Amit Kumar – McQuarrie

Okay, that's helpful. And I guess finally just one numbers question. You mentioned an individual risk loss, I think of $7 million. Maybe just expand on that a bit?

Chris Harris

Sure, this is Chris. In terms of where it falls in our numbers, you will see it the property specialty bucket. I mean we generally don't comment on individual policy but it’s just – we put it out there just so you know you will see a spike in the kind of current accent that your number for that bucket, can’t really say anything other than that. It was a risk excess treaty and we had a loss associated with it.

Amit Kumar – McQuarrie

Okay, that’s very helpful. That’s all I have, thanks.

Operator

And the next question we have comes from Dan Johnson with the Citadel.

Dan Johnson – Citadel Investment Group

Hey, Dan Johnson with Citadel Investment Group. Two questions for you. The follow-up on your comment on the, I guess potential maximum $20 million Gulf exposure. Was that a net or a gross number?

Chris Harris

That’s a net number.

Dan Johnson – Citadel Investment Group

Okay, and then I guess somewhat of a similar question. When you think about the Chilean losses, what sort of retro or other sort of protection do we have incase loss estimates move higher.

Chris Harris

None effectively for us. Growth of reinsurance equals net of reinsurance on that loss as well as the first one to be honest, growth in that would be the same number.

Dan Johnson – Citadel Investment Group

Got it. And sort in regard to Chile, what's the state of information as far as you hear from cedants and brokers and others. I mean how far into the ultimate assessment process. Do you feel like how it’s been going on in the local market?

Chris Harris

I mean that's difficult. I think it varies by cedant, but I would say, it's a still a slow process. I mean at this point we’re two months beyond the event and I would say that information is probably slower than some of the other events that we have seen in terms of getting reported to us. But also as I mentioned in our call, I think our exposure is concentrated in the reinsurance treaty book and we have a pretty good gauge in terms of contract limits that we have out there in most of our most sizable commitments. Frankly in a lot of cases, if it’s Chilean specific, we would assume there a total loss. So I think that puts the ring around it if you will.

Dan Johnson – Citadel Investment Group

Understood, thanks for taking the questions,

Chris Harris

Thank you Dan.

Operator

The next question we have comes from Dean Evans with KBW.

Dean Evans – KBW

Yes, thanks. I was wondering if you guys could first give us a little bit more color on the reserve development and sort of where that came from, I guess first half was any of it, prior year your named catastrophes that you could highlight or anything else there?

Chris Harris

Sure, thanks, Dean. Yes, it was actually the development was relatively well spread across our book this quarter. If you kind of look at the four buckets that we report, about $5 million of the development came from CAT. And to be honest, that was spread across a few different specific events. There was a little bit ‘04, little bit ’05, little bit ’07, ’08, nothing really of note but just generally spread across the prior event. Within the individual risk bucket was $6 million, now it’s driven by really a specific case reserve reduction. We had one relatively large risk loss from a couple of years back and it went away, the case reserve went away.

So you kind of have about half of it between those two buckets where it’s very specific event. Within the property specialty bucket which makes up $5 million, primarily driven by review of proportional accounts within our portfolio and the biggest single contributor would have been the Japanese book and generally that would have just been a review of those accounts in conjunction with the April 1 underwriting renewal season. So really just reviewing some of the picks on that business in advance to renewals.

And then lastly, within other specialty and there is mix of classes in there, that makes up about $8 million. The two probably biggest contributors will be one would be (inaudible) where we write some reinsurance on a stop loss or higher excess basis and based on where we saw last year’s loss ratios coming in. We’ve taken done some of that IBNR and then there is a couple of specific holding your liability treaties as well, that has taken a bit of reduction. So sorry for a long winded explanation but it was actually spread out among all four buckets. So they really weren’t one or two items that stood out this quarter.

Dean Evans – KBW

No, that’s very helpful, thank you. The second area I guess I was just sort of wondering if you could quantificate for a while and give us a little bit of an update on how the build out of MUSIC and Lloyd’s is going and some of the things you’re seeing in both of those segments?

Chris Harris

Ok, I’ll try not to quantificate for too long but thank you for the question. Yes, I mean I think certainly we’ve been pleased with the development we’ve seen of the platforms outside of Bermuda. As I mentioned in my opening commentary. I think our results for this quarter do highlight the fact that we have a bit more balanced in our portfolio outside of the property catastrophe portfolio, than we’ve had previously. In terms of areas where we’re still seeing growth clearly the marine team within London or you really wouldn’t have had numbers in there for last year? I think they’ve been off to a good start. We’re pleased with the developments there.

The Direct and Facultative portfolio within the US, again the development time is always a little bit longer there, because you have to establish those cedant relationships, get on the approval list, start getting in their roster in terms of sourcing that business and that’s taken a while but again we’re starting to see the fruits of that and you’ll see some growth in the numbers there and then again on MUSIC, we’re still seeing growth come in that portfolio as well. We really have a renewal book for the first time now.

We’ve been approved in all of the key states, we got California added within the last quarter. So we’re conscious, it’s a tough market and I don’t think we’re trying to ignore that, but we do have some pockets where we’ve seen good growth and we think we’re on track there.

Dean Evans – KBW

Okay, great. Thank you.

Operator

The next question we have comes from Ian Gutterman with Adage Capital.

Ian Gutterman – Adage Capital

Hi guys good morning. A few follow-ups, I guess maybe the easier one first. Just on the Ross buyback I guess, can you just talk about why waiting four months to complete a program was worth, I guess that should probably three or three bucks a share, we’re seeing on the sale, anyway could – you just sold them up in the marketing you have bought it back within that way, or was that not an option.

Chris Harris

Again I mean I guess, ultimately the transaction will depend on our stock trades over the next couple of years, I guess we weren’t looking it necessarily as what it does for the next week or the next two weeks, but we saw it as I said before it was a significant block of shares. We were able to buy them, still at a significant discounts to book value. And we felt it was important to get kind of certainty of execution and as I said executed soon or rather than later, obviously you can't predict what may or may not happen in those next four months. So that was our thought process and deciding to do the transaction.

Ian Gutterman – Adage Capital

Okay fair enough. Just following up on the Florida. And I think the point to talk about as far as trying to trade up party or cedants obviously makes a lot of sense. Can you just maybe talk through to the process, how do you decide, maybe it’s just simple as not doing the capital build outs and trying to do the national companies, I assume it’s more than that, I mean how do you decide which capital buildups you think are worthy and which aren’t and so forth, I mean how do you evaluate out of the really the true part only which ones do you think are good credits and which aren’t?

Chris Harris

I’ll David comment on some more of details but I think it’s a broader question in just Florida, I mean I think always its part of our underwriting policy, there is a quantitative part of the assessment but there is always a qualitative assessment as well.

Ian Gutterman – Adage Capital

Right, and I guess what I said…

Chris Harris

One of the things we’ve done in our portfolio over the last few years is try to focus on counterparty selection and concentrating our best with folks we consider preferred clients over time. So it’s always an ongoing process that we do here. I think David was just trying to highlight that I think within kind of the general market there is probably been a little bit more recognition that you’ve got some potential challenges in Florida for this upcoming renewal season. So I don’t believe to think that it’s something that’s isolated to Florida, or that it’s something that’s new.

Ian Gutterman – Adage Capital

Well, I guess what to me was a little bit different but part of that is in the rest of the country you don’t have primary insurance companies that allow the rate of leverage of three to one, or four to one, or five to one. Do you know what I mean, then they have to – and they generally are rated companies, these are kind of these (inaudible) rated companies.

And some of them I’m sure are good, but some of them are aren’t and it’s hard for us with outsider to know, when I look at schedule I can see who reinsure to know if they’re quantitative or not, so I don’t know if you can know without names obviously give us some kind of, to what features you look at to see who is a, is it just the simple as being comfortable with management or is it where there exposure is or the claims operations is what are sort of the things you care about.

David Sinnott

Those were number of the factors and I think the point is taken that I’d say the power of the microscope probably has to be turned up a lot higher on Florida segment than it does for our portfolio as a whole but really the evaluation process is in part its Chris alluded to, in part quantitative and in part qualitative. We are able to get the financial information from the statutory filings which we’ve been looking very carefully at the key NAIC ratios to see how companies compare on that basis.

We for several years running now have been making business to the offices of the Florida companies to actually see what their operations look like, whether it’s a fully fledged operation or whether it’s a post office box. You can tell a lot by what goes on within the four walls of these companies, who has the claims infrastructure, the service infrastructure, underwriting infrastructure in place and is trying to build something up enduring value, those visits tell you an awful lot, how companies buy their reinsurance protection tells you an awful lot. I mean we as a matter of course will look at our own evaluation of say one in a 100 year return periods and compare that to where companies are buying and I mean just that simple metric of looking at how bigger disparity there is between our assessment and downside risk and what the companies are buying, it tells you an awful lot about the level of conservatives on that they are employing in their business.

So there is a lot of different factors as Chris said we – it’s something that we – it’s a discipline that we practice in all segments of our portfolio but I quite agree that this particular segment is, it does take on heightened importance.

Ian Gutterman – Adage Capital

Okay, now that is very helpful, that’s a great answer. Thank you. And just wanted to follow up on Chile. Should I assume that there is going to be further upward development, it’s probably going to come through the retro book just because it’s obviously harder to know how conservative or not your reinsurance clients have been?

Chris Harris

Yes, I think certainly, historically you can argue the retro portfolio is a bit harder to reserve for than some of the others. I think in our specific case here, we have a very limited amount of retrocessional commitment.

As I said, it’s really a few more cold spot 3D, we are not large writers of what I will consider more of a worldwide retro portfolio, so the amount of limits we have out there are very small in terms of potential development, we could get there.

For us, really the one area I would look at would be a couple of the larger multinationals where they buy some of the layers higher up on a CAT program, where if for some reason, they saw their Chile loss really developed quite a bit, that’s probably the one area where we could pick up some loss. But the retrocessional book wouldn’t be an issue for us.

Ian Gutterman – Adage Capital

Okay, great. And then just finally just one more follow-up on the expense ratio. When you said the fixed costs were down this quarter from last quarter is sort of wherever the fixed cost are now, is it – is that sort of the new run rate or do you think there is more cost savings to come in that fixed expense will come down further as you go through the year?

Chris Harris

I think we are – I think we are reasonably close. I think you can use Q1 as a pretty disengage of the run rate for fixed expenses.

Ian Gutterman – Adage Capital

Okay, great. And the variable part, the impact on the – the 2010 accrual, I assume it was hurt by Chile. And just how do you do that? Is that sort of a – you look at Chile and you figure out what it’s going to do to the whole year. You take that all in Q1 or is that sort of amortize it with the four quarters. I guess I am just wondering are we back to a normal accrual for Q2 through Q4 if nothing else happens or is there sort of a baked in accruals to come still, lower accruals to come?

Chris Harris

What we do is in the first quarter, we generally assume target accruals, because the majority of the year has yet to transpire. In this case, we chose to go slightly below target. And the reason for that is we took our first quarter actual results and then projected our mean CAT plan for the balance of the year and that resulted in a slightly than lower target in the first quarter. And then we get a little more, a little more actual as experienced occurs throughout the year and then go straight to actual at yearend.

Ian Gutterman – Adage Capital

Okay. But if that’s slightly lower target X million, do you take the whole X million in Q1 or is it X divided by four for each of the four quarters?

Chris Harris

We take the year at the accrual rate which was below target for the first quarter and that is divided by four.

Ian Gutterman – Adage Capital

Got it, that’s what I thought I should make sure. Okay, thank you very much.

Chris Harris

Yes.

Operator

The next question we have comes from John Deysher with Pinnacle.

John Deysher – Pinnacle

Good morning. I have two financial questions. First regarding the treasury share repurchase. If I look at the balance sheet, I see the treasury share account went up by about $7.3 million. And I think the total shares repurchase was a $171 million. It looks like a difference went through the common shares and additional paid in capital account. I guess my question is, is that correct and is that the required accounting treatment or did you have an option in how to book those treasury shares?

Chris Harris

We absolutely have an option to either place our shares into treasury or to retire them. What we simply do is, is we took a look at our restricted stock unit inventory, those shares that are expected to be issued over the next couple of years and we like to maintain a treasury to be able to handle the issuing of those shares.

The reason for that is that if we effect a share repurchase at any given time, we like to properly reflect what is the reduction of our capital versus what is being used to essentially diffuse future share issuances through our share based plan.

John Deysher – Pinnacle

Okay, so that’s why the difference went to a common stock in additional paid in capital.

Chris Harris

Correct. But there is no real benefit or detriment as to whether we put them in treasury or we put them in surplus, it’s just the way that we view where our shares truly outstanding are versus those shares that are issuable in the future.

John Deysher – Pinnacle

Okay, so you are basically building up the treasury share account to issue shares in the future for options or whatever other –

Chris Harris

For our restricted share unit plan, exactly.

John Deysher – Pinnacle

Yes, okay, got it. The other question is on the income statement. The other comprehensive loss item of $4.4 million, I am just curious what’s embedded in that number.

Chris Harris

Well, that’s a good question. What you are going to see with the 10-Q where we are going to become more detailed is during the quarter, we had a private placement which is Symetra. Symetra was an available-for-sale holding, where its inception to date gains and losses were held in equity as opposed to going through the income statement in real-time.

With the IPO of Symetra in the first quarter, we transferred that to being a trading security. And from now on all of its changes in realized and unrealized gains will go through the income statement. Now that $2.6 million inception to date gain that we had on our balance sheet at yearend is now in our unrealized gains on the income statement, which had an increase of net income for the period.

We have got $2.6 million of negative adjustment or $2.6 million of that $4.4 million that you mentioned to get us back to the proper comprehensive income. So it’s simply a reclass between comprehensive income and unrealized gains. The other piece is simply foreign exchange for the period.

John Deysher – Pinnacle

Okay, and that makes sense. And then finally, about a year-ago, you guys had an investor day here in New York. And I was just wondering if you are planning something like that this spring. And if so, do you have a date?

Chris Harris

Plans haven’t been finalized at this point.

John Deysher – Pinnacle

Do you think you might have one or –?

Chris Harris

We are not sure to be honest. I mean we will look at that I mean in terms of scheduling, would either be this year or it could be early part of next year.

John Deysher – Pinnacle

Okay, so you will make an announcement on that if you have it.

Chris Harris

Yes, we will.

John Deysher – Pinnacle

Very good. Thanks a lot.

Operator

(Operator Instructions). The next question we have comes from Keith Alexander with JPMorgan.

Keith Alexander – JPMorgan

Hi, thanks for the follow-up. I was just wondering outside of the property and specialty items as you mentioned already, were any of the other segments impacted by renewal timing in 1Q?

Chris Harris

No, I don’t think there were any particular timing anomalies within the rest of the portfolio.

Keith Alexander – JPMorgan

Okay, great, thanks.

Operator

Gentlemen, it appears that we have no further questions at this time.

Chris Harris

Okay, thank you, operator. That concludes this morning’s 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 will join us again at our second quarter earnings call.

Operator

Thank you gentlemen for your time and we thank you everyone for attending today’s conference. At this time, you may disconnect. Thank you.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Montpelier Re Holdings Ltd. Q1 2010 Earnings Call Transcript
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