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Montpelier Re Holdings Ltd. (NYSE:MRH)

Q1 2014 Earnings Conference Call

May 1, 2014 08:00 AM ET

Executives

Jonathan Kim - General Counsel

Chris Harris - President and CEO

Mike Paquette -EVP and CFO

Chris Schaper - President

Analysts

Josh Shanker - Deutsche Bank

Dan Farrell - Sterne Agee

Ryan Byrnes - Janney Capital

John Desher - Pinnacle

Brett Shirreffs - KBW

Mike Zaremski - BAM

Operator

Greetings, ladies and gentlemen, and welcome to the Montpelier Group's First Quarter 2014 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.

Jonathan Kim

Thank you. Good morning and welcome to Montpelier Re’s first quarter 2014 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 14th, 2014.

Our speakers this morning are Christopher Harris, our President and CEO; and our Chief Financial Officer, Mike Paquette. Also with us are Chris Schaper, President of Montpelier Re Bermuda; Richard Chattock, CEO of Montpelier at Lloyds; Bill Pollett, President of Blue Capital. 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. Montpelier had an excellent first quarter with contributions from underwriting, capital management and investments leading to an increase in fully converted book-value per share of 5.8%. Solid execution of our focused underwriting strategy led to strong operating performance across each of our segments.

Quarterly combined ratios were 21% for Montpelier, Bermuda, 86% for Montpelier at Lloyds and 30% for collateralized re. Net written premiums increased by 5% as compared to the first quarter of 2013, although the trend varied by segment. Net written premiums in Montpelier of Bermuda decreased by 8% driven primarily by reduced property catastrophe writings reflecting the impact of both rate pressure and a lower U.S. hurricane PML.

Reinsurance market conditions remained competitive during the April renewal cycle with an average rate decrease of 10% on the overall Bermuda portfolio. Montpelier at Lloyds produced another strong quarter with net written premium growth of 7% and a combined ratio of 86%.

Growth was concentrated in individual risk, as we continue to expand the breath of insurance products, we offer within our core property, marine and engineering lines. Collateralized re written premium more than doubled off a relatively small base reflecting a launch of Blue Capital reinsurance holdings and the overall growth of managed capital within the segment.

By broadening the range of flexible and innovative products we offer to the market, we continue to strengthen our relationships with core business partners. The quarterly loss ratio of 18% reflect the absence of significant shock and catastrophe losses and the benefit of $35 million of favorable prior period releases, which arose primarily from the property catastrophe and individual risk classes.

The property catastrophe reductions were spread across a number of events with the largest contribution from the 2011 New Zealand earthquakes. Excluding the impact of reserve releases, the quarterly loss ratio was 40%. Share repurchases of 70 million in the first quarter were approximately equal operating earnings.

Since, quarter end we have repurchased an additional 17 million worth of common shares. While the outlook for the remainder of 2014 is challenging, our focus on delivering value to shareholders by concentrating on book value per share growth remains unchanged and we believe our nimble underwriting approach, flexible capital base and strong client relationships will serve us well in the execution of our plan.

I will hand over to Mike, to provide further details on the financials

Mike Paquette

Thank you, Chris. We ended the quarter with a fully converted book value per share of $31.01, an increase of 5.8% after taking into account our common dividend. Our operating income for the quarter was $72 million or a $1.48 per common share and our net income was $90 million or a $1.84 per common share, each expressed after preferred share dividends.

Our net income includes $23 million of net realized and unrealized investment gains and $5 million of net foreign exchange losses. Net premiums written in the first quarter were up 5% year-over-year, primarily as a result of increased writings within our Montpelier at Lloyd’s and collateralized reinsurance segments. Earned premiums were down 2% from a year ago.

We incurred no significant catastrophe losses during the quarter. The loss ratio for the quarter was just 18% and includes $35 million of favorable prior year loss reserve movements. The combined ratio was 50% for the quarter. Total operating and incentive compensation expenses were unchanged from those of a year ago.

Our total investment return for the quarter was 1.1% net of investment expenses and our net investment income was $13 million. At quarter end, our fixed maturities had an average duration of 0.6 years, including derivative and short positions and an average credit quality of AA minus.

Our equity and alternative investments at quarter end each comprised 4% of our total invested assets. The decrease in our net investment income versus the prior quarter reflects the lower duration profile and a greater focus on total return. The non-controlling interest shown on our financial statements reflect the third party capital deployed within our growing collateralized reinsurance operations, as well as the earnings there on.

Blue Capital Reinsurance Holdings Limited, our newest collateralized reinsurance vehicle, which is traded on the New York stock exchange is off to an excellent start achieving 3.5% increase in its book value per share for the quarter. To date we have repurchased $87 million of common shares at an average cost per share of $28.50. Our share repurchase activities to date represent a 6% reduction in our shares outstanding from the beginning of the year. Our current shareholders equity is $1.7 billion and our total capital is $2.1 billion. We believe our strong balance sheet positions us well for the remainder of 2014 and beyond.

And with I will now turn the discussion back to the operator.

Question-And-Answer Session

Operator

Ladies and gentleman at this time we will be conducting a question-and-answer session. (Operator instructions). Our first question is Josh Shanker of Deutsche Bank. Please go ahead.

Josh Shanker - Deutsche Bank

Looking at the premium volume generated during the quarter in the areas that you guys generate premium, it doesn’t seem like on the basis of premium there was any real change in appetite from last year to this year. In fact premium volume grew a little bit in the face of declining pricing. Can you talk about how that effects your exposures and what’s going on there?

Chris Harris

If you look at the overall premium volume, I think if you look at our disclosure as well as the risk position, if you look at our current PMLs today versus last summer of a year ago for U.S. hurricane that will be down as a percentage of equity. We have seen some growth within U.S. earthquake and European wind storm exposure. So that’s part of the offset there. And then -- so that’s really what we’re seeing is that we have seen some reduction in the U.S. hurricane risk and some growth in a couple of the zones outside of that. It is something we talked about on last quarter’s call.

Josh Shanker - Deutsche Bank

But is the pricing better in those zones or is it just a diversifying effect of weaker pricing and hurricane?

Chris Harris

Again I think that’s -- that varies -- we certainly think it varies by account and by where you attach on different on different types of cedents but at 1/1 [ph] we thought we still saw opportunities to deploy capital at relatively healthy rates. And we probably front loaded some of the exposure given that we expected to see more pricing pressure as we go through the year. So it’s a combination of those two factors.

Josh Shanker - Deutsche Bank

And I presume it’s all IBNR at this point. But can you…

Chris Harris

Sorry, just the other one, just when you’re looking at the numbers, also at 1/1 we did have some new capital coming online with some of the collateralized re-operations. So when you’re looking at the aggregate premium numbers that includes that as well. So you have to consider our risk position just consider the portion of that business that we keep now.

Josh Shanker - Deutsche Bank

That probably explains it better that makes sense. And in terms of the probably just IBNR and I realized there was nothing significant but what was the cat experience in the first quarter on numerical basis and I mean I don’t really know anything. So I mean I assume there is a high probability that you don’t have a loss or what would you say about that?

Chris Harris

Well I guess in terms of the current quarter, if I step back and look at the run rate that we booked for the current quarter, as I said in my script it was a relatively clean quarter. We didn’t -- there weren’t any particularly significant shock losses or catastrophe losses. So you do see that reflected in a lower run rate on the property catastrophe book. A year ago the first quarter was relatively clean but there were a few more small cats. So this year you saw a reduction within property cat. But when you go outside of that and look at the other buckets, generally those loss picks were consistent, if not in most cases they were up slightly just reflecting some of the pricing pressure that we’ve seen and a generally slightly higher attritional ratio picks.

Josh Shanker - Deutsche Bank

For the sake of my modeling can you put zero in the box for cat losses during the quarter or is that incorrect?

Chris Harris

That would be incorrect. I would encourage you to look at the financial supplement where we do have a pay that breakdowns kind of current year and prior year losses by the buckets that we report in and I think if you look at that that will give you a pretty good steer to see how those numbers have run historically.

Josh Shanker - Deutsche Bank

Okay. So there is a -- not catastrophe segment loss but cat losses but I’ll go take a look and maybe copy a number from there. Thank you.

Operator

Our next question is from Dan Farrell, Sterne Agee. Please go ahead.

Dan Farrell - Sterne Agee

Good morning. I was wondering if you could just expand a little bit more on some of the changes that you’re making in the investment portfolio strategy.

Chris Harris

It’s something we talked about last quarter as well. You started to see the duration move down and simply a function that we’ve decided to reduce the duration profile of our portfolio. So we’d love to take a little bit of interest rate risk off and focus, reallocate some funds to more managers with a total return approach. So historically we’ve always been focused on a total return investment philosophy. We’re relatively agnostic to whether return comes through NII or through unrealized and realized gains. And you’ve just seen we finished that reallocation during the quarter and you see that reflected in lower duration and lower net investment income for this quarter. Certainly we still think the total return of the portfolio was very acceptable this quarter.

Dan Farrell - Sterne Agee

And then just on the collateralized reinsurance premium, there was more bond premium than what was recognized in the written this quarter. Can you talk at all about how that pattern of written should look for the remainder of the year to top of what’s been bound in the first quarter?

Chris Harris

I’ll let Mike mention that one but it is -- you’re right. If you look at the premium there written versus what’s recognized it does have to do with writing some quota share transactions within the collateralized segment but that’s probably one we could take offline in terms of getting more details.

Operator

Our next question is from Ryan Byrnes, Janney Capital. Please go ahead.

Ryan Byrnes - Janney Capital

I just had a kind of a bigger picture question on the expense ratio. Overall it really hasn’t budged too much over the past three-four years where as I kind of always thought, it was little bit elevated in previous years because of the primary music ENS platform and now as I kind of completely out of numbers -- I was kind of always anticipating the expense ratio to come down little bit. But just want to see why that hasn’t happened and maybe is that a result a little bit of Blue Capital coming online as well?

Chris Harris

Okay, thanks for the question Ryan. We look at our expense ratio overall. We certainly feel that it’s been in line. We think we’ve done a good job of managing that over the last couple of years. You’ve got a couple of things working right now. One, on the incentive compensation expense, that’s been higher over the last couple of years just reflecting very strong results. So I think something that’s -- we think shareholders are happy to see that number go up. And then secondly if you look at the market currently, we are seeing some pricing pressure in many of our lines of business. So we’re seeing that reflected in the premium volumes to a certain extent. So that has -- pushes up the expense ratio. But if you compare the run rate now versus a few years ago, it certainly is down over that time frame.

Ryan Byrnes - Janney Capital

Okay, great. And then quickly just a little bit with the growth in the property specialty, just want to figure out is that more fact type business or where is that coming from?

Unidentified Company Representative

No, that’s all treaty business. And it’s again given the size of the the premium volume there it tends to be -- can be lumpy from quarter-to-quarter and that’s just a couple of transactions on property pro-rata and risk excess trading book.

Operator

Our next question is from John Desher of Pinnacle. Please go ahead.

John Desher - Pinnacle

Hi, good morning. Two quick questions one, what did you say the duration was of the fixed income portfolio or the weighted average duration as of March 31st?

Chris Harris

Its 0.6 years.

John Desher - Pinnacle

Okay. That’s what I thought, 0.6 years.

Chris Harris

0.6 correct.

John Desher - Pinnacle

Okay, fine. The other question is what were the assets under management of Blue Capital as of March 31st. Maybe you had said that but I missed it?

Chris Harris

The third party portion of those assets is reflected on our balance sheet as the non-controlling interest. That number is about $252 million just for the U.S. and the UK managed density. So that’s the third party portion. We owned about 20% of that. So you’d have to gross that up to include our portion of those investments.

Mike Paquette

And those would be the public vehicles. We do have certainly some other facilities which we operate on a private basis and those numbers aren’t, will not be included in there.

John Desher - Pinnacle

Okay. Well, I’d like to include those, what’s the growth asset under management number, I think in the annual report it was about $600 million. What would that equivalent number be at the end of the quarter?

Chris Harris

That’s very close, that’s -- right around that number is good proxy.

John Desher - Pinnacle

Okay. And how much of that is your own funds or MRH funds of that?

Mike Paquette

About $150 million.

John Desher - Pinnacle

$150 million, okay.

Chris Harris

Got a quarter of it.

John Desher - Pinnacle

All right. So that gets us to a net of about 450. And in terms of the incentive compensation that you mentioned earlier, is there any call back provision for that going forward, if results aren’t quite as stellar as they have been in the last few years?

Chris Harris

Well, a big portion of what we’re providing right now is for something that has not yet materialized but is projected currently to materialize. So some of that could reverse to the extent that our results for the balance of the year won’t keep pace with where we came out this quarter. Some of it is also items that have vested in terms of the performance criteria but have not yet vested in terms of time and length of service. So there is some of that at risk but also -- like any other company with proper cooperate governance we do have a call back policy to the extent that we have a restatement but I don’t think that’s what you’re asking here.

Mike Paquette

Yes. And I guess, I would more answer by saying the majority of that compensation is in the form of stock. So there’s a call back to the extent we don’t perform well and we don’t increase the share price for our shareholders.

John Desher - Pinnacle

I guess, the basic question is once the compensation is paid and it goes from accrued status to paid status, if the results are not quite as robust as they have been for any reason, does any of that paid compensation come back to the Company? That’s the question.

Chris Harris

And the answer to that is no. But again we’re providing contingent compensation expense currently to a large extent. So those amounts aren’t yet vested.

John Desher - Pinnacle

I understood.

Mike Paquette

It is of course, to keep in mind that incentive compensation has relatively long vesting period and a majority of it is stock based. So we think both of those factors help in that regard.

Operator

Our next question is from Brett Shirreffs with KBW. Please go ahead.

Brett Shirreffs - KBW

First point I want to ask was, as it relates to the catastrophe reserve development, I am just curious kind of a ballpark, how do you feel is left for some of the 2010 through 2012 catastrophe events to payout?

Chris Harris

Yeah. That’s -- certainly I’m looking at Mike. We can look up those numbers but in general I would say our reserving philosophy on the catastrophe events as we do try and react to the experience, as we learn new information or as we get more certainty on claims settling out. So and that’s really what you would saw reflected this quarter was just across a number of events. We saw some of the seasons taking down there case reserves or in the case of third New Zealand earthquake. We felt like we had more certainty about how that loss was going to be allocated among the different events. And you know that was the largest driver within this particular quarter.

Brett Shirreffs - KBW

Okay. I mean, do you think it’s 50% more than there, 75% there, is that too tough to determine?

Chris Harris

Sorry, in terms of -- what’s the exact percentage you’re looking for?

Brett Shirreffs - KBW

You know how much of what you’ve reserved for is paid out for those events?

Chris Harris

That’s the top one just because it varies so much by individual events and it tends to be a lumpy number because when we do pay claims, they tend to be in bigger chunks. So that number can move around a fair amount but I would say on average the paid ratio across the 2010 the 2012 events will -- I don’t want to guess. We’ll look that up and get that to you. I know we have that. I just don’t have it here in front of me.

Brett Shirreffs - KBW

Okay, that’s fine. And then just lastly, curious to hear your views on obviously the capital management was pretty strong in the quarter and as your share prices approaching book value I am just wondering what your thoughts are in terms of valuation sensitivity for capital management going forward?

Chris Harris

Thanks Brett. Yes, that certainly a factor that we consider. I always say we like to think about capital management within a risk reward frame work basically of how we can best grow our book value per share over time and if I look at where we sit today, versus a year ago a few of the factors that we’ll take into consideration. One, certainly our total underwriting capital has increased via growth in the various underwriting partnerships and that provides us both more operational and capital flexibility.

If I look at our risk position, PML to equity ratio is certainly lower than it was last summer and lower than what it was at the beginning of last year. And as we look at the current pricing environment, some of the rate changes we’re seeing within reinsurance, we do expect it will be partly defined attractive underwriting opportunities as we progress through the year. It’s not to say that we don’t think there are some good opportunities out there but they’re going to be harder to find. And some of the areas where we have seen pockets of growth have been more concentrated with the Lloyd’s platform and really outside of the catastrophe lines of business. So I think all of those probably work in the favor of us potentially continuing to look at share repurchases. As you say working against that, the price to book multiple has improved but we still feel at current valuations we’re comfortable with the capital management plans we have in place.

Operator

(Operator Instructions) And our next question is from Mike Zaremski of BAM. Please go ahead.

Mike Zaremski - BAM

Follow up on the investment income. Obviously good result this quarter on a total return but how should we think about the return going forward given the 0.6 year effective duration. Should we -- is this quarter a good run rate for the net investment income and was it kind of higher than what you would expect for net annualized gains of our account. How do we think about the dynamic given things are changing?

Chris Harris

Okay. Yes, certainly, good questions. The net realized and unrealized gains, certainly harder to predict. So I won’t make speculation there but in terms of the net investment income the portfolio shifts that we made those are in place at this point so I would say this quarter is a reasonably good proxy for the run rate in II going forward with the current yield environment in our current duration.

Mike Zaremski - BAM

Okay, got it. Thanks. And last follow up should we be thinking about buybacks kind of being more in a lull during wind season or what’s the view there for one season?

Chris Harris

I would say not necessarily. Again I think it will depend on a number of factors. We certainly do take into consideration wind season but there are times in the past when we have continued to be active buyers of our stock during the wind season. So traditionally it’s been a little bit slower just because, one, the amount of underwriting that goes on at very high during that period. So we’ve generally retained a little bit more capital for opportunities that might arise. But we certainly have not been averse to buying back our stock during that period in the past.

Mike Zaremski - BAM

And finally some of your competitors had talked about expecting some continued material pricing pressure in Florida, maybe your renewals might talked about also, their feelings that’s the third party capital pricing is kind of been disciplined than they’d hope. What are you guys expecting there?

Chris Harris

Okay. Well, I’ll turn now it over to Chris Schaper to give some of his thoughts.

Chris Schaper

Okay, so before that what we’re seeing we’re certainly seeing read limits being requested frankly from different cedants. Some of those cedants are existing firms and some are new within the State of Florida and so demand is actually up a bit. That being said certainly supply is there to take care of that. You asked about rates, I am not going to go into specifics but certainly rates are under pressure, competition is significant and both -- ILS are collateralized the businesses as well as the rated businesses are competing, in some cases for the same business but generally in different parts of the overall structure, but either way it is a competitive environment there in Florida.

As far as third party capital, it depends. Some are being I would say more disciplined, others are not. It depends on where they’re focused we’re seeing, some are focused more in the retro space. Some are not focused specifically there. So it just depends but it’s a dynamic market right now without a doubt and you’re kind of seeing a blend of some disciplined and undisciplined players in both the collateralized space as well and rated space.

Chris Harris

I would describe it as when we come off of a period of a relatively light industry catastrophe activity and I think there some level of complacency in the market and you’re seeing that reflected in pricing pressure and pressure on terms and structures in some cases. And when you’re in an environment like that I think it is very important that you stay very focused on managing your risk profile and that’s certainly something that we’re focused on at Montpelier and you’re in the that environment picking your clients and making sure that predictability and the persistency of your portfolio is high is very important and that’s really what we’re going to be focused on as we go through this mid-year renewal season.

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. 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 earnings call.

Operator

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

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