Fitch Upgrades Montpelier’s Ratings; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings today upgraded the ratings of Montpelier Re Holdings Ltd (Montpelier). These ratings upgrades include Montpelier's senior unsecured debt rating, which was upgraded to 'BBB+' from 'BBB', and the Insurer Financial Strength (IFS) rating of Montpelier Reinsurance Ltd. (Montpelier Re), which was upgraded to 'A' from 'A-'. A full list of ratings actions follows at the end of this release. The Rating Outlook is Stable.

The ratings upgrade reflects Montpelier's solid operating performance and internal capital generation over the past several years. The upgrade also reflects that the company's underwriting performance, while still volatile relative to many comparably rated reinsurers, is comparable to other property catastrophe reinsurers rated by Fitch when viewed on a multi-year rolling average basis.

Montpelier reported $169 million of net earnings in 1H12, driven by a strong combined ratio of 67.2%, which benefited from light catastrophe losses during the period. This result more than offsets the $124 million loss reported for the full year 2011, when record high international catastrophe losses hurt Montpelier's results, along with most other global reinsurers.

Fitch further observes that the company's share of global catastrophe losses over the last several years, while significant in some cases, has been manageable and consistent with levels that might be expected from a reinsurer of Montpelier's size and focus.

Fitch believes that the company uses sound risk management processes to manage its exposure to potential catastrophe-related losses by geographic zone and relative to its capital base. Montpelier's low underwriting leverage enables the company to preserve capital during periods that include underwriting volatility.

Fitch notes favorably that despite Montpelier's 2011 operating loss, capital ratios (such as net premium to equity and assets to equity) consistently remained well within tolerances for the current rating level. Fitch expects this trend to continue for the foreseeable future.

Fitch views Montpelier's balance sheet risk as relatively modest. The company maintains relatively low invested asset leverage and its investment portfolio is dominated by highly rated fixed income investments that fared well during periods of capital market volatility. There is relatively little risk of significant adverse loss development from the company's largely short-tail underwriting liabilities.

Montpelier's ratings continue to recognize the company's significant exposure to earnings and capital volatility derived from its property catastrophe reinsurance products, most recently evidenced by the company's roughly $409 million of combined catastrophe losses in 2011, including approximately $250 million combined from the Japanese and New Zealand earthquake events.

Key rating triggers that could result in a ratings downgrade include weakening of overall risk-adjusted capital strength as measured by traditional operating leverage ratios and the company's publicly disclosed probable maximum losses (PML's) from large catastrophe events as a percent of total shareholders' equity.

Specifically, an increase in underwriting leverage (measured by traditional net premiums written to equity ratios) to levels at or above 0.7 times (x) from recent levels of 0.4x could result in a ratings downgrade. Likewise, an increase in Montpelier's 1-100 and 1-250 year per event catastrophe PML's to 30% (currently 19%) and 40% (currently 23%) of total equity, respectively, could result in a downgrade.

Additionally, failure to maintain a run rate average combined ratio in the mid-80%'s, which approximates Montpelier's average result from 2007 through mid-year 2012, could result in ratings downgrade.

Fitch could also downgrade Montpelier's ratings if the company were to suffer catastrophe losses that were unfavorably inconsistent with its own internally modeled results, or that resulted in earnings and/or capital declines that were significantly worse than comparably rated peers.

Key rating triggers that could generate longer term positive rating pressure include a prolonged period during which Montpelier outperformed comparably rated peers with respect to underwriting performance and overall profitability, continued strong risk adjusted capitalization metrics, and enhanced competitive positioning and scale in the company's key product lines.

Fitch has upgraded the following ratings and assigned a Stable Rating Outlook:

Montpelier Re Holdings Ltd

-- Issuer Default Rating (IDR) to 'A-' from 'BBB+';

-- $228,009,000 6.125% senior notes due Aug. 15, 2013 to 'BBB+' from 'BBB';

-- $150,000,000 8.875% non-cumulative perpetual preferred securities to 'BBB-' from 'BB+'.

<p>Montpelier Reinsurance Ltd.

-- IFS to 'A' from 'A-'.

Montpelier Capital Trust III

-- $100,000,000 floating rate trust preferred securities due March 30, 2036 to 'BBB-' from 'BB+.'

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

-- 'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688011

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Fitch Ratings
Primary AnalystGreg DickersonDirector
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Fitch, Inc.
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or
Secondary AnalystBrian SchneiderSenior Director
+1-312-606-2321
Committee Chairperson
orJeff MohrenweiserSenior Director
+1-312-368-3182
or
Media RelationsBrian Bertsch+1 212-908-0549
[email protected]

Source: Fitch Ratings