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On Jul 5, 2013, we downgraded our recommendation on  Montpelier Re Holdings Ltd. (MRH - Analyst Report) to Neutral from Outperform due to its mixed performance in the last reported quarter as well as increasing expenses that are taking a toll on margin expansion. The property and casualty insurer carries a Zacks Rank #3 (Hold).
Why the Downgrade?

Montpelier’s expenses have been rising over the last few years. Expenses in the last reported quarter escalated 4.8% primarily due to higher loss and loss adjustment expense, and higher insurance and reinsurance acquisition costs. Higher expenses have affected operating margin as well. Operating margin declined 550 basis points year-over-year in the first quarter. If expenses continue to accelerate, operating margin will be hugely affected going forward.

Montpelier has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. Exposure to cat activities will always remain a concern because of its uncertainty of occurrences as well as its magnitude of impact.

In the last reported quarter, Montpelier’s operating earnings lagged the year-ago numbers. The Zacks Consensus Estimate of 65 cents for the second quarter reflects a year-over-year decline of 21%.

Despite the hurdles, Montpelier remains well positioned to deliver solid numbers going forward, given its increased exposure in the property catastrophe lines of business. In addition, focusing on underwriting operations, augmenting capital flexibility, and strengthening its competitive position augur well going forward. Besides focusing on enhancing shareholder value, it also scores strongly with the ratings agencies. The company also benefits from tax exemptions in Bermuda.

Other Stocks to Consider

Though we currently remain on the sidelines for Montpelier, Alleghany Corporation (Y - Snapshot Report), American Safety Insurance Holdings Ltd. and Hilltop Holdings Inc. (HTH - Analyst Report) look attractive. All these stocks carry a Zacks Rank #1 (Strong Buy).

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