Montpelier Downgraded

We are downgrading our recommendation on Montpelier Re Holdings Ltd. (MRH - Analyst Report) to Underperform from Neutral given its exposure to catastrophe losses coupled with the current pricing environment in the primary insurance market and the stressed economy that is expected to restrict top-line growth.

Montpelier has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events, leading it to report an  operating loss in the first quarter. The last quarter suffered largely owing to huge catastrophe losses coupled with a significant increase in expenses as well as lower investment income.

Montpelier guided second quarter catastrophe losses from severe flood, hail, tornado and wind events in the United States to $35 million, pre-tax and net of reinsurance recoveries and reinstatement premiums. However, Montpelier does not anticipate any losses from the New Zealand earthquake that occurred in June.

Montpelier is experiencing a weakness in its commercial property book. Looking forward, Montpelier expects continued lower net premium written attributable to the lower percentage of property CAT premium renewing in the forthcoming quarters and timing differences associated with ceded reinsurance premiums.

Counting on the positives, Montpelier continues to benefit from its transition from a Bermuda “monoline” property catastrophe reinsurer to a diversified global reinsurer, positive ratings from the credit rating agency as well as share buybacks.

The Zacks Consensus Estimate for second-quarter 2011 is 56 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are respectively, loss of 22 cents and earnings of $2.34 per share.

The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.

Headquartered in Pembroke, Bermuda, Montpelier, through its subsidiaries in the U.S., the U.K. and Switzerland, provides customized and innovative reinsurance and insurance solutions to the global market. It competes with RenaissanceRe Holdings Ltd. (RNR - Analyst Report), Flagstone Reinsurance Holdings SA (FSR - Snapshot Report) and Validus Holdings Ltd.(VR - Snapshot Report).

Read the full analyst report on RNR

Read the full analyst report on MRH

Read the full analyst report on VR

Read the full analyst report on FSR