We are upgrading Montpelier Re Holdings Ltd. ( MRH - Analyst Report ) to Outperform from Neutral on the back of solid first quarter results.

Operating earnings in the first quarter breezed past the Zacks Consensus and also reversed the year-ago loss. A substantial decline in loss and loss adjustment expenses boosted the profitability in the quarter.

In order to return more value to its shareholders, the company’s Board approved a dividend hike of 5%. Its dividend yield is presently 2.04%. The company also buys back shares to enhance shareholders value.

In the first quarter, the company spent $37 million to buyback 1.95 million shares with 1.03 million shares already repurchased for $20 million in the second quarter. Also, the company is left with $107.7 million in its share buyback authorization as of March 31, 2012.

Further, the company benefits from tax exemptions in Bermuda as no income taxes are levied there. Also, Bermuda Minister of Finance has assured exemption of Bermuda-imposed income, withholdings and capital gains and taxes until 2035 on all Bermuda-based subsidiaries.

Besides, the company scores strongly with the credit rating agencies.

On the flip side, Montpelier has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. Many of its insurance and reinsurance policies cover unpredictable natural and other disasters such as hurricanes, windstorms, earthquakes, floods, fires,explosions and terrorism.

Nevertheless, the entire industry benefited from lower cat loss in the first quarter. However, exposure to cat activities will always remain a concern as natural disasters can affect the results adversely.

Montpelieris experiencing a weakness in its commercial property book. Its ability to sustain the level of price improvement as seen earlier in 2009 is increasingly becoming challenging owing to the stressed economic conditions.

The Zacks Consensus Estimate for second quarter 2012 and full year 2012 are 65 cents and $2.96 per share, respectively. The quantitative Zacks #2 Rank (short term Buy rating) for the company indicates slight boost on the stock over the near term.

Montpeliercompetes with Flagstone Reinsurance Holdings SA ( ) , RenaissanceRe Holdings Ltd. ( RNR - Analyst Report ) and Validus Holdings, Ltd. ( VR - Snapshot Report ) .