Fitch Positive on Montpelier

Fitch Ratings reiterated Insurer Financial Strength (“IFS”) at 'A-' of Montpelier Reinsurance Ltd., the main insurance operating subsidiary of Montpelier Re Holdings Ltd ( MRH - Analyst Report ) .

The rating agency also reiterated the Issuer Default Rating (“IDR”) at 'BBB+' of Montpelier.

The outlook remains positive.

The rating affirmations came on the back of Montpelier’s sustained strong operational results and internal capital generation over a long span of time. It also takes into account its exposure to earnings and capital instability stemming from property catastrophe reinsurance products. However, Fitch noted that the company is positioned to prudently manage its exposure to catastrophe related losses.

Fitch also noted that the company’s low underwriting and asset leverage has helped it to preserve capital even during the trying times of instable capital market and poor underwriting results. Also, the company’s investment portfolio consists of superior fixed income investments which performed well even amidst instable markets. Furthermore, chances of adverse loss development from short-tail underwriting liabilities are unlikely.

The outlook accounts for Montpelier's strong long-term operational performances as well as potential benefits arising from pricing improvement in the catastrophe and other short tail specialty reinsurance lines of businesses. Also, the rating reflects Montpelier's improving operating profile that involves less instability compared to its peers.

The rating agency might consider a rating upgrade if Montpelier continues to deliver solid results in 2012 on the heels of better underwriting performances and combined ratio returns to historical levels. Also, Montpelier's Lloyd's Syndicate 5151 should contribute considerably. This would further reinstate the diversification from specialty (re)insurance lines aiding operating profit stability going forward.

The rating would be subject to downgrade if risk-adjusted capital erodes, operating leverage ratios with underwriting leverage (traditional premiums written to equity ratios) increases to 1.0x or above, or suffers huge catastrophe loss.

We believe, the company’s strong ratings scores will help retain investor confidence and help it to write more businesses going forward, thereby augmenting the results.

We retain our Outperform recommendation on Montpelier. The quantitative Zacks #1 Rank (short term Strong Buy rating) for the company indicates a boost on the stock over the near term.

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