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Montpelier Re Holdings Ltd. (MRH - Analyst Report) reported third quarter 2012 operating income of 85 cents per share, surpassing the Zacks Consensus Estimate by 20 cents. Earnings strongly rebounded from a loss of 40 cents incurred in the prior-year quarter. Operating income of $48.5 million, compared favorably with loss of $24.9 million in third quarter 2011.

Including net realized investment gains of $14.9 million, net unrealized investment gains of $18.3 million, net losses from investment-related derivative instruments of $2.1 million, net foreign exchange losses of $10.8 million and net gains from foreign exchange-related derivative instruments of $2.9 million, the company reported net income of $72 million or $1.25 per share, reversing the loss of $66.2 million or $1.07 per share in the third quarter of 2011.

Operational Update

Gross premiums written declined 21% year over year. Net insurance and reinsurance premiums earned waned 1.9% year over year to $153 million in the quarter.

Montpelier booked underwriting profit of $41.7 million in the quarter, reversing the loss of $33.5 million in the year-ago quarter.

Net investment income in the quarter came in at $15.5 million, down 8.8% from $17.0 million in the year ago-quarter.

The loss ratio in the quarter was 37% compared with 89.0% in the year-ago quarter. Reported quarter loss ratio includes $16 million of favorable prior-year loss reserve movements, offset by $16 million loss estimate for a number of smaller catastrophe events.

The combined ratio in the quarter was 72.7%, a stark improvement from 121.5% reported in the year-ago quarter.

Financial Update

Montpelier exited the quarter with cash and cash equivalents of $414.3 million, up 21.7% from 2011-end.

At quarter end, the debt level slightly increased to $327.9 million from $327.8 million at the end of 2011.

Book value per share as of September 30, 2012, was $26.61, nearly 20% higher than $22.18 as of September 30, 2011.

Share Repurchase

Montpelier spent $22 million to buyback approximately 1.04 million shares in the third quarter of 2012.

Our Take

Montpelier is well positioned to deliver robust numbers going forward, given its increased exposure in the property catastrophe lines of business. Also, focusing on underwriting operations, augmenting capital flexibility, and strengthening its competitive position augur well going forward. Moreover, the $300 million senior debt refinancing supports enhanced capital flexibility. It also scores strongly with the rating agencies.

The company also benefits from tax exemptions in Bermuda, as no income taxes are levied there. Additionally, Bermuda Ministry of Finance has assured exemption of Bermuda-imposed income, withholding and capital gains taxes until 2035 on all Bermuda-based subsidiaries.

The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates a slight boost on the stock over the near term.

RenaissanceRe Holdings Ltd. (RNR - Analyst Report), a close competitor of Montpelier, is scheduled to release its third quarter results on November 1 after the bell. It also carries a Zacks #2 Rank.

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