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Montpelier Upgraded to Neutral

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We are upgrading Montpelier Re Holdings Ltd. by a notch to Neutral from Underperform on the back of better performance in the fourth quarter.

In spite of Montpelier’s operating loss being narrower than the Zacks Consensus loss, the quarter suffered largely due to catastrophe losses, resulting from the Thailand floods.  Nevertheless, favorable prior-year loss reserve movements were a partial offset.

In an effort to increase focus on its short tail reinsurance underwriting, Montpelier divested Montpelier U.S. Insurance Company ("MUSIC"). Also, the divestiture will help the company deploy capital for its Bermuda and London platforms and is expected to be accretive to book value growth over the long term. However, Montpelier retained, reinsured or otherwise indemnified Selective for all business written by MUSIC with an effective date on or prior to December 31, 2011.

Also, Montpelier remains focused on enhancing its shareholders' value through dividend hike, which is supported by its strong balance sheet and ability to generate healthy cash flow. The company’s annualized dividend yield of 2.21% is higher than that of its nearest peer Flagstone Reinsurance Holdings SA with the latter’s annualized dividend yield being 2.19%.

On the flip side, Montpelier has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. During fiscal 2011, Montpelier incurred $409.0 million in net losses stemming from catastrophes, including the earthquakes in New Zealand and Japan, and the Thailand floods. The net loss increased more than three-fold year over year. The company has also been experiencing vulnerability in its commercial property book.

Also, Montpelier has been experiencing a weakness in its commercial property book.

Over the last 30 days, only one out of the five firms covering the stock revised the estimate upward for the first quarter and fiscal 2012. The Zacks Consensus Estimate for first quarter 2012 is 64 cents per share and $2.19 for fiscal 2011.

The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates slight upward 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. The company competes with RenaissanceRe Holdings Ltd. (RNR - Free Report) , Flagstone Reinsurance Holdings SA and Validus Holdings Ltd. (VR - Free Report) .

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