Best Affirms Montpelier Re ‘A’ Rating; ‘bbb’ Debt

May 26, 2004

A.M. Best Co. announced that it has affirmed the financial strength rating of “A” (Excellent) of Bermuda-based Montpelier Reinsurance Ltd. and its debt rating of “bbb” on $250 million 6.125 percent senior unsecured notes due 2013 for Montpelier Re Holdings Ltd., as well as all debt securities filed under the $1 billion shelf registration. The outlook for all ratings is stable.

“The ratings reflect Montpelier’s superior risk based capitalization, excellent operating results, experienced management team and solid broker relationships,” said Best. “Since commencing operations in 2001, the company has established a diversified book of business focusing on property risk excess of loss, property pro-rata, property catastrophe, aviation liability, marine and personal accident catastrophe coverages. In 2004, Montpelier plans to expand into professional indemnity casualty reinsurance, primarily medical malpractice and errors and omissions (E&O) on an excess of loss basis” Best indicated that it does not anticipate that Montpelier’s participation in casualty reinsurance lines will exceed 10 percent of gross premiums.

The bulletin noted that “Montpelier produced a combined ratio of 51 percent in 2003, and shareholders’ equity has grown to $1.8 billion at March 31, 2004. The company’s success is attributable to favorable market rates, light catastrophes and an unencumbered balance sheet, along with the implementation of strict underwriting and risk management controls. Montpelier’s strategy of operating with a relatively small staff from a Bermuda-only platform allows it to be opportunistic and to selectively write lines of business with more favorable returns. Furthermore, its underwriting is supported by the extensive use of sophisticated modeling and pricing systems.

“Montpelier’s debt-to-adjusted capital is expected to remain in the mid- 20 percent range with fixed charge coverage sustained in the high single-digit range. The company’s existing senior note offering was used to support additional growth in the operating company. A.M. Best anticipates that any issuance under the current shelf registration will be used judiciously to support additional growth and financial flexibility.”

Offsetting factors, noted by Best include “the onset of softening in pricing for property covers, which could dampen expected returns, combined with external pressure from its original sponsors and shareholders to maintain double-digit returns on equity. Furthermore, Montpelier’s short operating history has not fully tested management’s underwriting expertise and risk management capabilities relating to low frequency high severity property catastrophe losses.

“Despite these concerns, A.M. Best expects Montpelier to continue to manage its capital base very conservatively, within acceptable ranges to support its current financial strength rating and meet the more stringent capital requirements for a newly establish Bermuda start-up entity. Best said it would “continue to closely monitor the company’s operations and performance.”

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