Fitch Downgrades Montpelier Re’s IFS Rating to ‘BBB’; Remains on Watch/Negative

November 4, 2005

Fitch Ratings announced that it has downgraded the long-term and senior debt ratings of Montpelier Re Holdings Ltd. to “BB” from “BBB-” and the insurer financial strength (IFS) rating of Montpelier Reinsurance Ltd. to “BBB” from “A-“. All the ratings remain on Fitch’s Rating Watch Negative.

“The rating actions follow Montpelier Re’s announcement of an $875 million net loss for the third quarter” (See IJ Website Nov. 1), said the announcement. “The net loss includes $950 million of losses related to Hurricanes Katrina and Rita. Montpelier Re also announced that it incurred a further $75 million to $85 million of losses as the result of Hurricane Wilma, which occurred in the fourth quarter. These losses are materially higher than Montpelier Re’s prior estimate of $450 million to $675 million for Hurricane Katrina.”

Fitch noted that Montpelier Re suffered “over $1 billion of losses” from the 2005 hurricane season, which, while perhaps “expected from insurers focusing on property catastrophe reinsurance,” far exceeded the rating agency’s expectations. “The magnitude of these losses,” said Fitch, “which represent 70 percent of Montpelier Re’s equity as of June 30, 2005, indicate that Montpelier Re had a high concentration of risk that was far beyond Fitch’s expectations. Fitch considers such a concentration to be inconsistent with the profile of an insurer in the ‘A-‘ range.”

Fitch’s analysis reveals its basic “concerns about Montpelier’s core underwriting abilities, at least in the near-term. Fitch said it believes there’s a degree of “uncertainty surrounding Montpelier’s Re’s future performance, in the face of further catastrophic events, is significant. Thus, the two-notch downgrade in Montpelier’s rating is less reflective of near-term capital levels, and more reflective of our noted lack of confidence in future performance.”

The ratings remain on Rating Watch Negative because Fitch said it “remains concerned about the concentration of risk in Montpelier Re’s book of business. While Montpelier has indicated that it plans to revise its risk profile going forward, such changes will take time to implement since reinsurance treaties tend to renew on either January 1 or July 1. Also, Montpelier’s ability to successfully execute on such plans remains unclear. Additionally, there remains the possibility of further development in hurricane loss estimates. Further, Fitch believes there is some risk that Montpelier’s near-term financial flexibility, and access to capital, may be impaired.”

Fitch indicated it “expects to be able to resolve the Rating Watch once it can reassess Montpelier Re’s revised risk profile and once Fitch believes there is a reasonably stable estimate of Montpelier Re’s ultimate losses from the 2005 hurricane season. Resolution of the Rating Watch will depend upon Fitch’s updated assessment of Montpelier Re’s risk profile and core underwriting capabilities, capital base, franchise positioning, financial flexibility and success in the January 1 renewal season.”

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