Montpelier Re Holdings Ltd. (MRH) reported second quarter 2011 operating of 8 cents per share, much lower than the Zacks Consensus estimate of 45 cents. Results were way behind earnings of $1.00 in the year ago quarter. Operating income was $5.2 million, plummeting from $72.5 million in the second quarter of 2010.
The quarter suffered largely due to catastrophe losses, resulting from tornado activity in the United States in April and May, lower investment income and higher operating expenses. However, favorable prior year loss reserve movements were a partial offset.
Including net realized investment gains of $5.0 million, net unrealized investment gains of $4.4 million, Net gains from investment-related derivative instruments of $0.2 million, net foreign exchange gains of $2.3 million and net gains from foreign exchange-related derivative instruments of $4.1 million, the company reported net income of $21.2 million or 33 cents per share, compared with $69.9 million or 96 cents per share.
Operational Update
Net insurance and reinsurance premiums earned decreased 0.9% year over year to $194.3 million in the quarter under review.
Underwriting loss in second quarter 2011 totaled $3.8 million, comparing unfavorably with the year ago quarter profit of $59.5 million.
Net investment income in the quarter came in at $17.1 million, 16% lower than the year-ago quarter.
The loss ratio in the fourth quarter was 68.6% compared with 29.4% in the year-ago quarter. Results include $39 million of catastrophe losses partially offset by $20 million of favorable prior year loss reserve movements.
Combined ratio in the quarter was 102.6%, a substantial deterioration from 59.8% in the year-ago quarter.
Financial Update
Montpelier ended the quarter with cash and cash equivalents of $423.5 million, up 82% from 2010-end.
At quarter end, the debt level slightly increased to $327.8 million from 2010-end level of $327.7 million.
Book value per share as of June 30, 2011 was $23.36, 1.6% higher than $23.10 as of March 31, 2011.
During the second quarter of 2011, Montpelier spent $15 million to buy back 811,350 shares.
Peer Comparison
RenaissanceRe Holdings Ltd. (RNR) which competes with Montpelier, reported a second quarter operating loss of 21 cents per share, as opposed to the Zacks Consensus Estimate of operating earnings of $1.64, showing a sharp decline from operating earnings of $2.40 per share reported in the year-ago quarter.
Results deteriorated primarily due to losses amounting to $70.8 million arising as a consequence of the U.S. tornadoes. Premiums, particularly from the reinsurance business, improved, reflecting improving market conditions, but the huge catastrophe (CAT) loss more than offset the improvement.
Our Take
Catastrophe losses coupled with the current pricing environment in the primary insurance market and the stressed economy are expected to restrict top-line growth.
We maintain our Underperform recommendation on Montpelier. The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.
