NEW YORK--(BUSINESS WIRE)--Fitch Ratings today affirmed Montpelier Re Holdings Ltd's (Montpelier) senior unsecured debt rating at 'BBB+' and the Insurer Financial Strength (IFS) rating of Montpelier Reinsurance Ltd. (Montpelier Re) at 'A'. A full list of ratings actions follows at the end of this release. The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings affirmation reflects Montpelier's continued solid operating performance and internal capital generation over the past several years.
Montpelier's results for 2013 were strong, as would be expected during a period free of large catastrophic events. The company's 56.1% combined ratio generated net earnings of $191 million for the year. This result generated a solid return on average equity of 12.9%, despite the negative impact of $47.5 million of unrealized investment losses that were largely related to the rise in risk free interest rates during the period.
Montpelier's ratings continue to reflect the company's significant exposure to earnings and capital volatility derived from its property catastrophe reinsurance products. The company's share of market-wide losses from Sandy and other large catastrophic events over the last several years, while significant in some cases, has been consistently manageable and within levels that Fitch views as reasonable for a reinsurer of Montpelier's size and focus.
Fitch attributes this to sound risk management processes used by the company to manage its exposure to potential catastrophe-related losses by geographic zone and relative to its capital base. Montpelier's low underwriting leverage enables the company to preserve capital during periods of underwriting volatility.
Montpelier's capital ratios (such as net premium to equity and assets to equity) have consistently remained well within tolerances for the current rating level. Fitch expects this trend to continue for the foreseeable future.
Fitch views Montpelier's balance sheet risk as relatively modest. The company maintains relatively low invested asset leverage and its investment portfolio is dominated by highly rated fixed-income investments that fared well during periods of capital market volatility. There is relatively little risk of significant adverse loss development from the company's largely short-tail underwriting liabilities.
Key rating triggers that could result in a ratings downgrade include weakening of overall risk-adjusted capital strength as measured by an increase in net premiums written to equity ratio to levels at or above 0.6x from recent levels of 0.4x or an increase in Montpelier's 1 - 250 year per event catastrophe PMLs to 40% (currently 24%) of total equity.
Additionally, failure to maintain a run rate average combined ratio in the mid-80%s, which approximates Montpelier's average result from 2009 through 2013, could result in a ratings downgrade.
Fitch could also downgrade the company's ratings if Montpelier were to suffer catastrophe losses that were unfavorably inconsistent with its own internally modeled results or that resulted in earnings and/or capital declines that were significantly worse than comparably rated peers.
Key rating triggers that could generate longer term positive rating pressure include a prolonged period during which Montpelier outperformed comparably rated peers with respect to underwriting performance and overall profitability, continued strong risk adjusted capitalization metrics, and enhanced competitive positioning and scale in the company's key product lines.
Fitch has affirmed the following ratings with a Stable Rating Outlook:
Montpelier Re Holdings Ltd
--Issuer Default Rating (IDR) at 'A-';
--$300,000,000 4.7% senior notes due Oct. 15, 2022 at 'BBB+'.
--$150,000,000 8.875% non-cumulative perpetual preferred securities at 'BBB-'.
Montpelier Reinsurance Ltd.
--Insurer Financial Strength Rating (IFS) at 'A'.
Montpelier Capital Trust III
--$100,000,000 floating rate trust preferred securities due March 30, 2036 at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013);
--'Reinsurance (Global) Sector Credit Factors Special Report' (Aug. 14, 2013).
Applicable Criteria and Related Research:
Reinsurance (Global) Sector Credit Factors
Insurance Rating Methodology