Fitch Affirms Montpelier's Ratings; Outlook Revised to Negative

CHICAGO--()--Fitch Ratings has affirmed its ratings on Montpelier Re Holdings Ltd. (NYSE: MRH) as follows:

--Insurer Financial Strength (IFS) at 'A';

--Issuer Default Rating (IDR) at 'A-';

--Senior unsecured notes at 'BBB+';

--Non-cumulative preferred shares at 'BBB-'.

The Rating Outlook has been revised to Negative from Stable. A complete list of ratings is provided at the end of this release.

KEY RATING DRIVERS

Fitch's affirmation of MRH's ratings reflect the company's continued solid financial performance, conservative operating leverage, modest financial leverage, sound risk management processes and niche market position with regional and super-regional primary insurers. MRH's ratings also continue to reflect the company's significant exposure to earnings and capital volatility derived from its property catastrophe reinsurance products.

The Negative Outlook reflects Fitch's view that, given MRH's comparatively narrow business focus and smaller size/scale, the company is relatively more exposed to the current difficult reinsurance market conditions. This is particularly the case in property catastrophe risk (42% of MRH's total 2013 gross premiums written), where record capitalization among traditional reinsurers and the growing capacity provided by alternative capital market providers are softening reinsurance pricing and broadening policy terms and conditions (T&C).

Barring an unexpected improvement in market conditions, or enhancement of MRH's competitive positioning and scale, Fitch's Negative Rating Outlook indicates that MRH's ratings will likely be downgraded by one notch within the next 12 months.

Fitch views alternative forms of risk transfer as a structural change to the property catastrophe reinsurance market. On balance, Fitch considers the emergence of the alternative reinsurance market as a negative to reinsurers' credit quality and financial strength, contributing to Fitch's negative sector outlook on global reinsurance.

Fitch expects the current market trend of cedants retaining more risks and concentrating more business with fewer, larger reinsurers to continue. This could hurt the ability of more focused and smaller providers like MRH to maintain their capacity share at adequate levels of profitability. Fitch also expects the property catastrophe pricing cycle to be more muted post event, which could reduce payback opportunities and dampen the future profitability profile for MRH and other property catastrophe focused reinsurers.

MRH maintains a niche market position with regional and super-regional primary insurers. However, Fitch considers MRH to have an overall small market position and size/scale with net premiums written of $603 million for full-year 2013 and total GAAP shareholders' equity (available to the company) of approximately $1.6 billion at Sept. 30, 2014. Fitch views reinsurers with net premiums of less than $1 billion and shareholders' equity of less than $2.5 billion to have a small market position and scale.

Fitch views MRH's capitalization favorably as measured by a low underwriting leverage ratio of 0.32x net premiums written to total equity in 2013. This level is lower relative to property/casualty (re)insurers but in line with other property catastrophe focused reinsurers.

Fitch believes that MRH uses a moderate amount of financial leverage in its capital structure, with a financial leverage ratio of 17.6% at Sept. 30, 2014. MRH's GAAP operating earnings-based interest and preferred dividend coverage has been strong, averaging 6.2x from 2009-2013, which included negative earnings coverage in 2011 due to increased catastrophe losses.

RATINGS SENSITIVITIES

Key rating triggers that could result in a ratings downgrade include continued weakness in reinsurance market conditions over the next six to nine months, particularly as it relates to property catastrophe pricing and T&C. Additionally, an increase in underwriting leverage to levels at or above 0.6x or an increase in Montpelier's 1-in-250-year per event catastrophe probable maximum loss (PML) to 40% (currently 21%) of total equity, or failure to maintain an average combined ratio in the mid-80% range, could result in a ratings downgrade.

Fitch could also downgrade the company's ratings if MRH 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 lead to an upgrade over the long term include improvement in MRH's competitive position in profitable market segments outside of property catastrophe reinsurance, including its specialty reinsurance and Lloyd's business; material risk-adjusted capital growth; and continued favorable profitability and strong capitalization metrics.

Fitch affirms the following ratings. The Rating Outlook has been revised to Negative from Stable:

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' (Sept. 4, 2014);

--'Reinsurance (Global) Sector Credit Factors Special Report' (Aug. 14, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Reinsurance (Global) Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715686

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=949635

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Contacts

Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1 312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Christopher A. Grimes, CFA
Director
+1 312-368-3263
or
Committee Chairperson
Jeff A. Mohrenweiser, FSA, CFA
Senior Director
+1 312-368-3182
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1 312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Christopher A. Grimes, CFA
Director
+1 312-368-3263
or
Committee Chairperson
Jeff A. Mohrenweiser, FSA, CFA
Senior Director
+1 312-368-3182
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com