We retain our Neutral recommendation on Montpelier Re Holdings Ltd. (MRH), as exposure to catastrophe losses, rising expenses and debt level continue to dwarf the positives. The property and casualty insurer carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Montpelier Re has substantial exposure to cat losses. The second quarter of 2013 also faced the brunt of flooding in Europe and Canada, and of U.S. tornadoes. Underwriting results in the second quarter included $26.3 million of net catastrophe losses stemming from the cat events. Exposure to catastrophe activities will always remain a concern because of the uncertainty of their occurrence as well as the magnitude of impact.
Montpelier Re’s expenses have been rising over the last few years, leading to margin contractions. Though expenses declined in the first half of 2013, attributable to lower underwriting expenses, interest and other financing costs, this could not limit margin contraction. The company should try to drive the magnitude of increase in revenue such that it outdoes that of the expense, failing which operating margin will be hugely affected going forward.
Further, Montpelier Re’s debt level has also been increasing over the years, resulting in deterioration in debt equity ratio, which is also well above the industry average. The company should continue to service the debt uninterruptedly, else creditworthiness could be dented.
Nevertheless, counting on the positives, Montpelier Re has transformed from a Bermuda “monoline” property catastrophe reinsurer to a global diversified catastrophe specialist, expanding its operations in the U.S. and U.K. The company benefits from tax exemptions in Bermuda as no income taxes are levied there.
We expect Montpelier Re to deliver growth in its premium, riding on the strength of its product and geographic diversification, underwriting disciplines, and better pricing. Additionally, the company prudently manages risks by diversifying across geographies.
Additionally, to enhance shareholder value, the company engages in share buybacks as well as in the process of increasing dividends. Montpelier Re also scores strongly with the credit rating agencies.
Other Stocks to Consider
Other better-placed property and casualty insurers Alleghany Corp. (Y), Berkshire Hathaway Inc. (BRK.A) (BRK.B) and Cincinnati Financial Corp. (CINF), that carry a Zacks Rank #1 (Strong Buy), are also worth considering.
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