With the catastrophic hurricanes of 2005 behind them, many insurers are on the road to recovery. Just look at property and casualty reinsurer Montpelier Re (NYSE: MRH ) , which reported an amazing quarter in which its book value leaped 33% from last year to $15.46 per share. Reinsurers are essentially insurance companies for insurance companies.
After the devastating 2005 hurricane season, Montpelier Re was charged with having mispriced its policies for megacatastrophic events. While not entirely correct -- just because the once-in-10-lifetimes event comes to pass, doesn't mean mispricing is the culprit -- Montpelier Re adjusted its business and its pricing plans.
Where the reinsurers and insurance companies like United Fire & Casualty (Nasdaq: UFCS ) and White Mountains (NYSE: WTM ) were seen as on the ropes following Wilma, Katrina, and the other big hurricanes, a road to higher premiums was put in place.
The Bermuda-based reinsurer, which is a recommendation of Motley Fool Hidden Gems and Stock Advisor, reported net income of $122.3 million, compared with a hurricane-laden loss of $61 million last year. It was able to stand that loss on its head because it could raise premiums in the wake of the storms. Until now, Montpelier Re had been conservative in issuing new policies, but in the fourth quarter, net premiums written rose more than sixfold to $53.2 million.
Couple that with a dearth of storm activity during the year, and you end up with a 35.7% combined ratio, which is claims and expenses as a percentage of premiums. Combined ratios higher than 100% mean a company is losing money on its underwriting, while below that means it's earning a profit.
By every measure, this was a blowout result for Montpelier Re as it returns to a much firmer financial footing. While the hurricanes had dealt quite a blow to its solar plexus, Montpelier Re used the knockdown to enhance its business model and put in place a pricing structure that, when coupled with a lack of major losses this year, allowed it to regroup.
Obviously, we can't expect the reinsurer to escape from having to pay out claims. Hurricanes will come, and they will exact their toll. The insurance industry will be paying out claims in the future, which is something investors in these companies need to realize. Panicking at the sight of an insurance company paying out claims, even incurring occasional losses as a result, means such an investment is not for you.
Yet following every storm comes the sunshine. It's easy to see that Montpelier Re is basking in the glow.
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Fool contributor Rich Duprey owns shares of Montpelier Re but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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