Many investors never think twice about insurance companies, let alone the reinsurance companies that help traditional insurers slough off some of their excess risk. Yet Montpelier Re Holdings (UNKNOWN:MRH.DL) has been extremely successful, and over the past three years the stock has doubled to new decade highs as an unusually favorable environment with minimal claim losses bolstered the entire insurance industry. Coming into Monday afternoon's fourth-quarter financial report, investors in Montpelier Re were ready for some of those positive factors to fade, but still hoped for reasonable revenue growth. All in all, Montpelier Re closed 2014 on a positive note, giving investors much of what they were looking for. Let's take a closer look at how Montpelier Re did last quarter.
Montpelier Re holds its own
Montpelier Re's fourth-quarter performance was mixed, but it largely lived up to investor expectations. Total premiums written grew almost 20% to $93.2 million; on an earned-premium basis, underwriting revenue rose 8.5% to $160.6 million, just shy of the $161.3 million that analysts had hoped to see. A less favorable year from a loss standpoint caused operating income to drop by a third to $60.3 million, and unrealized investment losses further pressured net income, which fell to $1.09 per share. Nevertheless, that was a nickel per share better than investors had anticipated
Once again, though, Montpelier Re earned slight gains in its book value. Accounting for restricted shares outstanding, Montpelier Re's book value climbed almost 3% for the quarter, to $33.19 per share. That amounted to a 15% rise for full-year 2014, and it also puts the stock's valuation at less than 1.1 times book value, which some would see as a relative bargain even though the company actually posted a slight negative return on its investment portfolio.
As we saw in the previous quarter, Montpelier Re's loss experience was much worse than it was for the same quarter of 2013. Current-year losses and loss-adjustment expenses climbed almost 69% compared to the fourth quarter of 2013, sending its combined ratio up more than 21 percentage points to 60.7%. For the year, the rise in combined ratio was more modest, and at 65.6%, Montpelier Re is still enjoying an incredibly good run with its underwriting practices.
Will Montpelier Re keep seeing falling earnings?
Montpelier Re's leaders counted 2014 as a success. "All operating segments delivered strong profitability," said CEO Christopher Harris, "driving an increase in book value per share." Yet Harris warned investors should prepare for less impressive results during the first quarter of 2015, with expectations for flat premium volume as "planned growth in Individual Risk and Other Specialty lines offset the impact of targeted reductions in Property Catastrophe."
Montpelier Re also continued its aggressive share repurchase program, albeit not at the same pace it followed in the third quarter. Montpelier Re spent about $31.9 million buying back just over 1 million shares of stock at an average price of just over $31.75 per share. The company has had good timing with its repurchases, as the current stock price is 14% higher than that average purchase price, allowing Montpelier Re to continue reducing its share count and boosting per-share figures.
Investors should keep an eye on the expense side of the business. Montpelier Re saw acquisition costs climb more than three percentage points to 17.7%, and operating expenses also rose slightly. As losses return to more normal conditions, Montpelier Re will need the discipline to rein in overhead costs in order to keep as much capital for shareholders as possible.
Montpelier Re continues to take advantage of good conditions in the reinsurance market, and those factors don't appear likely to turn anytime soon. It only takes a bad loss event to reverse its fortunes, but Montpelier Re is in good shape to keep moving pushing its business and its stock price upward.