All seven analysts following Motley Fool Hidden Gems recommendation Montpelier Re Holdings (NYSE:MRH) expected the Bermuda-based reinsurer's second-quarter earnings to fall from last year's $1.55 per share. The company ended up exceeding even its own expectations, clocking in at $1.62 a share, well above the analysts' estimates of $1.18 to $1.51.
Montpelier was formed in December 2001 by White Mountains Insurance (NYSE:WTM) and Benfield Group. When Jack Byrne left Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) subsidiary GEICO to run White Mountain, Berkshire took a 20% stake in the company because Warren Buffett thought so highly of Byrne -- who later became Montpelier's first chairman.
The reason for the brief history is to highlight a comment in today's earnings report. Montpelier says that rates are softening, and that's certainly not good news. But even so, the company has been "declining programs" that do not meet its underwriting guidelines. However, the company has been writing a limited number of attractive new opportunities, and overall premiums were higher than expected.
How Berkshire-like is it to decline business when pricing is soft, in favor of long-term prospects? It is of the utmost importance that companies, especially reinsurers, underwrite with austerity, since risks typically outweigh those that traditional insurers encounter.
To be fair to the analysts, the company had warned in a previous conference call that premium revenue would decline by 10% from 2005. But so far, gross premium written for the first six months of 2005 stands at $582 million. That's well ahead of last year's $544 million six-month total.
Montpelier is trading at 7.9 times expected 2005 earnings -- and that forecast is before today's surprise to the upside. Given the company's pedigree, that's a pretty cheap valuation for a company showing that it knows how to underwrite properly.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
