The reinsurance game is a tricky business. You create your models, make your assumptions, price your policies, and hope you got it all right. But just like in scientific research or studying for that big exam, you don't really know you're right until you're put to the test -- and then it's too late. 2005 was a harsh test for the reinsurance industry, and Montpelier Re's (NYSE:MRH) stock price took one of the biggest hits.

Investors actually had to endure a one-two punch to the gut when the company cut its dividend in response to this year's hurricane losses. Though not as bad as the third quarter, fourth-quarter results were still pretty bleak. The company posted a net loss of $61 million and a worse-than-expected operating loss of $53 million, and saw book value per share drop almost 38% for the full year.

I'm also a little concerned about Montpelier's premiums. Gross premiums looked soft, down 2% from last year. I realize the company decided to exit some lines of business (like marine drilling rigs), but I still thought it would have posted some growth here. Investors should also note that the net-premiums-written number for this quarter was hugely affected by the company's decision to boost its own reinsurance.

Now that all the damage from the hurricanes (not to mention the faulty models and resulting pricing decisions) has come home to roost, it's rebuilding mode for companies like Montpelier Re. The company has changed its model and raised capital, and is back out there writing policies. As far as the new policies go, management's commentary seemed similar to that of RenaissanceRe (NYSE:RNR) -- namely, that European pricing disappointed, but domestic pricing was more in line with expectations.

Montpelier's general focus on short-tail business is at least partly responsible for making its performance consistently more volatile than the likes of Arch Capital (NASDAQ:ACGL), Endurance Specialty (NYSE:ENH), and XL Capital (NYSE:XL). Unlike those firms, I think Montpelier lacks an adequately higher return on equity to compensate for its ups and downs. Perhaps other Fools will think that the stock's valuation relative to other reinsurers overstates future risks, but I'd rather stick to the likes of Arch Capital or even RenRe at present.

For more Foolish reassurances:

Montpelier Re is a Motley Fool Hidden Gems recommendation, while Endurance Specialty is a Motley Fool Inside Value recommendation.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).