The hurricane season of 2005 was a painful way to learn that Motley Fool Hidden Gems pick Montpelier Re's
The first quarter was tough, but that was no surprise. Gross written premiums fell 27%, as an agreement with Aspen Insurance
All in all, it was no surprise to see underwriting income down 34% and operating earnings down about 30%. In the combined ratio, the loss ratio was good, but the expenses ratio was high -- though if I understood management's comments correctly, this was caused by some one-time items.
On the pricing side, things seem mighty interesting. International price increases have been moderate (up about 10% year to date), which I find surprising, given the flooding in Europe. But in the U.S. markets, increases have been on the order of 80% in this current second quarter (they were about 35% in the first quarter). What's more, it's possible that some buyers in certain areas won't be able to afford the premiums that insurers will charge for their risk.
Speaking of risk, management believes it has significantly altered its model for the better. Had these new standards been in place last year, the losses from the Gulf hurricanes would have been about 50% less. In addition, management believes that this model can provide 15% returns on equity over the cycle and returns in the 20% range in non-cat years. This all sounds good, but just remember that you never really know until the wind starts to blow.
Past performance and present guidance being what it is, Montpelier Re is deservedly cheap. But perhaps there's still a bargain to be found here -- particularly if you have confidence in the management team. Personally, I wish Arch Capital
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).