As Motley Fool Hidden Gems and Stock Advisor pick Montpelier Re (NYSE: MRH) warned us back in February, unusually large and frequent individual risk losses pummeled results this quarter.

Net income for the first quarter came in at $0.3 million, or $0.00 per share, quite a turnaround from the $73.3 million, or $0.76 per share logged in the same period last year. Gross premiums written sank a tad more than 1%, to $256.8 million. Operating income -- an important measure showing what kind of job management has done writing insurance -- tumbled to $28.2 million, down from $60.3 million scored in the first quarter last year. The real stinger hitting the bottom line came from a loss on investments of nearly $40 million, but who hasn't been losing money on investments these days? The reinsurance industry is facing a tough environment, with competitors RenaissanceRe (NYSE: RNR), Flagstone Reinsurance (NYSE: FSR), and PartnerRe (NYSE: PRE) all facing similar headwinds.

Montpelier's loss ratio for the quarter came in at 54.5%, up from 41.8% in the first quarter last year, partly attributable to roughly $43 million in individual risk losses and $14 million in losses from a wicked windstorm in Europe. The combined ratio, the granddaddy of insurance-performance measures, stood at 89.7% for the quarter -- an uncomfortable jump from the 65.6% in the same period last year. A combined ratio of under 100% means the company is earning profit on its underwriting.

On the balance sheet front, things were fairly anemic. Fully converted book value per share as of March 31 stood at $17.76, essentially flat quarter over quarter. Meanwhile, a continued share repurchase campaign took 4.78 million shares off the table during the quarter.

While it was a respectable performance, all things considered, the coming periods might not turn out to be roses and daisies for the insurance industry, Montpelier included. Warren Buffett, whose Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is home to one of the world's largest reinsurance operations, stated in his recent annual report to shareholders:

It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years.

It's hard to argue with that blunt statement. Nonetheless, Montpelier likely has enough fuel to keep it moving during the business cycle, albeit at a slower pace. With a strong balance sheet, 1.7% dividend yield, skimpy P/E ratio, and solid reputation, there's still room to smile.

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