Insurer-to-the-insurers Montpelier Re (NYSE:MRH) will report first-quarter 2007 financial results on Wednesday, April 25.

What analysts say:

  • Buy, sell, or waffle? Apparently, eight of the 10 analysts covering this dual Motley Fool Hidden Gems and Motley Fool Stock Advisor recommendation are waiting to see whether the big one blows over the reinsurer; they've rated it a hold. The other two have taken opposing views, with one saying "sell" and the other "buy."

  • Revenues. Still benefiting from the dearth of catastrophic damage, revenues are expected to grow nearly 10% to $172.8 million.

  • Earnings. Profits are expected to be weaker, though, falling 23% to $0.39 per share.

What management says:
Last quarter's boffo results showed the reinsurer's inherent strength when it's not beset by the perfect storm of massive hurricanes and other hundred-year events. As chairman and CEO Anthony Taylor noted, Montpelier Re's performance reflected "a favorable pricing environment, the low level of catastrophe losses, zero development of the 2004 and 2005 hurricane reserves and $17 million of net favorable reserve development on prior accident years." Yet while that displays the company's stability in a calm period, Wall Street wants to see how it reacts under greater stress.

What management does:
Typical profit ratios don't really apply to insurance companies. You want to see how they're investing the premiums received, what the loss ratios are, and how their combined ratios are faring, among other things. When you look at Montpelier Re, you find that the strong pricing environment was a key factor in helping its combined ratio fall to 35.7% last quarter. Combined ratios -- claims and expenses as a percentage of revenues -- higher than 100% mean that a company is losing money on its underwriting, while figures below that mean it's earning a profit. Management was also able to increase the reinsurer's book value 33%, to $15.46 per share.

Insurers, however, are expecting reinsurance rates to drop as much as 20% during the summer renewal season. That follows 50% to 100% premium hikes the year before, to make up for losses from hurricanes Katrina, Rita, and Wilma.

One Fool says:
Of course, no one wants devastating natural disasters to strike anyone. But when investing in an insurance company, you expect that they will happen, and that the company will have to pay out claims as a result. To move this stock higher, Montpelier Re must show that it can perform admirably under pressure -- which won't happen until a catastrophe strikes. It's a high-risk business to invest in, but it carries the potential for a large reward for the risk undertaken.

Additional problems also exist in Florida, essentially eliminating the insurance market there by mandating a hurricane catastrophe fund. Buyers of property catastrophe reinsurance will have the backing of as much as $17 billion in taxpayer funds to shore up capacity there, which effectively serves to reduce premiums for reinsurers like Montpelier Re to dangerous levels. Of course, if there is a major hurricane, the state's residents will bear the full burden of the cost. That's why many opposed the politically popular but economically unworkable plan.

Related Foolishness:

Montpelier Re has earned a five-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock-rating service by joining today. It's free!

Montpelier Re is a recommendation of both Motley Fool Hidden Gems and Motley Fool Stock Advisor. A 30-day guest pass to either lets you see what makes this insurer of the insurance companies special enough to garner a dual recommendation.

Fool contributor Rich Duprey owns shares of Montpelier Re, but holds no financial position in any other companies mentioned here. You can see his holdings here. The Motley Fool has a disclosure policy.