XNYS:MRH Montpelier RE Holdings Ltd Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from        to     

 

Commission file number  001-31468

 

Montpelier Re Holdings Ltd.

(Exact Name of Registrant as Specified in Its Charter)

 

Bermuda

(State or Other Jurisdiction of

Incorporation or Organization)

 

98-0428969

(I.R.S. Employer

Identification No.)

 

Montpelier House

94 Pitts Bay Road

Pembroke HM 08

Bermuda

(Address of Principal Executive Offices)

 

(441) 296-5550

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of April 30, 2012, the registrant had 57,897,716 common shares outstanding, with a par value of 1/6 cent per share (“Common Shares”).

 

 

 



Table of Contents

 

MONTPELIER RE HOLDINGS LTD.

 

INDEX TO FORM 10-Q

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (Unaudited)

3

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the Three Month Periods Ended March 31, 2012 and 2011 (Unaudited)

4

 

 

 

 

Consolidated Statements of Common Shareholders’ Equity for the Three Month Periods Ended March 31, 2012 and 2011 (Unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2012 and 2011 (Unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

67

 

 

 

Item 4.

Controls and Procedures

67

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

67

 

 

 

Item 1A.

Risk Factors

68

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

 

Item 3.

Defaults Upon Senior Securities

68

 

 

 

Item 4.

Mine Safety Disclosures

68

 

 

 

Item 5.

Other Information

68

 

 

 

Item 6.

Exhibits

69

 

 

 

SIGNATURES

69

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

Unaudited

 

 

 

March 31,

 

December 31,

 

(In millions of U.S. dollars, except share amounts)

 

2012

 

2011

 

Assets

 

 

 

 

 

Fixed maturity investments, at fair value (amortized cost: $2,491.6 and $2,359.1)

 

$

2,544.8

 

$

2,390.2

 

Equity securities, at fair value (cost: $38.7 and $79.3)

 

39.8

 

96.1

 

Other investments (cost: $89.6 and $100.0)

 

94.9

 

102.4

 

Total investments

 

2,679.5

 

2,588.7

 

Cash and cash equivalents

 

438.8

 

340.3

 

Restricted cash

 

83.0

 

128.4

 

Reinsurance recoverable on unpaid losses

 

71.1

 

77.7

 

Reinsurance recoverable on paid losses

 

3.2

 

7.7

 

Insurance and reinsurance premiums receivable

 

287.1

 

213.4

 

Unearned reinsurance premiums ceded

 

38.2

 

22.0

 

Deferred insurance and reinsurance acquisition costs

 

56.9

 

50.9

 

Accrued investment income

 

18.4

 

16.2

 

Unsettled sales of investments

 

106.4

 

33.9

 

Other assets

 

21.0

 

20.3

 

Total Assets

 

$

3,803.6

 

$

3,499.5

 

Liabilities

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

1,035.7

 

$

1,077.1

 

Debt

 

327.9

 

327.8

 

Unearned insurance and reinsurance premiums

 

344.7

 

265.9

 

Insurance and reinsurance balances payable

 

68.9

 

44.0

 

Liability for investment securities sold short

 

104.3

 

136.3

 

Unsettled purchases of investments

 

275.2

 

69.9

 

Accounts payable, accrued expenses and other liabilities

 

31.8

 

29.2

 

Total Liabilities

 

2,188.5

 

1,950.2

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (See Note 11)

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Non-cumulative preferred shares (“Preferred Shares”) - issued 6,000,000 shares

 

150.0

 

150.0

 

Common Shares at par value - issued 60,310,792 and 62,260,930 shares

 

0.1

 

0.1

 

Additional paid-in capital

 

1,129.9

 

1,165.6

 

Treasury shares at cost: 1,387,287 and 1,396,756 shares

 

(21.8

)

(22.0

)

Retained earnings

 

360.6

 

259.7

 

Accumulated other comprehensive loss

 

(3.7

)

(4.1

)

Total Shareholders’ Equity

 

1,615.1

 

1,549.3

 

Total Liabilities and Shareholders’ Equity

 

$

3,803.6

 

$

3,499.5

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Unaudited

 

 

 

Three Month Periods Ended

 

 

 

March 31,

 

(In millions of U.S. dollars, except per share amounts)

 

2012

 

2011

 

Revenues

 

 

 

 

 

Gross insurance and reinsurance premiums written

 

$

259.7

 

$

254.1

 

Ceded reinsurance premiums

 

(39.7

)

(27.6

)

Net insurance and reinsurance premiums written

 

220.0

 

226.5

 

Change in net unearned insurance and reinsurance premiums

 

(59.5

)

(60.4

)

Net insurance and reinsurance premiums earned

 

160.5

 

166.1

 

Net investment income

 

17.6

 

17.5

 

Net realized and unrealized investment gains

 

32.4

 

16.6

 

Net foreign exchange losses

 

(2.6

)

(2.0

)

Net income (expense) from derivative instruments

 

1.5

 

(0.6

)

Other revenue

 

0.5

 

 

Total revenues

 

209.9

 

197.6

 

Expenses

 

 

 

 

 

Underwriting expenses:

 

 

 

 

 

Loss and loss adjustment expenses

 

44.0

 

248.4

 

Insurance and reinsurance acquisition costs

 

24.8

 

24.7

 

General and administrative expenses

 

25.7

 

24.0

 

Non-underwriting expenses:

 

 

 

 

 

Interest and other financing expenses

 

5.0

 

5.9

 

Total expenses

 

99.5

 

303.0

 

Income (loss) before income taxes

 

110.4

 

(105.4

)

Income tax benefit

 

 

1.1

 

 

 

 

 

 

 

Net income (loss)

 

110.4

 

(104.3

)

 

 

 

 

 

 

Dividends declared on Preferred Shares

 

(3.3

)

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

107.1

 

$

(104.3

)

 

 

 

 

 

 

Net income (loss)

 

$

110.4

 

$

(104.3

)

Net change in foreign currency translation

 

0.4

 

0.5

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

110.8

 

$

(103.8

)

 

 

 

 

 

 

Per share data:

 

 

 

 

 

Basic and diluted earnings (loss) per Common Share

 

$

1.74

 

$

(1.67

)

Dividends declared per Common Shares

 

0.105

 

0.100

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Month Periods Ended March 31, 2012 and 2011

Unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

Total

 

 

 

Common

 

Additional

 

Common

 

 

 

compreh-

 

 

 

shareholders’

 

Preferred

 

Shares at

 

paid-in

 

Shares held

 

Retained

 

ensive

 

(In millions of U.S. dollars)

 

equity

 

Shares

 

par value

 

capital

 

in treasury

 

earnings

 

loss

 

Opening balances at January 1, 2012

 

$

1,549.3

 

$

150.0

 

$

0.1

 

$

1,165.6

 

$

(22.0

)

$

259.7

 

$

(4.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

110.4

 

 

 

 

 

110.4

 

 

Other comprehensive income

 

0.4

 

 

 

 

 

 

0.4

 

Repurchases of Common Shares

 

(37.3

)

 

 

(37.3

)

 

 

 

Issuances of Common Shares from treasury

 

 

 

 

(0.2

)

0.2

 

 

 

Expense recognized for RSUs

 

1.8

 

 

 

1.8

 

 

 

 

Dividends declared on Common Shares

 

(6.2

)

 

 

 

 

(6.2

)

 

Dividends declared on Preferred Shares

 

(3.3

)

 

 

 

 

(3.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances at March 31, 2012

 

$

1,615.1

 

$

150.0

 

$

0.1

 

$

1,129.9

 

$

(21.8

)

$

360.6

 

$

(3.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

Total

 

 

 

Common

 

Additional

 

Common

 

 

 

compreh-

 

 

 

shareholders’

 

Preferred

 

Shares at

 

paid-in

 

Shares held

 

Retained

 

ensive

 

(In millions of U.S. dollars)

 

equity

 

Shares

 

par value

 

capital

 

in treasury

 

earnings

 

loss

 

Opening balances at January 1, 2011

 

$

1,628.8

 

$

 

$

0.1

 

$

1,258.7

 

$

(32.7

)

$

408.9

 

$

(6.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(104.3

)

 

 

 

 

(104.3

)

 

Other comprehensive income

 

0.5

 

 

 

 

 

 

0.5

 

Repurchases of Common Shares

 

(47.4

)

 

 

(47.4

)

 

 

 

Issuances of Common Shares from treasury

 

 

 

 

(2.4

)

2.4

 

 

 

Expense recognized for RSUs

 

1.4

 

 

 

1.4

 

 

 

 

RSUs withheld for income taxes

 

(0.7

)

 

 

(0.7

)

 

 

 

Dividends declared on Common Shares

 

(6.2

)

 

 

 

 

(6.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances at March 31, 2011

 

$

1,472.1

 

$

 

$

0.1

 

$

1,209.6

 

$

(30.3

)

$

298.4

 

$

(5.7

)

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

 

Three Month Periods Ended

 

 

 

March 31,

 

(In millions of U.S. dollars)

 

2012

 

2011

 

Cash flows from operations:

 

 

 

 

 

Net income (loss)

 

$

110.4

 

$

(104.3

)

Charges (credits) to reconcile net income (loss) to net cash from operations:

 

 

 

 

 

Net realized and unrealized investment gains

 

(32.4

)

(16.6

)

Net realized and unrealized (gains) losses on investment-related derivative instruments

 

(1.7

)

0.6

 

Net amortization and depreciation of assets and liabilities

 

3.6

 

5.3

 

Expense recognized for RSUs

 

1.8

 

1.4

 

Net change in:

 

 

 

 

 

Loss and loss adjustment expense reserves

 

(49.9

)

200.4

 

Reinsurance recoverable on paid and unpaid losses

 

17.5

 

8.3

 

Unearned insurance and reinsurance premiums

 

75.6

 

72.3

 

Insurance and reinsurance balances payable

 

24.3

 

11.3

 

Unearned reinsurance premiums ceded

 

(16.0

)

(11.9

)

Deferred insurance and reinsurance acquisition costs

 

(5.3

)

(6.6

)

Insurance and reinsurance premiums receivable

 

(71.3

)

(75.6

)

Other assets

 

(1.1

)

2.2

 

Accounts payable, accrued expenses and other liabilities

 

(7.4

)

(19.5

)

Other

 

0.6

 

(1.0

)

Net cash provided from operations

 

48.7

 

66.3

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of fixed maturity investments

 

(1,089.8

)

(817.5

)

Purchases of equity securities

 

(71.6

)

(112.0

)

Purchases of other investments

 

(0.7

)

(10.8

)

Sales, maturities, calls and pay downs of fixed maturity investments

 

1,059.4

 

862.7

 

Sales of equity securities

 

136.1

 

122.2

 

Sales and redemptions of other investments

 

13.2

 

14.6

 

Payment of closing expenses associated with the MUSIC Sale

 

(1.0

)

 

Settlements of investment-related derivative instruments

 

(4.5

)

(1.4

)

Net change in restricted cash

 

45.6

 

17.3

 

Payment of accrued investment performance fees

 

 

(1.0

)

Acquisitions of capitalized assets

 

(0.1

)

(0.2

)

Net cash provided from investing activities

 

86.6

 

73.9

 

Cash flows from financing activities:

 

 

 

 

 

Repurchases of Common Shares

 

(32.5

)

(47.4

)

Dividends paid on Common Shares

 

(6.4

)

(6.5

)

Dividends paid on Preferred Shares

 

(3.3

)

 

Net cash used for financing activities

 

(42.2

)

(53.9

)

Effect of exchange rate fluctuations on cash and cash equivalents

 

5.4

 

4.5

 

Net increase in cash and cash equivalents during the period

 

98.5

 

90.8

 

Cash and cash equivalents - beginning of year

 

340.3

 

232.3

 

Cash and cash equivalents - end of period

 

$

438.8

 

$

323.1

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

MONTPELIER RE HOLDINGS LTD.

 

Notes To Consolidated Financial Statements

(In millions of U.S. dollars, except share and per

share amounts or as otherwise indicated)

Unaudited

 

NOTE 1.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

Montpelier Re Holdings Ltd. (the “Company” or the “Registrant”) was incorporated as an exempted Bermuda limited liability company under the laws of Bermuda on November 14, 2001.  The Company, through its subsidiaries in Bermuda, the United States (the “U.S.”), the United Kingdom (the “U.K.”) and Switzerland (collectively “Montpelier”), provides customized and innovative insurance and reinsurance solutions to the global market.  The Company’s headquarters and principal executive offices are located at Montpelier House, 94 Pitts Bay Road Pembroke, Bermuda HM 08.

 

On December 31, 2011, the Company completed the sale of Montpelier U.S. Insurance Company (“MUSIC”), its former U.S.-based excess and surplus lines insurance company, to Selective Insurance Group, Inc. (“Selective”). In connection with this transaction (the “MUSIC Sale”), Montpelier has either retained, reinsured or otherwise indemnified Selective for all business written by MUSIC with an effective date on or prior to December 31, 2011 (the “MUSIC Run-Off”).  See Note 2.

 

The Company currently operates through three reportable segments:  Montpelier Bermuda, Montpelier Syndicate 5151 and MUSIC Run-Off. The Montpelier Bermuda and Montpelier Syndicate 5151 segments represent separate underwriting platforms through which the Company writes insurance and reinsurance business. The MUSIC Run-Off segment consists of: (i) for all periods through December 31, 2011, the historical operations of the Company’s former MUSIC segment; and (ii) for all subsequent periods, the insurance business retained, reinsured or otherwise indemnified by Montpelier in accordance with the MUSIC Sale. The segment disclosures provided herein present the operations of the Montpelier Bermuda, Montpelier Syndicate 5151 and MUSIC Run-Off segments prior to the effects of intercompany quota share reinsurance agreements among them.

 

Detailed financial information about each of the Company’s reportable segments for the three month periods ended March 31, 2012 and 2011 is presented in Note 9. The activities of the Company, certain of its intermediate holding and service companies and eliminations relating to intercompany reinsurance and support services, collectively referred to as “Corporate and Other”, are also presented in Note 9.

 

The nature and composition of each of the Company’s reportable segments and its Corporate and Other activities are as follows:

 

Montpelier Bermuda

 

The Montpelier Bermuda segment consists of the assets and operations of Montpelier Reinsurance Ltd. (“Montpelier Re”), the Company’s wholly-owned operating subsidiary based in Pembroke, Bermuda.

 

Montpelier Re is registered in Bermuda as a Class 4 insurer, meaning that Montpelier Re is subject to the most stringent capital and solvency margin requirements within Bermuda’s regulatory environment.  Montpelier Re seeks to identify and underwrite attractive insurance and reinsurance opportunities by combining underwriting experience with proprietary risk pricing and capital allocation models and catastrophe modeling tools.

 

Montpelier Syndicate 5151

 

The Montpelier Syndicate 5151 segment consists of the collective assets and operations of Montpelier Syndicate 5151 (“Syndicate 5151”), Montpelier Capital Limited (“MCL”),  Montpelier Underwriting Agencies Limited (“MUAL”), Montpelier Underwriting Services Limited (“MUSL”), Montpelier Underwriting Inc. (“MUI”), Montpelier Europa AG (“MEAG”) and Paladin Underwriting Agency Limited (“PUAL”).

 

7



Table of Contents

 

Syndicate 5151, the Company’s wholly-owned Lloyd’s of London (“Lloyd’s”) syndicate based in London, was established in July 2007.  Syndicate 5151 underwrites property insurance and reinsurance, engineering, marine hull and liability, cargo and specie as well as specialty casualty classes sourced mainly from the London, U.S. and European markets.

 

MCL, the Company’s wholly-owned U.K. subsidiary based in London, serves as Syndicate 5151’s sole corporate member.

 

MUAL, the Company’s wholly-owned Lloyd’s Managing Agent based in London, provides management and governance services to Syndicate 5151.

 

MUSL, the Company’s wholly-owned U.K. subsidiary based in London, provides support services to Syndicate 5151, MUAL and PUAL.

 

MUI,  MEAG and PUAL serve as Lloyd’s Coverholders, meaning that each are authorized to enter into contracts of insurance and reinsurance and/or issue documentation on behalf of Syndicate 5151. MUI, the Company’s wholly-owned U.S. subsidiary based in Hartford, Connecticut, underwrites reinsurance business on behalf of Syndicate 5151 through managing general agents and intermediaries.  MEAG, the Company’s wholly-owned Swiss subsidiary based in Baar, Canton Zug, Switzerland, focuses on marketing activities in Continental Europe and the Middle East on behalf of Syndicate 5151 and Montpelier Re.  PUAL, the Company’s wholly-owned U.K. subsidiary based in London, underwrites business on behalf of Syndicate 5151 and third parties.

 

MUSIC Run-Off

 

On December 31, 2011, Montpelier completed the MUSIC Sale. See Note 2.

 

Prior to the MUSIC Sale, MUSIC was a domestic surplus lines insurer and was authorized as an excess and surplus lines insurer in all 50 U.S. states and the District of Columbia. MUSIC underwrote smaller commercial property and casualty risks that did not conform to standard insurance lines.

 

Since Montpelier has either retained, reinsured or otherwise indemnified Selective for all of the business written by MUSIC with an effective date on or prior to December 31, 2011, the Company’s former and future operations associated with MUSIC do not constitute a “discontinued operation” in accordance with generally accepted accounting principles (“GAAP”) in the U.S.  The cash flows subsequent to the MUSIC Sale, as well as certain reinsurance balances and other designated assets serving as collateral supporting such cash flows, will continue to be presented within the MUSIC Run-Off segment.  See Note 9.

 

Corporate and Other

 

The Company’s Corporate and Other activities consist of the assets and operations of the Company and certain of its intermediate holding and service companies, including Montpelier Technical Resources Ltd. (“MTR”).

 

MTR, the Company’s wholly-owned U.S. subsidiary with its main offices in Woburn, Massachusetts and Hanover, New Hampshire, provides accounting, finance, legal, risk management, information technology, internal audit, human resources and advisory services to many of the Company’s subsidiaries.

 

The unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The financial statements incorporated in this report on Form 10-Q should be read in conjunction with the financial statements incorporated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission. In the opinion of management, these interim financial statements include all normally recurring adjustments considered necessary to fairly present the Company’s financial position, results of operations and cash flows. All significant intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements may not be indicative of financial results for the full year.

 

8



Table of Contents

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues earned and expenses incurred during the period. Actual results could differ materially from those estimates. The major estimates reflected in the Company’s unaudited consolidated financial statements include, but are not limited to, loss and loss adjustment expense (“LAE”) reserves, written and earned insurance and reinsurance premiums, ceded reinsurance and share-based compensation.

 

Insurance and Reinsurance Premiums and Related Costs

 

Reinsurance contracts can be written on a risks-attaching or losses-occurring basis. Under risks-attaching reinsurance contracts, all claims from cedants’ underlying policies incepting during the contract period are covered, even if they occur after the expiration date of the reinsurance contract. In contrast, losses-occurring reinsurance contracts cover all claims occurring during the period of the contract, regardless of the inception dates of the underlying policies. Any claims occurring after the expiration of the losses-occurring contract are not covered.

 

Premiums written are recognized as revenues, net of any applicable underlying reinsurance coverage, and are earned over the term of the related policy or contract.  For direct insurance, and facultative and losses-occurring contracts, the earnings period is the same as the reinsurance contract. For risks-attaching contracts, the earnings period is based on the terms of the underlying insurance policies.

 

For contracts that have a risk period of three years or less, the premiums are earned ratably over the term. For the relatively few contracts with risk periods greater than three years, premiums are earned in accordance with predetermined schedules that reflect the level of risk associated with each period in the contract term. These schedules are reviewed periodically and are adjusted as deemed necessary.

 

For the majority of Montpelier’s excess-of-loss contracts, written premium is based on the deposit or minimum premium as defined in the contract. Subsequent adjustments, based on reports of actual premium or revisions in estimates by ceding companies, are recorded in the period in which they are determined.  For Montpelier’s pro-rata contracts and excess-of-loss contracts where no deposit or minimum premium is specified in the contract, written premium is recognized based on estimates of ultimate premiums provided by ceding companies and Montpelier’s underwriters. Initial estimates of written premium are recognized in the period in which the underlying risks incept. Subsequent adjustments, based on reports of actual premium by the ceding companies, or revisions in estimates, are recorded in the period in which they are determined. Unearned premiums represent the portion of premiums written that are applicable to future insurance or reinsurance coverage provided by policies or contracts in force.

 

Premiums receivable are recorded at amounts due less any provision for doubtful accounts.  As of March 31, 2012 and December 31, 2011, Montpelier’s provision for doubtful accounts was $3.6 million.

 

When a reinsurance contract provides for a reinstatement of coverage following a covered loss, the associated reinstatement premium is recorded as both written and earned when Montpelier determines that such a loss event has occurred.

 

Deferred acquisition costs are comprised of commissions, brokerage costs, premium taxes and excise taxes, each of which relates directly to the writing of insurance and reinsurance contracts. These deferred acquisition costs are generally amortized over the underlying risk period of the related contracts.  However, if the sum of a contract’s expected losses and LAE, and deferred acquisition costs exceeds related unearned premiums and projected investment income, a premium deficiency is determined to exist. In this event, deferred acquisition costs are immediately expensed to the extent necessary to eliminate the premium deficiency.  If the premium deficiency exceeds deferred acquisition costs then a liability is accrued for the excess deficiency. There were no significant premium deficiency adjustments recognized during the periods presented.

 

Also included in acquisition costs are profit commissions incurred. Accrued profit commissions are included in insurance and reinsurance balances payable.

 

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Foreign Currency Exchange

 

The U.S. dollar is the Company’s reporting currency.  The British pound is the functional currency for the operations of Syndicate 5151, MUAL, PUAL, MCL and MUSL and the Swiss franc is the functional currency for the operations of MEAG. The U.S. dollar is the functional currency for all other operations. The assets and liabilities of these foreign operations are converted to U.S. dollars at exchange rates in effect at the balance sheet date, and the related revenues and expenses are converted using average exchange rates for the period. Net foreign exchange gains and losses arising from translating these foreign operations to U.S. dollars are reported as a separate component of shareholders’ equity as translation gains and losses, with changes therein reported as a component of other comprehensive income.

 

The following rates of exchange to the U.S. dollar were used to translate the results of the Company’s U.K. and Swiss operations:

 

Currency 

 

Opening Rate
January 1, 2012

 

Closing Rate
March 31, 2012

 

Opening Rate
January 1, 2011

 

Closing Rate
March 31, 2011

 

British Pound (GBP)

 

1.5617

 

1.6012

 

1.5441

 

1.6002

 

Swiss Franc (CHF)

 

1.0634

 

1.1081

 

1.0429

 

1.0875

 

 

Other transactions involving certain monetary assets and liabilities denominated in foreign currencies have been converted into the appropriate functional currencies at exchange rates in effect at the balance sheet date, and the related revenues and expenses are converted using either specific or average exchange rates for the period, as appropriate.  Net foreign exchange transaction gains and losses arising from these activities are reported as a component of net income in the period in which they arise.

 

Investments and Cash

 

Montpelier’s fixed maturity investments and equity securities are carried at fair value, with the net unrealized appreciation or depreciation on such securities included in income and reported within net realized and unrealized investment gains or losses in the Company’s statement of operations.

 

Montpelier’s other investments are carried at either fair value or on the equity method of accounting (which is based on underlying net asset values) and consist primarily of investments in limited partnership interests and private investment funds, event-linked securities whose principal and interest are forgiven if specific events occur (“CAT Bonds”), private placements and certain derivative instruments.  See Notes 5 and 7.

 

Investments, including investment securities sold short, are recorded on a trade date basis. For those marketable securities not listed and regularly traded on an established exchange, fair values are determined based on bid prices, as opposed to ask prices.  Fair values are not adjusted for transaction costs. Gains and losses on sales of investments are determined on the first-in, first-out basis and are included in income when realized. Realized investment gains and losses typically result from the actual sale of securities. Unrealized investment gains and losses represent the gain or loss that would result from a hypothetical sale of securities on the reporting date. In instances where the Company becomes aware of a significant unrealized loss with little or no likelihood of recovery, it writes down the cost basis of the investment and recognizes the loss as being realized.

 

Some of Montpelier’s investment managers are entitled to performance fees determined as a percentage of their portfolio’s net total return achieved over specified periods. Montpelier’s net realized and unrealized investment gains and net income (expense) from derivative instruments are presented net of any associated performance fees.  During the three month periods ended March 31, 2012 and 2011, Montpelier incurred performance fees related to its investments and investment-related derivative instruments of $2.2 million and $0.3 million, respectively.

 

Cash and cash equivalents include cash and fixed income investments with maturities of less than three months, as measured from the date of purchase.  Restricted cash of $83.0 million at March 31, 2012 consisted of $76.0 million of collateral supporting open short sale investment and derivative positions, and $7.0 million of foreign deposit accounts held at Lloyd’s.  Restricted cash of $128.4 million at December 31, 2011 consisted of $121.7 million of collateral supporting open short sale investment and derivative positions, and $6.7 million of foreign deposit accounts held at Lloyd’s.

 

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As of March 31, 2012 and December 31, 2011, $173.4 million and $34.8 million, respectively, of Montpelier’s cash equivalents represented repurchase agreements which were fully collateralized.

 

Net investment income is stated net of investment management, custody and other investment-related expenses. Investment income is recognized when earned and includes interest and dividend income together with the amortization of premiums and the accretion of discounts associated with those fixed maturity investments that were purchased at amounts different from their par value.

 

Common Shares Held in Treasury

 

Common Shares held in treasury are carried at cost and any resulting gain or loss on subsequent issuances is determined on a last-in, first-out basis.  As of March 31, 2012 and December 31, 2011, the Company had inception-to-date gains from issuances of its treasury shares of $2.3 million and $2.2 million, respectively, which have been recorded as additional paid-in capital. See Note 8.

 

Funds Withheld

 

Funds withheld by reinsured companies represent insurance balances retained by ceding companies in accordance with contractual terms. Montpelier typically earns investment income on these balances during the period the funds are held.  At March 31, 2012 and December 31, 2011, funds withheld balances of $5.1 million and $6.0 million, respectively, were recorded within “other assets” on the Company’s consolidated balance sheets.

 

NOTE 2.  MUSIC Sale

 

On December 31, 2011, Montpelier completed the MUSIC Sale, received total proceeds of $54.9 million therefrom and recorded an after tax gain on the sale of $11.1 million, which is inclusive of $1.0 million of expenses related to the transaction.  At the time of the MUSIC Sale, MUSIC had 44 employees, all of whom were retained by Selective.

 

In connection with this transaction, Montpelier has either retained, reinsured or otherwise indemnified Selective for all business written by MUSIC with an effective date on or prior to December 31, 2011. These protections were effected through the following arrangements, each of which became effective as of the closing date:

 

(i)                   Montpelier Re amended and increased its existing quota share arrangement with MUSIC from 75% to 100% (the “MUSIC Quota Share”) which has the effect of ceding the majority of MUSIC’s unearned premiums at December 31, 2011 to Montpelier Re;

 

(ii)                Montpelier Re entered into a Loss Development Cover (the “Loss Development Cover”) with MUSIC which has the effect of ensuring that MUSIC’s net loss and LAE reserves relating to retained business written on or prior to December 31, 2011 (that business not otherwise covered by the MUSIC Quota Share) remains adequate.  Under the Loss Development Cover, any future adverse development associated with such retained reserves will be protected by Montpelier Re and any future favorable development associated with such retained reserves will benefit Montpelier Re; and

 

(iii)             the Company provided Selective with an indemnification which has the effect of guaranteeing each of the contractual arrangements (those with MUSIC and/or Selective) of Montpelier Re U.S. Holdings Ltd.  (“MRUSHL”), as MUSIC’s seller, and Montpelier Re, as MUSIC’s primary reinsurer.

 

Also in connection with the MUSIC Sale, Montpelier has agreed not to compete directly with MUSIC’s business for a period of three years after the closing date.

 

During the first quarter of 2012 Montpelier Re assumed $1.3 million of MUSIC’s premium writings, representing policies bound by MUSIC in 2012 with an effective date on or prior to December 31, 2011. Under certain circumstances,  Montpelier may be required to assume additional MUSIC premium writings in future periods but such additional writings are not currently expected to be significant.

 

As of March 31, 2012 and December 31, 2011, Montpelier Re had remaining unearned premiums of $14.7 million and $24.8 million, respectively, and loss and LAE reserves of $42.4 million and $38.3 million, respectively, under the MUSIC Quota Share.

 

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NOTE 3.  Loss and LAE Reserves

 

The following table summarizes Montpelier’s loss and LAE reserve activities for the three month periods ended March 31, 2012 and 2011:

 

 

 

Three Month Periods
Ended March 31,

 

 

 

2012

 

2011

 

Gross unpaid loss and LAE reserves - beginning

 

$

1,077.1

 

$

784.6

 

Reinsurance recoverable on unpaid losses - beginning

 

(77.7

)

(62.4

)

Net unpaid loss and LAE reserves - beginning

 

999.4

 

722.2

 

 

 

 

 

 

 

Losses and LAE incurred:

 

 

 

 

 

Current year losses

 

72.7

 

282.0

 

Prior year losses

 

(28.7

)

(33.6

)

Total losses and LAE incurred

 

44.0

 

248.4

 

 

 

 

 

 

 

Impact of net foreign currency translation movements on loss and LAE

 

7.6

 

6.1

 

 

 

 

 

 

 

Losses and LAE paid and approved for payment:

 

 

 

 

 

Current year losses

 

(2.2

)

(2.7

)

Prior year losses

 

(84.2

)

(51.8

)

Total losses and LAE paid and approved for payment

 

(86.4

)

(54.5

)

 

 

 

 

 

 

Net unpaid loss and LAE reserves - ending

 

964.6

 

922.2

 

Reinsurance recoverable on unpaid losses - ending

 

71.1

 

68.7

 

Gross unpaid loss and LAE reserves - ending

 

$

1,035.7

 

$

990.9

 

 

Loss and LAE reserves are comprised of case reserves (which are based on claims that have been reported) and IBNR reserves (which are based on losses that are believed to have occurred but for which claims have not yet been reported and may include a provision for expected future development on existing case reserves). Case reserve estimates are initially set on the basis of loss reports received from third parties.  IBNR reserves are estimated by management using various actuarial methods as well as a combination of Montpelier’s own loss experience, historical insurance industry loss experience and management’s professional judgment. Montpelier’s internal actuaries review the reserving assumptions and methodologies on a quarterly basis and its loss estimates are subject to an annual corroborative review by independent actuaries using generally accepted actuarial principles.

 

Montpelier’s reserving process is highly dependent on loss information received from its cedants. With respect to prior year loss and LAE development, information and experience obtained since the last reporting date included changes in loss amounts reported by ceding companies, IBNR recorded as a result of these loss advices and other information and events.

 

In particular, loss and LAE reserves for non-catastrophe losses initially include significant IBNR as a result of timing lags inherent in the reporting process.

 

Loss and LAE Development — three month period ended March 31, 2012

 

During the first quarter of 2012, Montpelier experienced $28.7 million in net favorable development on prior year loss and LAE reserves.

 

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The net favorable development recognized during the first quarter of 2012 related to the following events and factors:

 

·                                        2011 Japan earthquake ($6.8 million decrease),

 

·                                        2011 Danish cloudburst ($3.9 million increase),

 

·                                        Three fire losses occurring during 2011 and 2010 ($3.9 million decrease),

 

·                                        February 2011 New Zealand earthquake ($2.3 million increase), and

 

·                                        Other known 2011 and 2010 catastrophe events ($1.3 million increase).

 

In addition to the foregoing, claims reported to Montpelier through March 31, 2012 indicated that the non-catastrophe property and casualty IBNR initially recorded during 2011 and 2010 exceeded the extent of losses that actually occurred, and consequently Montpelier decreased its loss and LAE reserves by a further $9.8 million during the first quarter of 2012.

 

The remaining net favorable development on prior year loss and LAE reserves related to several smaller adjustments made across multiple classes of business.

 

Loss and LAE Development — three month period ended March 31, 2011

 

During the first quarter of 2011, Montpelier experienced $33.6 million in net favorable development on prior year loss and LAE reserves.

 

The net favorable development recognized during the first quarter of 2011 related to the following events and factors:

 

·                                        2010 Australian floods ($3.7 million decrease),

 

·                                        Casualty reserves, primarily related to 2007 and prior years ($2.5 million decrease),

 

·                                        2005 and 2004 hurricanes ($2.1 million decrease),

 

·                                        Partial subrogation of a 2010 marine loss ($1.2 million decrease), and

 

·                                        A non-catastrophe property loss that occurred during 2008 ($1.0 million decrease).

 

In addition to the foregoing, claims reported to Montpelier through March 31, 2011 indicated that the non-catastrophe property IBNR initially recorded during 2010 and 2009 exceeded the extent of losses that actually occurred, and consequently Montpelier decreased its loss and LAE reserves by a further $12.8 million during the first quarter of 2011.

 

The remaining net favorable development on prior year loss and LAE reserves related to several smaller adjustments made across multiple classes of business.

 

Net Impact of Foreign Currency Translation Movements on Loss and LAE Reserves

 

Montpelier recognized net foreign exchange translation losses related to its current and prior year loss and LAE reserves of $7.6 million and $6.1 million during the three month periods ended March 31, 2012 and 2011, respectively.

 

NOTE 4.  Reinsurance

 

In the normal course of business, Montpelier purchases reinsurance from third parties in order to manage its exposures. The amount of ceded reinsurance that Montpelier buys varies from year to year depending on its risk appetite, as well as the availability and cost of the reinsurance coverage. Ceded reinsurance premiums are accounted for on a basis consistent with those used in accounting for the underlying premiums assumed, and are reported as a reduction of net premiums written.  Certain of Montpelier’s assumed pro-rata contracts incorporate reinsurance protection provided by third-party reinsurers that inures to Montpelier’s benefit. These reinsurance premiums are reported as a reduction in gross premiums written.

 

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All of Montpelier’s reinsurance purchases to date have represented prospective cover, meaning that the coverage has been purchased to protect Montpelier against the risk of future losses as opposed to covering losses that have already occurred but have not yet been paid. The majority of Montpelier’s reinsurance contracts are excess-of-loss contracts covering one or more lines of business.  Montpelier has also purchased pro-rata reinsurance with respect to specific lines of its business. Montpelier also purchases industry loss warranty (“ILW”) policies which provide coverage for certain losses incurred, provided they are triggered by events exceeding a specified industry loss size as well as Montpelier’s own incurred loss. For non-ILW excess-of-loss reinsurance contracts, the attachment point and exhaustion of these contracts are based solely on the amount of Montpelier’s actual losses incurred from an event or events.

 

Montpelier remains liable for losses it incurs to the extent that any third-party reinsurer is unable or unwilling to make timely payments under reinsurance agreements.  Montpelier would also be liable in the event that its ceding companies were unable to collect amounts due from underlying third-party reinsurers.

 

Montpelier records provisions for uncollectible reinsurance recoverable when collection becomes unlikely due to the reinsurer’s inability to pay.  Montpelier does not believe that there are any amounts uncollectible from its reinsurers as of the balance sheet dates presented.

 

Earned reinsurance premiums ceded were $23.6 million and $16.1 million for the three month periods ended March 31, 2012 and 2011, respectively.  The increase (decrease) in estimated ultimate reinsurance recoveries included in loss and LAE were $(3.8) million and $9.4 million for the three month periods ended March 31, 2012 and 2011, respectively. Changes in estimated ultimate reinsurance recoveries are primarily the result of changes in the estimated gross losses incurred. In addition to loss recoveries, certain of Montpelier’s ceded reinsurance contracts provide for recoveries of additional premiums, reinstatement premiums and for forgone no-claims bonuses, which are incurred when losses are ceded to these reinsurance contracts.

 

Reinsurance Recoverable on Paid and Unpaid Losses

 

Under Montpelier’s reinsurance security policy, reinsurers are generally required to be rated “A-” (Excellent) or better by A.M. Best (or an equivalent rating with another recognized rating agency) at the time the policy is written. Montpelier also considers reinsurers that are not rated or do not fall within this threshold on a case-by-case basis if adequately collateralized.  Montpelier monitors the financial condition and ratings of its reinsurers on an ongoing basis.

 

The A.M. Best ratings of Montpelier’s reinsurers related to reinsurance recoverable on paid losses as of March 31, 2012 and December 31, 2011, are as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

Rating

 

Amount

 

% of Total

 

Amount

 

% of Total

 

A+

 

$

1.5

 

47

%

$

3.2

 

42

%

A

 

1.7

 

53

 

4.4

 

57

 

A-

 

 

 

0.1

 

1

 

Unrated by A.M. Best

 

 

 

 

 

Total reinsurance recoverable on paid losses

 

$

3.2

 

100

%

$

7.7

 

100

%

 

The A.M. Best ratings of Montpelier’s reinsurers related to reinsurance recoverable on unpaid losses at March 31, 2012 and December 31, 2011, are as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

Rating

 

Amount

 

% of Total

 

Amount

 

% of Total

 

A+

 

$

22.2

 

31

%

$

23.6

 

30

%

A

 

25.0

 

35

 

27.5

 

35

 

A-

 

2.8

 

4

 

2.8

 

4

 

Unrated by A.M. Best

 

21.1

 

30

 

23.8

 

31

 

Total reinsurance recoverable on unpaid losses

 

$

71.1

 

100

%

$

77.7

 

100

%

 

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Montpelier’s unrated reinsurance recoverables as of March 31, 2012 and December 31, 2011 relate to reinsurers that have either: (i) fully collateralized the reinsurance obligation; (ii) a Standard & Poor’s financial strength rating equivalent to an A.M. Best rating of “A-” (Excellent) or better; or (iii) entered run-off but are considered by management to be financially sound.

 

Reinsurance Disputes

 

Montpelier is subject to litigation and arbitration proceedings in the normal course of its business.  These proceedings often involve reinsurance contract disputes which are typical for the reinsurance industry.  Expected or actual reductions in reinsurance recoveries due to contract disputes, as opposed to a reinsurer’s inability to pay, are not recorded as an uncollectible reinsurance recoverable. Rather, they are factored into the determination of Montpelier’s net loss and LAE reserves.

 

As of March 31, 2012, Montpelier had no ongoing material insurance or reinsurance contract disputes.

 

NOTE 5.  Investments

 

Fixed Maturity Investments and Equity Securities

 

The table below shows the aggregate cost (or amortized cost) and fair value of Montpelier’s fixed maturity investments and equity securities, by investment type, as of the dates indicated:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Cost or
Amortized

Cost

 

Fair
Value

 

Cost or
Amortized
Cost

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

954.4

 

$

978.3

 

$

887.1

 

$

886.2

 

Residential mortgage-backed securities

 

600.8

 

612.0

 

560.8

 

574.4

 

Debt securities issued/sponsored by the U.S. Treasury and its agencies

 

504.5

 

508.2

 

488.6

 

495.7

 

Commercial mortgage-backed securities

 

121.6

 

125.9

 

139.2

 

142.0

 

Debt securities issued by U.S. states and political subdivisions

 

71.1

 

78.2

 

58.3

 

64.7

 

Debt securities issued by foreign governments and their agencies

 

46.3

 

47.1

 

46.2

 

46.8

 

Other debt obligations

 

192.9

 

195.1

 

178.9

 

180.4

 

Total fixed maturity investments

 

$

2,491.6

 

$

2,544.8

 

$

2,359.1

 

$

2,390.2

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

Exchange-listed funds

 

$

25.0

 

$

25.6

 

$

25.0

 

$

23.6

 

Financial

 

5.8

 

5.9

 

11.9

 

9.4

 

Consumer goods

 

3.6

 

3.9

 

4.6

 

9.0

 

Industrial

 

2.6

 

2.6

 

4.7

 

6.4

 

Energy

 

0.8

 

1.0

 

16.5

 

24.5

 

Technology

 

0.7

 

0.6

 

14.2

 

19.5

 

Other

 

0.2

 

0.2

 

2.4

 

3.7

 

Total equity securities

 

$

38.7

 

$

39.8

 

$

79.3

 

$

96.1

 

 

As a provider of insurance and reinsurance for natural and man-made catastrophes, Montpelier could become liable for significant losses on short notice.  As a result, its asset allocation is predominantly oriented toward high quality, fixed maturity securities with a short average duration. This asset allocation is designed to reduce Montpelier’s sensitivity to interest rate fluctuations and provide a secure level of liquidity for the settlement of its liabilities as they arise.  As of March 31, 2012, Montpelier’s fixed maturities had an average credit quality of “AA-” (Very Strong) by Standard & Poor’s and an average duration of 3.1 years (inclusive of fixed maturity short positions).

 

As of March 31, 2012, 79% of Montpelier’s fixed maturity investments were either rated “A” (Strong) or better by Standard & Poor’s (or represented U.S. government or U.S. government-sponsored enterprise securities), 8% were rated “BBB” (Good) by Standard & Poor’s and 13% were either unrated or rated below “BBB”.

 

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In addition to the investment securities presented above, Montpelier had open short fixed maturity positions of $96.9 million and $128.5 million as of March 31, 2012 and December 31, 2011, respectively.  Montpelier also had open short equity and investment option and future positions of $7.4 million and $7.8 million at March 31, 2012 and December 31, 2011, respectively.  Net unrealized gains (losses) associated with Montpelier’s open short positions totaled $(1.1)  million and $1.1 million as of March 31, 2012 and December 31, 2011, respectively.

 

Other Investments

 

Montpelier’s investments in limited partnership interests and private investment funds are carried at either their fair values or their underlying net asset values, depending on Montpelier’s ownership share. For those funds carried at fair values, the underlying net asset value is used as a best estimate of fair value.  Montpelier’s CAT Bonds and derivative instruments are carried at fair value.  The table below shows the aggregate cost and carrying value of Montpelier’s other investments, by investment type, as of the dates indicated:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Cost

 

Carrying
Value

 

Cost

 

Carrying
Value

 

 

 

 

 

 

 

 

 

 

 

Other investments carried at net asset value:

 

 

 

 

 

 

 

 

 

Limited partnership interests and private investment funds

 

$

51.4

 

$

51.4

 

$

59.8

 

$

59.8

 

 

 

 

 

 

 

 

 

 

 

Other investments carried at fair value:

 

 

 

 

 

 

 

 

 

Limited partnership interests and private investment funds

 

$

27.4

 

$

28.4

 

$

29.2

 

$

29.3

 

CAT Bonds

 

10.0

 

10.0

 

10.0

 

10.2

 

Derivative instruments

 

0.8

 

5.1

 

1.0

 

3.1

 

Total other investments carried at fair value

 

$

38.2

 

$

43.5

 

$

40.2

 

$

42.6

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

89.6

 

$

94.9

 

$

100.0

 

$

102.4

 

 

Net appreciation or depreciation in the value of Montpelier’s investments in limited partnerships, private investment funds and CAT Bonds is reported within “net realized and unrealized investment gains (losses)” in the Company’s consolidated statements of operations. Net appreciation or depreciation on Montpelier’s derivative instruments is reported as net income (expense) from derivative instruments.  See Note 7.

 

Montpelier’s interests in limited partnerships and private investment funds that are carried at fair value relate to vehicles that invest in distressed mortgages. Redemptions from these investments occur at the discretion of the investment manager or, in other cases, subject to a unanimous vote of the partners. Montpelier does not currently expect to redeem a significant portion of these investments during 2012.

 

Montpelier’s interests in limited partnerships and private investment funds that are carried at net asset value relate to vehicles that invest in the following:

 

·                            Small growth-oriented businesses,

·                            Structured credit instruments backed by residential mortgages and other loans and receivables, and

·                            Public and private equity, fixed maturity and derivative instruments.

 

Approximately half of Montpelier’s interests in limited partnerships and private investment funds carried at net asset value can be redeemed with no penalty upon 45 days’ notice.  Redemptions of the remaining interests are subject to early termination fees and liquidity constraints.  Montpelier does not currently expect to redeem a significant portion of any of these investments during 2012.

 

Montpelier also had open Foreign Exchange Contracts, Credit Derivatives, Interest Rate Contracts and Investment Options and Futures contracts as of March 31, 2012 and December 31, 2011.  See Note 7.

 

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Fair Value Hierarchy

 

GAAP establishes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the three broad levels described below. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, and Level 3 inputs are unobservable inputs for the asset or liability.

 

Montpelier uses an independent service provider for assistance with its investment accounting function. This service provider, as well as Montpelier’s investment managers, in turn use several pricing services and brokers to assist with the determination of the fair value of Montpelier’s marketable securities. Montpelier performs several reviews of these values as it is ultimately management’s responsibility to ensure that the fair values reflected in the Company’s financial statements are appropriate. The ultimate pricing source varies based on the security and pricing service, but investments valued on the basis of observable (Levels 1 and 2) inputs are generally assigned values on the basis of actual transactions. Securities valued on the basis of pricing models with significant unobservable inputs or non-binding broker quotes are classified as Level 3.

 

In accordance with GAAP, the valuation techniques used by Montpelier and its pricing services maximize the use of observable inputs; unobservable inputs are used to measure fair value only to the extent that observable inputs are unavailable. Montpelier uses both the market and income approaches in valuing its investments.  There have been no significant changes in the Company’s use of valuation techniques or related inputs during the periods presented.

 

The following tables present Montpelier’s investments carried at fair value, categorized by the level within the hierarchy in which the fair value measurements fall, at March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

926.2

 

$

52.1

 

$

978.3

 

Residential mortgage-backed securities

 

 

612.0

 

 

612.0

 

Debt securities issued/sponsored by the U.S. Treasury and its agencies

 

245.1

 

263.1

 

 

508.2

 

Commercial mortgage-backed securities

 

 

125.9

 

 

125.9

 

Debt securities issued by U.S. states and political subdivisions

 

 

78.2

 

 

78.2

 

Debt securities issued by foreign governments and their agencies

 

1.0

 

46.1

 

 

47.1

 

Other debt obligations

 

 

186.3

 

8.8

 

195.1

 

Total fixed maturity investments

 

$

246.1

 

$

2,237.8

 

$

60.9

 

$

2,544.8

 

Equity securities:

 

 

 

 

 

 

 

 

 

Exchange-listed funds

 

$

 

$

25.6

 

$

 

$

25.6

 

Financial

 

5.9

 

 

 

5.9

 

Consumer goods

 

3.9

 

 

 

3.9

 

Industrial

 

2.6

 

 

 

2.6

 

Energy

 

1.0

 

 

 

1.0

 

Technology

 

0.6

 

 

 

0.6

 

Other

 

0.2

 

 

 

0.2

 

Total equity securities

 

$

14.2

 

$

25.6

 

$

 

$

39.8

 

Other investments carried at fair value

 

$

 

$

15.1

 

$

28.4

 

$

43.5

 

Total investments carried at fair value

 

$

260.3

 

$

2,278.5

 

$

89.3

 

$

2,628.1

 

Other investments carried at net asset value

 

$

 

$

26.5

 

$

24.9

 

$

51.4

 

Total investments

 

$

260.3

 

$

2,305.0

 

$

114.2

 

$

2,679.5

 

 

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December 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

$

841.5

 

$

44.7

 

$

886.2

 

Residential mortgage-backed securities

 

 

574.4

 

 

574.4

 

Debt securities issued/sponsored by the U.S. Treasury and its agencies

 

163.1

 

332.6

 

 

495.7

 

Commercial mortgage-backed securities

 

 

142.0

 

 

142.0

 

Debt securities issued by U.S. states and political subdivisions

 

 

64.7

 

 

64.7

 

Debt securities issued by foreign governments and their agencies

 

1.6

 

45.2

 

 

46.8

 

Other debt obligations

 

 

170.7

 

9.7

 

180.4

 

Total fixed maturity investments

 

$

164.7

 

$

2,171.1

 

$

54.4

 

$

2,390.2

 

Equity securities:

 

 

 

 

 

 

 

 

 

Exchange-listed funds

 

$

 

$

23.6

 

$

 

$

23.6

 

Financial

 

9.4

 

 

 

9.4

 

Consumer goods

 

9.0

 

 

 

9.0

 

Industrial

 

6.4

 

 

 

6.4

 

Energy

 

24.5

 

 

 

24.5

 

Technology

 

19.5

 

 

 

19.5

 

Other

 

3.7

 

 

 

3.7

 

Total equity securities

 

$

72.5

 

$

23.6

 

$

 

$

96.1

 

Other investments carried at fair value

 

$

 

$

13.3

 

$

29.3

 

$

42.6

 

Total investments carried at fair value

 

$

237.2

 

$

2,208.0

 

$

83.7

 

$

2,528.9

 

Other investments carried at net asset value

 

$

 

$

25.4

 

$

34.4

 

$

59.8

 

Total investments

 

$

237.2

 

$

2,233.4

 

$

118.1

 

$

2,588.7

 

 

Level 1 Securities

 

Montpelier’s investments classified as Level 1 as of March 31, 2012 and December 31, 2011, consisted of U.S. Treasuries, debt securities issued by foreign governments and long and short equity positions that are publicly listed and/or actively traded in an established market.  In addition, as of March 31, 2012 and December 31, 2011, approximately 30% and 40%, respectively, of Montpelier’s open short fixed maturity positions were valued on the basis of Level 1 inputs.

 

Level 2 Securities

 

For Montpelier’s investments classified as Level 2 as of March 31, 2012 and December 31, 2011, Montpelier’s pricing vendors generally utilize third-party market data and other observable inputs in matrix pricing models to determine prices. Although prices for these securities obtained from broker quotations are generally considered non-binding, they are based on observable inputs and secondary trading patterns of similar securities obtained from active, non-distressed markets.  In addition, as of March 31, 2012 and December 31, 2011, approximately 70% and 60%, respectively, of Montpelier’s open short fixed maturity positions are valued on the basis of Level 2 inputs.

 

Further details for selected investment types classified as Level 2 follow:

 

Corporate debt securities.  Montpelier’s Level 2 corporate debt securities are priced using market sources and other considerations such as the issuer of the security, credit data, the specific terms and conditions of the securities, including any specific features which may influence risk, as well as other observations from relevant market and sector news reports. Evaluations are updated by obtaining broker quotes and other market information including actual trade volumes, when available. Each security is individually evaluated using a spread model which is added to the U.S. Treasury curve.

 

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Residential mortgage-backed securities and debt securities issued/sponsored by the U.S. Treasury and its agencies.  Montpelier’s Level 2  residential mortgage-backed securities and debt securities issued by U.S. agencies are priced using a mortgage-pool-specific model which utilizes daily inputs from the to-be-announced, or “TBA” market (the most liquid secondary market for mortgage loans), as well as the U.S. Treasury market. This pricing model also utilizes additional information such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the agency. Valuations are also corroborated by daily active market quotes.

 

Montpelier’s Level 2 U.S. government-sponsored enterprise securities are priced using information from market sources, as well as other observations from relevant market and sector news. Evaluations are updated by obtaining broker quotes and other market information including actual trade volumes, when available. Each security is individually evaluated using analytical models which incorporate option-adjusted spreads and other relevant interest rate data.

 

Commercial mortgage-backed securities.  Montpelier’s Level 2 commercial mortgage-backed securities are priced using dealer quotes and other available trade information such as bids and offers, prepayment speeds (which may be adjusted for the underlying collateral or current price data), the U.S. Treasury curve, swap curve and TBA values, as well as cash settlement. This pricing methodology utilizes a single cash flow stream, computes both a yield-to-call and weighted average yield-to-maturity and generates a derived price for the security by applying the most likely scenario.

 

Equity securities.  Montpelier’s Level 2 equity securities represent investments in exchange-listed funds which are priced based on net asset values provided by the relevant investment managers.

 

There were no significant transfers between Levels 1 and 2 during the three month periods ended March 31, 2012 and 2011.

 

Level 3 Securities

 

Montpelier’s investments classified as Level 3 as of March 31, 2012 and December 31, 2011 consisted primarily of the following: (i) with respect to certain fixed maturity investments, bank loans and certain asset-backed securities, many of which are not actively traded; and (ii) with respect to other investments, certain limited partnerships and private investment funds. Further details for selected investment types follow:

 

Corporate debt securities.  Montpelier’s Level 3 corporate debt securities represent bank loans that are priced using non-binding broker quotes that cannot be corroborated with other externally obtained information.

 

Other investments.  Montpelier’s Level 3 other investments include investments in limited partnerships and private investment funds at March 31, 2012 and December 31, 2011 which represent alternative asset limited partnerships that invest in distressed mortgages. The fair value of these private equity investments is based on net asset values obtained from the investment manager or general partner of the respective entity. The underlying investments held by the investee, which form the basis of the net asset valuation, can require significant management judgment by the investee to determine the underlying value.  Montpelier also considers financial and other information in making its own determination of value. Montpelier regularly reviews the performance of these entities directly with the fund and partnership managers.

 

As of March 31, 2012 and December 31, 2011, the Company’s Level 3 investments represented 3.4% and 3.3% of its total investments measured at fair value, respectively.

 

The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three month periods ended March 31, 2012 and 2011:

 

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Three Month Period Ended March 31, 2012

 

 

 

Beginning
Level 3
balance

 

Purchases

 

Sales and
maturities

 

Net
realized
gains

 

Net
unrealized
gains

 

Net
transfers
out

 

Ending
Level 3
balance

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

44.7

 

$

49.0

 

$

(42.9

)

$

0.6

 

$

0.7

 

$

 

$

52.1

 

Other debt obligations

 

9.7

 

 

(1.0

)

 

0.1

 

 

8.8

 

Total fixed maturity investments

 

54.4

 

49.0

 

(43.9

)

0.6

 

0.8

 

 

60.9

 

Other investments

 

29.3

 

 

(2.0

)

0.3

 

0.8

 

 

28.4

 

Total Level 3 investments at fair value

 

$

83.7

 

$

49.0

 

$

(45.9

)

$

0.9

 

$

1.6

 

$

 

$

89.3

 

 

 

 

Three Month Period Ended March 31, 2011

 

 

 

Beginning
Level 3
balance

 

Purchases

 

Sales and
maturities

 

Net
realized
gains

 

Net
unrealized
gains
(losses)

 

Net
transfers
out

 

Ending
Level 3
balance

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

37.9

 

$

 

$

(3.4

)

$

 

$

0.4

 

$

 

$

34.9

 

Other debt obligations

 

4.7

 

9.0

 

(0.7

)

 

 

 

13.0

 

Total fixed maturity investments

 

42.6

 

9.0

 

(4.1

)

 

0.4

 

 

47.9

 

Other investments

 

42.6

 

 

(4.0

)

0.2

 

(0.5

)

 

38.3

 

Total Level 3 investments at fair value

 

$

85.2

 

$

9.0

 

$

(8.1

)

$

0.2

 

$

(0.1

)

$

 

$

86.2

 

 

There were no transfers out of Level 3 investments during the three month periods ended March 31, 2012 and 2011.

 

Changes in Carrying Value

 

Changes in the carrying value of Montpelier’s investment portfolio and its short investment positions for the three month periods ended March 31, 2012 and 2011, consisted of the following:

 

 

 

Net Realized
Gains (Losses) on
Investments

 

Net Unrealized
Gains (Losses) on
Investments

 

Net Foreign
Exchange and
Income (Expense)
From Certain
Derivatives (1)

 

Total Changes in
Carrying Value
Reflected in
Revenues

 

Three Month Period Ended March 31, 2012:

 

 

 

 

 

 

 

 

 

Fixed maturity investments

 

$

7.7

 

$

14.8

 

$

3.1

 

$

25.6

 

Equity securities

 

22.5

 

(15.3

)

(0.8

)

6.4

 

Other investments

 

(2.0

)

4.7

 

1.5

 

4.2

 

Three Month Period Ended March 31, 2011:

 

 

 

 

 

 

 

 

 

Fixed maturity investments

 

$

1.2

 

$

2.1

 

$

1.8

 

$

5.1

 

Equity securities

 

5.7

 

6.9

 

0.1

 

12.7

 

Other investments

 

0.2

 

0.5

 

(0.4

)

0.3

 

 


(1)     Represents net realized and unrealized foreign exchange gains (losses) from investments and income (expense) derived from the following derivative instruments: (i) Foreign Exchange Contracts;  (ii) Credit Derivatives; (iii) Interest Rate Contracts; (iv) Investment Options and Futures; and (v) the LIBOR Swap (see Note 7).  These derivatives are carried at fair value as “other investments” within in the Company’s consolidated balance sheets.

 

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Net Investment Income

 

Montpelier’s net investment income for the three month periods ended March 31, 2012 and 2011 consisted of the following:

 

 

 

 

Three Month Periods
Ended March 31,

 

 

 

2012

 

2011

 

Fixed maturity investments

 

$

18.4

 

$

17.9

 

Cash and cash equivalents

 

0.1

 

0.1

 

Equity securities

 

0.1

 

0.1

 

Other investments

 

0.5

 

0.6

 

Total investment income

 

19.1

 

18.7

 

Investment expenses

 

(1.5

)

(1.2

)

Net investment income

 

$

17.6

 

$

17.5

 

 

Investment Assets Held in Trust

 

In December 2011, Montpelier Re entered into a Reinsurance Trust (the “MUSIC Trust”) in connection with the MUSIC Sale. The MUSIC Trust was established as a means of providing statutory credit to MUSIC in support of the MUSIC Quota Share and the Loss Development Cover.  As of March 31, 2012 and December 31, 2011, the fair value of all assets held in the MUSIC Trust was $59.9 million and $65.0 million, respectively, which exceeded the minimum value required on both of those dates.  See Note 6.

 

A number of states in the U.S. have recently considered reducing their collateral requirements for risks ceded to financially sound non-U.S. reinsurers.  During 2011, Montpelier Re became authorized to post reduced collateral with respect to certain risks ceded from insurers domiciled in Florida and New York.  Montpelier Re also intends to monitor and, where possible, take advantage of reduced collateral statutes as and when they may be adopted in other states. In June 2011, Montpelier Re established a trust in connection with its reduced collateral requirements in Florida (the “FL Trust”).  As of March 31, 2012 and December 31, 2011, the fair value of all assets held in the FL Trust was $25.3 million and $25.0 million, respectively. See Note 6.

 

In September 2010, Montpelier Re entered into a Multi-Beneficiary U.S. Reinsurance Trust (the “Reinsurance Trust”) for the benefit of certain of its U.S. cedants. The Reinsurance Trust was established as a means of providing statutory credit to Montpelier Re’s cedants.  As of March 31, 2012, Montpelier Re was granted authorized or trusteed reinsurer status in 49 states and the District of Columbia.  As of March 31, 2012 and December 31, 2011, the fair value of all assets held in the Reinsurance Trust was $331.1 million and $328.1 million, respectively, which exceeded the minimum value required on both dates.  See Note 6.

 

In March 2010, Montpelier entered into a Lloyd’s Deposit Trust Deed (the “Lloyd’s Capital Trust”) in order to meet MCL’s ongoing funds at Lloyd’s (“FAL”) requirements.  The minimum value of cash and investments held by the Lloyd’s Capital Trust is determined on the basis of MCL’s Individual Capital Assessment, which is used to determine the required amount of FAL. The initial minimum value of the Lloyd’s Capital Trust was set at $230.0 million.  As of March 31, 2012 and December 31, 2011, the fair value of all assets held in the Lloyd’s Capital Trust was $252.5 million and $251.8 million, respectively.  See Note 6.

 

Premiums received by Syndicate 5151 are received into the Lloyd’s Premiums Trust Funds (the “Premiums Trust Funds”). Under the Premiums Trust Funds’ deeds, assets may only be used for the payment of claims and valid expenses for a stated period of time.  As of March 31, 2012 and December 31, 2011, the fair value of all assets held in the Premiums Trust Funds was $327.7 million and $243.6 million, respectively. See Note 12.

 

Montpelier’s investment assets held in trust appear on the Company’s consolidated balance sheets as “cash and cash equivalents”, “investments” and “accrued investment income”, as appropriate.

 

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Sales and Maturities of Investments

 

Sales of investments totaled $1,070.4 million and $885.4 million for the three month periods ended March 31, 2012 and 2011, respectively. Maturities, calls and paydowns of investments totaled $138.3 million and $114.1 million for the three month periods ended March 31, 2012 and 2011, respectively. There were no non-cash exchanges or involuntary sales of investment securities during these periods.

 

Pending Securities Litigation

 

During 2011 Montpelier Re was named in a series of lawsuits filed by a group of plaintiffs in their capacity as trustees for senior debt issued by the Tribune Company (“Tribune”) on behalf of various senior debt holders. Montpelier Re, along with thousands of other named defendants, formerly owned Tribune common shares and tendered such common shares pursuant to a 2007 leveraged buyout led by Tribune management (the “Tribune LBO”). Tribune subsequently filed for bankruptcy protection at the end of 2008.

 

The plaintiffs are suing all tendering shareholders, including Montpelier Re, on the grounds of fraudulent conveyance and seek recovery of the proceeds received pursuant to the Tribune LBO on the basis that the transaction was undertaken without fair consideration and left Tribune insolvent. The various lawsuits are still pending and, on December 19, 2011, were consolidated in the Federal District Court for the Southern District of New York by the United States Judicial Panel on Multidistrict Litigation.

 

Montpelier Re was also named in a similar suit filed by the Office Committee of Unsecured Creditors in the Tribune bankruptcy case.  This suit was filed in the United States Bankruptcy Court for the District of Delaware and also asserts a fraudulent conveyance claim involving the Tribune LBO.

 

In the event that the plaintiffs in these suits were to fully prevail, Montpelier Re would have to return the $4.4 million in cash proceeds it received in connection with the Tribune common shares tendered pursuant to the Tribune LBO.

 

NOTE 6.  Debt, Letter of Credit Facilities and Trust Arrangements

 

Senior Unsecured Debt (“Senior Notes”)

 

During 2003, the Company issued $250.0 million of Senior Notes. The Senior Notes bear interest at a fixed rate of 6.125% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The Senior Notes are scheduled to mature on August 15, 2013, and do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.

 

The carrying value of the Senior Notes as of March 31, 2012 and December 31, 2011, was $227.9 million and $227.8 million, respectively.

 

The Company incurred interest expense on the Senior Notes of $3.5 million during each of the three month periods ended March 31, 2012 and 2011, respectively.  The Company paid $7.0 million in interest on the Senior Notes during each of the three month periods ended March 31, 2012 and 2011.

 

Trust Preferred Securities

 

In January 2006 the Company, through Montpelier Capital Trust III, participated in a private placement of $100.0 million of capital securities (the “Trust Preferred Securities”). The Trust Preferred Securities mature on March 30, 2036, are redeemable at Montpelier Capital Trust III’s option at par, and require quarterly distributions of interest to the holders. The Trust Preferred Securities bore interest at 8.55% per annum through March 30, 2011, and thereafter at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly.  This floating rate varied from 4.27% to 4.38% during the period from January 1, 2012 to March 31, 2012.

 

The Company incurred and paid interest on the Trust Preferred Securities of $1.1 million and $2.1 million during the three month periods ended March 31, 2012 and 2011, respectively.

 

The Trust Preferred Securities do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.

 

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LIBOR Swap

 

On February 7, 2012, the Company entered into a five-year swap agreement with a third party (the “LIBOR Swap”) which will result in the future net cash flows in connection with the Trust Preferred Securities, for the five-year period beginning March 30, 2012, being the same as if these securities bore interest at a fixed rate of 4.905%, provided the Company holds the swap agreement to its maturity. The net realized and unrealized gains and losses associated with the LIBOR Swap is reported within “net income (expense) from derivative instruments” on the Company’s consolidated statement of operations, as opposed to “interest and financing expenses”.  See Note 7.

 

Letter of Credit Facilities

 

In the normal course of business, the Company and Montpelier Re maintain letter of credit facilities and Montpelier Re provides letters of credit to third parties as a means of providing collateral and/or statutory credit in varying amounts to certain of its cedants. These letter of credit facilities were secured by collateral accounts containing cash and investments totaling $191.9 million and $264.2 million at March 31, 2012 and December 31, 2011, respectively. The following table outlines these facilities as of March 31, 2012:

 

Secured operational Letter of Credit Facilities

 

Total
Capacity

 

Amount
Drawn

 

Expiry
Date

 

Syndicated 5-Year Facility

 

$

215.0

 

$

135.2

 

June 2012

 

Syndicated 364-day Facility

 

250.0

 

 

June 2012

 

Bilateral Facility

 

75.0

 

6.6

 

None

 

 

The agreements governing these letter of credit facilities contain covenants that limit Montpelier’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain burdensome agreements.  In addition, the syndicated secured facilities require the Company to maintain debt leverage of no greater than 30% and Montpelier Re to maintain an A.M. Best financial strength rating of no less than “B++”.  If the Company or Montpelier Re were to fail to comply with these covenants or fail to meet these financial ratios, the lenders could revoke the facilities and exercise remedies against the collateral. As of March 31, 2012 and December 31, 2011, the Company and Montpelier Re were in compliance with all covenants.

 

The Syndicated 5-Year Facility, which has a capacity of $215.0 million, is subject to an annual commitment fee of 0.225% on drawn balances and 0.08% on undrawn balances.

 

The Syndicated 364-day Facility, which has a capacity of $250.0 million, is subject to an annual commitment fee of 0.45% on drawn balances and 0.10% on undrawn balances.

 

The Bilateral Facility, which has a capacity of $75.0 million, is subject to an annual commitment fee of 0.45%, which was increased from 0.40% effective August 1, 2011.  The commitment fee is charged on drawn balances only.

 

Trust Arrangements

 

In December 2011 Montpelier Re established the MUSIC Trust as a means of providing statutory credit to MUSIC.  See Note 5.

 

In June 2011 Montpelier Re established the FL Trust in connection with its reduced collateral requirements to cedants domiciled in Florida.  See Note 5.

 

In September 2010 Montpelier Re established the Reinsurance Trust as an alternative means of providing statutory credit to certain of Montpelier Re’s U.S. cedants.  See Note 5.

 

In March 2010 Montpelier established the Lloyd’s Capital Trust in order to meet MCL’s ongoing FAL requirements. See Note 5.

 

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NOTE 7.  Derivative Instruments

 

Montpelier enters into derivative instruments from time to time in order to manage certain of its business risks and to supplement its investing and underwriting activities.

 

As a means to manage its underwriting risk, Montpelier has entered into a ILW swap contract (the “ILW Swap”) which provides reinsurance-like protection for specific loss events associated with certain lines of its business.

 

As an extension of its underwriting activities, Montpelier has sold ILW protection (the “ILW Contract”), which is a derivative instrument that provides reinsurance-like protection to third parties for specific loss events associated with certain lines of business.

 

Foreign exchange risk, specifically Montpelier’s risk associated with making claim payments in foreign currencies, is managed through the use of foreign currency exchange agreements (“Foreign Exchange Contracts”).

 

As an extension of Montpelier’s investing activities, certain of its investment managers have entered into investment options and futures (“Investment Options and Futures”), credit derivative arrangements (“Credit Derivatives”), and interest rate contracts (“Interest Rate Contracts”), as well as Foreign Exchange Contracts.

 

In order to fix the future net cash flows associated with its Trust Preferred Securities to be a set amount each period, Montpelier entered into the LIBOR Swap.

 

None of Montpelier’s derivatives are formally designated as hedging instruments.

 

The following tables present the fair values, notional values and balance sheet location of Montpelier’s derivative instruments recorded as of March 31, 2012 and December 31, 2011:

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

Derivative Instrument

 

Balance Sheet
Location

 

Fair
Value

 

Notional
Value

 

Fair
Value

 

Notional
Value

 

Foreign Exchange Contracts:

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollars purchased

 

Other Investments

 

$

0.1

 

$

201.2

 

$

1.4

 

$

202.0

 

U.S. Dollars sold

 

Other Investments

 

(0.3

)

135.8

 

2.0