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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 September 30, 2002
[ ] 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 Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Mintflower Place
8 Par-La-Ville Road
Hamilton HM 08
Bermuda
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (441) 296-5550
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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 8, 2002, the Registrant had 63,392,600 common voting shares
outstanding, with a par value of 1/6 cent each.
MONTPELIER RE HOLDINGS LTD.
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION ..................................................... 1
ITEM 1. FINANCIAL STATEMENTS ................................................. 1
Combined Balance Sheets as at September 30, 2002 (Unaudited) and
December 31, 2001 .................................................. 1
Combined Statements of Operations and Comprehensive Income for the
Three and Nine Months ended September 30, 2002 (Unaudited) ......... 2
Combined Statement of Shareholders' Equity for the Nine Months Ended
September 30, 2002 (Unaudited) ..................................... 3
Combined Statement of Cash Flows for the Nine Months ended
September 30, 2002 (Unaudited) ..................................... 4
Notes to Combined Financial Statements (Unaudited) ................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........... 25
ITEM 4. CONTROLS AND PROCEDURES .............................................. 29
PART II OTHER INFORMATION ........................................................ 30
ITEM 1. LEGAL PROCEEDINGS .................................................... 30
ITEM 5. OTHER INFORMATION .................................................... 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..................................... 30
SIGNATURES ....................................................................... 32
CERTIFICATIONS ................................................................... 33
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONTPELIER RE HOLDINGS LTD.
COMBINED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(UNAUDITED)
ASSETS
Fixed maturities, at fair value (amortized cost: 2002 -- $1,077,390; 2001 --
$638,525) .................................................................. $ 1,105,120 $ 640,403
Equity investment, unquoted, at fair value (cost: $34,543) .................... 34,104 --
Cash and cash equivalents, at fair value ...................................... 147,232 350,606
Unearned premium ceded ........................................................ 15,991 --
Premium receivable ............................................................ 213,128 133
Reinsurance recoverable ....................................................... 10,604 --
Deferred acquisition costs .................................................... 45,536 16
Accrued investment income ..................................................... 10,731 1,699
Deferred financing costs ...................................................... 1,495 2,005
Common voting shares subscriptions receivable ................................. -- 26,000
Other assets .................................................................. 3,648 936
----------- -----------
Total assets ............................................................... $ 1,587,589 $ 1,021,798
=========== ===========
LIABILITIES
Loss and loss adjustment expense reserves ..................................... $ 132,491 $ --
Unearned premium .............................................................. 287,725 142
Accounts payable, accrued expenses and other liabilities ...................... 4,896 10,429
Investment trades pending ..................................................... 44,488 --
Amount due to affiliates ...................................................... -- 574
Long-term debt ................................................................ 150,000 150,000
----------- -----------
Total liabilities .......................................................... $ 619,600 $ 161,145
=========== ===========
SHAREHOLDERS' EQUITY
Common voting shares (1/6 cent par value, 1,200,000,000 shares authorized;
52,440,000 shares issued and outstanding) .................................. $ 87 $ 87
Additional paid-in capital .................................................... 923,877 920,306
Accumulated other comprehensive income ........................................ 27,325 1,878
Retained earnings (accumulated deficit) ....................................... 16,700 (61,618)
----------- -----------
Total shareholders' equity ................................................. 967,989 860,653
----------- -----------
Total liabilities and shareholders' equity ................................. $ 1,587,589 $ 1,021,798
=========== ===========
The accompanying Notes to the Combined Financial Statements are an
integral part of the Combined Financial Statements.
1
MONTPELIER RE HOLDINGS LTD.
COMBINED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
(UNAUDITED) (UNAUDITED)
REVENUES
Gross premiums written ..................................................... $ 193,736 $ 533,754
Reinsurance premiums ceded ................................................. (20,861) (39,709)
------------ ------------
Net premiums written ....................................................... 172,875 494,045
Change in net unearned premiums ............................................ (66,379) (269,504)
------------ ------------
Net premiums earned ........................................................ 106,496 224,541
Net investment income ...................................................... 12,545 31,500
Net realized gains on investments .......................................... 4,005 5,502
------------ ------------
Total revenues ............................................................. 123,046 261,543
EXPENSES
Loss and loss adjustment expenses .......................................... 69,031 122,373
Acquisition costs .......................................................... 20,404 41,578
General and administrative expenses ........................................ 5,843 15,956
Interest on long-term debt ................................................. 1,155 3,268
------------ ------------
Total expenses ............................................................. 96,433 183,175
------------ ------------
Net income before taxes ........................................................ 26,613 78,368
Income tax expense ............................................................. 50 50
------------ ------------
NET INCOME ..................................................................... $ 26,563 $ 78,318
============ ============
COMPREHENSIVE INCOME
Net income ................................................................. $ 26,563 $ 78,318
Change in net unrealized gains on investments .............................. 15,512 25,413
Change in currency translation adjustments ................................. 34 34
------------ ------------
Comprehensive income ....................................................... $ 42,109 $ 103,765
============ ============
PER SHARE DATA
Weighted average number of common and common equivalent shares outstanding:
Basic ................................................................... 52,440,000 52,440,000
Diluted ................................................................. 53,129,393 52,523,970
Basic earnings per share ................................................... $ 0.51 $ 1.49
============ ============
Diluted earnings per share ................................................. $ 0.50 $ 1.49
============ ============
The accompanying Notes to the Combined Financial Statements are an
integral part of the Combined Financial Statements.
2
MONTPELIER RE HOLDINGS LTD.
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30, 2002
(UNAUDITED)
Common voting shares
Balance -- beginning of period .................. $ 87
Issue of common voting shares ................... --
--------------
Balance -- end of period ..................... 87
--------------
Additional paid-in-capital
Balance -- beginning of period .................. 920,306
Direct equity offering expenses ................. (233)
Compensation recognized under stock option plan . 3,804
--------------
Balance -- end of period ..................... 923,877
--------------
Accumulated other comprehensive income
Balance -- beginning of period .................. 1,878
Change in currency translation adjustments ...... 34
Change in net unrealized gains on investments ... 25,413
--------------
Balance -- end of period ..................... 27,325
--------------
Retained earnings (accumulated deficit)
Balance -- beginning of period .................. (61,618)
Net income ...................................... 78,318
--------------
Balance -- end of period ..................... 16,700
--------------
Total shareholders' equity ................... $ 967,989
==============
The accompanying Notes to the Combined Financial Statements are an
integral part of the Combined Financial Statements.
3
MONTPELIER RE HOLDINGS LTD.
COMBINED STATEMENT OF CASH FLOWS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------
(UNAUDITED)
Cash flows provided by operating activities:
Net income .............................................................. $ 78,318
Adjustments to reconcile net income to net cash provided by operating
activities:
Accretion (amortization) of premium/ (discount) on fixed
maturities ........................................................... 2,130
Depreciation ......................................................... 184
Compensation recognized under stock option plan ...................... 3,804
Net realized gains on fixed maturities ............................... (5,502)
Amortization of deferred financing costs ............................. 510
Unrealized foreign exchange gain ..................................... (1,497)
Change in:
Unearned premium ceded ............................................... (15,991)
Premium receivable ................................................... (212,995)
Reinsurance recoverable .............................................. (10,604)
Deferred acquisition costs ........................................... (45,520)
Accrued investment income ............................................ (9,032)
Other assets ......................................................... (1,054)
Loss and loss adjustment expense reserves ............................ 132,491
Unearned premium ..................................................... 287,583
Accounts payable, accrued expenses and other liabilities ............. 3,486
Amount due to affiliates ............................................. (324)
Interest accrued on long-term debt ................................... 677
-----------
Net cash provided by operating activities ............................... 206,664
-----------
Cash flows from investing activities:
Purchases of investments ................................................ (1,417,206)
Proceeds from sale of investments ....................................... 993,188
Purchases of property, plant and equipment .............................. (1,842)
-----------
Net cash used for investing activities .................................. (425,860)
-----------
Cash flows provided by financing activities:
Issue of common shares .................................................. 26,000
Amount paid to affiliate for overpayment of subscription ................ (250)
Direct equity offering expenses.......................................... (9,928)
-----------
Net Cash provided by financing activities................................ 15,822
-----------
Decrease in cash and cash equivalents ................................... (203,374)
Cash and cash equivalents -- Beginning of period ........................ 350,606
-----------
Cash and cash equivalents -- End of period .............................. $ 147,232
===========
Supplemental cash flow information:
Interest paid on long-term debt ......................................... $ 2,298
The accompanying Notes to the Combined Financial Statements are an
integral part of the Combined Financial Statements.
4
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AMOUNTS
OR AS WHERE OTHERWISE DESCRIBED)
(UNAUDITED)
1. BASIS OF PRESENTATION
These interim unaudited combined financial statements include the accounts
of Montpelier Re Holdings Ltd. (the "Company") and its wholly-owned operating
subsidiary Montpelier Reinsurance Ltd. ("Montpelier Re"). Montpelier Re has two
subsidiaries: Montpelier Marketing Services (UK) Limited ("MMSL") and Montpelier
Holdings (Barbados) SRL ("MHB"). MMSL provides business introduction and other
support services to Montpelier Re. MHB, a Barbados registered Society with
Restricted Liability incorporated on July 25, 2002, has not yet commenced
operations. MHB will be the registered holder of certain types of securities,
including United States equity securities, purchased as part of the overall
Montpelier Re investment portfolio.
The Company, through Montpelier Re, is a provider of global specialty
property reinsurance products.
The unaudited combined financial statements have been prepared on the
basis of accounting principles generally accepted in the United States ("GAAP")
for interim financial information and 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 combined financial
statements. In the opinion of management, these unaudited combined financial
statements reflect all the normal recurring adjustments necessary for a fair
presentation of the Company's financial position at the end of and for the
periods presented. The results of operations and cash flows for any interim
period will not necessarily be indicative of the results of the operations and
cash flows for the full fiscal year or subsequent quarters. All significant
intercompany accounts and transactions have been eliminated on combination. 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 at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
These interim unaudited combined financial statements should be read in
conjunction with the 2001 audited combined financial statements and related
notes thereto and the Company's Registration Statement on Form S-1 (Registration
No. 333-89408).
2. SIGNIFICANT ACCOUNTING POLICIES
PREMIUMS
Written premiums are recognized for the full period of the reinsurance
contract as of the date that the contract is bound. The Company writes both
excess of loss and pro-rata contracts.
For excess of loss contracts, written premium is based on the minimum and
deposit premium as defined in the contract. Subsequent adjustments to the
minimum and deposit premium are recognized in the period in which they are
determined. For pro-rata contracts, written premiums are recognized based on
estimates of ultimate premiums from the underlying insurance policies provided
by the ceding companies. 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, are recorded in the period
in which they are determined.
5
Premiums are earned ratably over the term of the reinsurance contract. The
portion of the premium related to the unexpired portion of the contract is
reflected in unearned premium.
Premiums receivable are recorded at amounts due less any required
provision for doubtful accounts.
Where contract terms require the reinstatement of coverage after a ceding
company's loss, the mandatory reinstatement premiums are recorded as written
premiums when the loss event occurs, and are recognized as earned premium
ratably over the remaining contract risk period.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense reserves include amounts determined from
loss reports as notified by the ceding companies, provisions for settlement
expenses, and provisions for losses incurred but not reported based on actuarial
determinations and management estimates. Montpelier Re's limited historical
experience and resultant lack of reported losses means that industry data must
be relied upon in the reserving process.
A significant portion of Montpelier Re's business is in the property
catastrophe market and programs with higher layers of risks. Reserving for
losses in such programs is inherently complicated in that losses in excess of
the attachment level of Montpelier Re's policies are characterized by high
severity and low frequency. This limits the volume of relevant industry claims
experience available from which to reliably predict ultimate losses following a
loss event.
Management uses industry data and professional judgment to estimate the
ultimate loss to Montpelier Re from reinsurance contracts exposed to a loss
event. Delays in ceding companies reporting losses to Montpelier Re together
with the potential for unforeseen adverse developments may result in losses and
loss adjustment expenses significantly greater or less than the reserve provided
at the time of the loss event. Reserving can prove especially difficult should a
significant loss event take place near the end of an accounting period,
particularly if the loss is a catastrophic event.
Loss and loss adjustment expense reserve estimates are regularly reviewed
and updated, as new information becomes known to Montpelier Re. Any resulting
adjustments are included in income in the period in which they become known.
REINSURANCE
For certain pro-rata contracts, including qualifying quota share
contracts, the subject direct insurance contracts will carry underlying
reinsurance protection from third party reinsurers. Montpelier Re records its
pro-rata share of gross premiums from the direct insurance contracts as gross
written premiums and records its proportionate share of amounts incurred by the
ceding company for the underlying third party reinsurance coverage as
reinsurance premiums ceded.
Reinsurance recoverable includes Montpelier Re's share of balances due from
the underlying third party reinsurance contracts for paid losses, unpaid losses
and loss adjustment expenses and reserves for losses incurred but not reported.
Initial estimates of reinsurance recoverable are recognized in the period in
which loss events occur. Subsequent adjustments, based on reports of actual
amounts recoverable by the ceding companies are recorded in the period in which
they are determined. In the event that ceding companies are unable to collect
amounts due from the underlying third party reinsurers, Montpelier Re's losses
will increase. Montpelier Re records provisions for uncollectible underlying
reinsurance recoverable when collection becomes unlikely.
6
EARNINGS PER SHARE
Diluted earnings per common share are based upon the weighted average
number of common shares and common share equivalents outstanding, using the
treasury stock method. Common share equivalents comprise warrants and options,
which are dilutive when the book value per share of the Company exceeds the
strike price of the warrants or options. Basic earnings per common share give no
effect for dilutive securities.
3. EMPLOYEE INCENTIVE PLANS
PERFORMANCE UNIT PLAN (THE "PUP")
The PUP is the Company's primary executive long-term incentive scheme.
Pursuant to the terms of the PUP, at the discretion of the Compensation
Committee of the Board of the Directors (the "Committee"), performance units may
be granted to executive officers and certain other key employees. Performance
units entitle the recipient to receive, without payment to the Company, all,
double, or a part of the value of the units granted, depending on the
achievement of specific financial or operating goals. Performance units are
generally payable at the end of a three-year performance cycle, and can be
denominated in common shares at market value and are payable in cash, common
shares or a combination thereof at the discretion of the Committee.
In the 2002-2004 cycle, the current performance target for a 100% harvest
of value of the units granted is an average combined ratio of 70% for the
calendar years 2002, 2003, and 2004. The target for a maximum harvest of 200% of
the value of the units granted is a combined ratio of 50% or less. A combined
ratio of 95% or more will result in a harvest of nil. Straight line
interpolation is used between these points. Determination of actual performance
and amount of payment is at the sole discretion of the Committee.
A total of 936,000 performance units are authorized under the PUP (or up
to 1,872,000 common shares should the maximum harvest of 200% of units apply).
On January 8, 2002, the Committee approved the grant of up to 312,000
performance units for the three year performance period covering calendar years
2002, 2003 and 2004. The Company granted nil and 264,390 performance units
during the three and nine months ended September 30, 2002, respectively. The
Company accrues the projected value of these units and expenses the value in the
income statement over the course of each three-year performance period. The
Company recalculates their liability under the PUP as the Company's financial
results evolve, and reflects such adjustments in the income statement in the
period in which they are determined. The associated accrual for the performance
unit expense was $432 and $1,204 for the three and nine months ended September
30, 2002, respectively.
47,610 performance units in the 2002-2004 performance cycle have not been
granted, and may be granted during the remainder of 2002, or carried forward to
future periods.
OPTION PLAN
Under the option plan, options expire 10 years after the award date, and
are subject to various vesting periods. Options granted under the option plan
may be exercised for common shares upon vesting. A total of 510,000 and
2,040,000 options for common shares were issued under the plan for the
7
three and nine months ended September 30, 2002, respectively. The total of
2,550,000 options issued represents the maximum number of common shares that may
be issued under the option plan under current Committee approvals.
A summary of options issued and outstanding for the nine-month period
ended September 30, 2002 is as follows:
OPTIONS FOR AVERAGE
COMMON EXERCISE
SHARES PRICE
------ -----
Balance at January 1, 2002 ............................... -- --
Options granted .......................................... 2,550,000 $ 18.08
Options exercised ........................................ -- --
Options forfeited ........................................ -- --
Balance at September 30, 2002 ............................ 2,550,000 $ 18.08
The following table summarizes the range of exercise prices for
outstanding options at September 30, 2002:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---- ----- ----------- -----
$16.67 ...................... 510,000 9.25 years $ 16.67 -- --
$17.50 ...................... 637,500 9.40 years $ 17.50 -- --
$18.33 ...................... 637,500 9.40 years $ 18.33 -- --
$19.17 ...................... 637,500 9.40 years $ 19.17 -- --
$20.00 ...................... 127,500 10.00 years $ 20.00
--------- --------- --------
2,550,000 -- --
========= ========= ========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2002: risk free interest rate of 3.8% to 4.8%
based on the applicable zero-coupon bond interest rates, expected life of two
years after vesting date as detailed below, expected volatility of 30.0% to
31.2% and a dividend yield of 0.0%.
The weighted average fair value of options granted during 2002 is detailed
below.
ASSUMPTION OF
EXPECTED LIFE
EXERCISE OPTIONS AT DATE OF FAIR VALUE ON
PRICES OUTSTANDING VESTING DATE GRANT DATE OF GRANT
------ ----------- ------------ ----- -------------
$16.67 .................. 510,000 December 31, 2002 3 years $ 2,116
$17.50 .................. 510,000 December 31, 2003 4 years $ 2,384
$17.50 .................. 127,500 September 30, 2003 3 years $ 636
$18.33 .................. 510,000 December 31, 2004 5 years $ 2,639
$18.33 .................. 127,500 September 30, 2004 4 years $ 707
$19.17 .................. 510,000 December 31, 2005 6 years $ 2,885
$19.17 .................. 127,500 September 30, 2005 5 years $ 776
$20.00 .................. 127,500 September 30, 2006 6 years $ 842
--------- ----------
2,550,000 $ 12,985
========= ==========
8
A compensation expense of $1,350 and $3,804 was recorded in General and
Administrative expenses in the three and nine months ended September 30, 2002,
respectively, with a corresponding increase to Additional paid in capital. The
expense represents the proportionate accrual of the fair value of each grant
based on the remaining vesting period.
4. EARNINGS PER SHARE
The reconciliation of basic and diluted earnings per share is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2002 ENDED SEPTEMBER 30, 2002
------------------------ ------------------------
BASIC EARNINGS PER COMMON SHARE:
Net income available to common shareholders ......... $ 26,563 $ 78,318
Weighted average common shares outstanding - Basic .. 52,440,000 52,440,000
BASIC EARNINGS PER COMMON SHARE ..................... $ 0.51 $ 1.49
DILUTED EARNINGS PER COMMON SHARE:
Net income available to common shareholders ......... $ 26,563 $ 78,318
Weighted average common shares outstanding - Basic .. 52,440,000 52,440,000
Dilutive effect of Warrants ......................... 623,864 78,500
Dilutive effect of Share Options .................... 65,529 5,470
Weighted average common and common equivalent shares
outstanding - Diluted ............................... 53,129,393 52,523,970
DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE ............................................... $ 0.50 $ 1.49
5. SEGMENT REPORTING
Management has determined that they operate in one segment only. The
Company has primarily focused on writing global specialty property and other
classes of reinsurance business. The following table sets forth a breakdown of
the Company's gross premiums written by line of business and by geographic area
of risks insured:
GROSS PREMIUMS WRITTEN BY LINE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------- -------------------
($ IN MILLIONS) ($ IN MILLIONS)
Property Catastrophe ................................ $ 29.5 15.3% $ 140.3 26.2%
Other Property ...................................... 98.6 50.9 184.0 34.5
Qualifying Quota Share .............................. 42.0 21.7 153.5 28.8
Specialty and Other ................................. 23.6 12.1 56.0 10.5
-------- ----- -------- -----
Total ............................................... $ 193.7 100.0% $ 533.8 100.0%
======== ===== ======== =====
9
GROSS PREMIUMS WRITTEN BY GEOGRAPHIC AREA OF RISK INSURED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
($ IN MILLIONS) ($ IN MILLIONS)
Worldwide risks (1) $ 78.1 40.4% $ 274.2 51.4%
USA and Canada 91.9 47.4 186.1 34.9
Japan 3.8 2.0 20.4 3.8
Worldwide risks, excluding USA and Canada (2) 1.3 0.7 10.7 2.0
United Kingdom or Ireland 5.4 2.8 10.4 1.9
Western Europe excluding Scandinavia, the United Kingdom and 1.8 0.9 8.4 1.6
Ireland
Other (1.0% or less) 11.4 5.8 23.6 4.4
-------- ----- -------- -----
Total $ 193.7 100.0% $ 533.8 100.0%
======== ===== ======== =====
(1) "Worldwide risks" comprise individual policies that insure risks on a worldwide basis.
(2) "Worldwide risks, excluding USA and Canada" comprise individual policies that insure risks on a worldwide
basis but specifically exclude the USA and Canada.
The Qualifying Quota Share contracts and substantial amounts of other
lines of business are world-wide in nature, with the majority of business
related to North America and Europe.
In the nine months ended September 30, 2002, 86.7% of gross written
premium was produced by four brokers as follows: Benfield $161.5 million; Willis
Group $130.4 million; Guy Carpenter $92.6 million; Aon Re $78.1 million.
6. LONG-TERM DEBT
On incorporation, the Company obtained a term loan from a syndicate of
lenders, totaling $150.0 million in aggregate. The term loan agreement requires
that the Company and/or certain of its subsidiaries maintain specific covenants,
including a combined tangible net worth covenant and a maximum leverage
covenant, and has a final maturity date of December 12, 2004. The loan bears
interest on the outstanding principal at a rate equal to various base rates plus
a margin of between 50 and 125 basis points, depending on certain conditions.
The Company incurred interest expense for the three and nine months ended
September 30, 2002 of $1,115 and $3,268 respectively, at an average annual
interest rate of 3.0% and 2.9%, respectively and paid interest of $nil and
$2,298 respectively.
7. RELATED PARTIES
Described below are some of the transactions the Company has entered into
with related parties. The Company believes that each of the transactions
described below was on terms no less favorable than could have been obtained
from unrelated parties.
The Company's Chairman is also the Chairman and Chief Executive Officer of
White Mountains Insurance Group, who beneficially owns 27.2% of the Company at
September 30, 2002. The Chief Financial Officer is also President and a Director
of White Mountains Insurance Group and a director of Amlin, one of the Company's
qualifying quota share cedents.
10
In addition, the Chairman and Chief Financial Officer and another director
are shareholders of Olympus Re Holdings, Ltd., the parent company of a Bermuda
domiciled reinsurer writing certain lines of business which are similar to some
of those written by Montpelier Re. The Company does not have an investment in
Olympus Re Holdings, Ltd.
The Company has engaged OneBeacon Asset Management, a wholly owned
indirect subsidiary of White Mountains Insurance Group, to provide investment
advisory and management services. The Company pays investment management fees
based on the month-end market values held under custody. The fees, which vary
depending on the amount of assets under management, are between 0.15% and 0.30%
and are included in net investment income. The Company incurred an average fee
of 0.18% for the nine month period ended September 30, 2002. For the three and
nine months ended September 30, 2002, the Company expensed investment management
fees of approximately $442 and $1,460, respectively, and has recorded an amount
payable for these services of $480 at September 30, 2002.
In addition, in the ordinary course of business, the Company has entered
into four reinsurance agreements with OneBeacon. The Company will receive $780
in aggregate annual premiums from these contracts.
Benfield, a shareholder in the Company and a major broker, produced $161.5
million in premium in the nine months to September 30, 2002.
8. COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENT
The Company signed a subscription and shareholders agreement to invest in
approximately 8.9% of the total common shares of the Bermuda-based holding
company of the newly formed reinsurer, Wellington Re Limited ("Wellington Re").
Subject to various conditions, Montpelier Re has agreed to invest up to 40.0
million pounds sterling, or approximately $60.0 million in two separate
tranches. On June 21, 2002, Montpelier Re invested 22.1 million pounds sterling
(or $33.0 million). The second tranche of up to 17.9 million pounds sterling,
or approximately $26.9 million is expected to close in November 2002. Payment of
the second tranche is secured by a letter of credit in favor of Wellington Re,
in an amount equal to 110% of the second tranche, or approximately $29.6
million.
As part of the subscription and shareholders agreement, Montpelier Re has
agreed to provide quota share reinsurance to Wellington Re comprising annual
ceded premiums to Montpelier Re of approximately $60.0 million for the
underwriting years 2003, 2004 and 2005. These arrangements cover mainly property
and casualty risks.
Exali Reinsurance Holdings Limited, the Bermuda-based holding company of
Wellington Re, is unquoted. The investment is carried at estimated fair value
with any unrealized gain or loss included in other comprehensive income as a
separate component of shareholders' equity.
LETTER OF CREDIT
In order for Montpelier Re to write Lloyd's Qualifying Quota Share
business, it must provide an evergreen letter of credit in favor of The Society
and Council of Lloyd's ("Lloyd's") in accordance with Lloyd's rules. Montpelier
Re has made arrangements with Fleet National Bank for the provision of a standby
letter of credit in a form acceptable to Lloyd's in an amount of up to $200.0
million. The letter of credit outstanding at September 30, 2002 was
approximately $38.1 million, which is secured by investments of approximately
$41.9 million.
11
LEASE COMMITMENTS
The Company and its subsidiaries lease office space in the countries in
which they operate under operating leases, which expire at various dates. The
Company has also entered into operating leases for office equipment and
furniture. Future minimum annual commitments under existing leases are expected
to be as follows: 2002-$313; 2003-$347; 2004-$347.
9. SHAREHOLDERS' EQUITY
On September 20, 2002, the Board of Directors of the Company authorized a
six-for-one share split of the Company's common shares. The share split has been
reflected in the December 31, 2001 comparative financial information, and all
applicable references as to the number of common shares, common share
equivalents, including exercise prices where applicable, and per share
information have been restated.
10. ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued FAS No. 145,
"Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections as of April 2002", FAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" and FAS No. 147,
"Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9." Currently, we
anticipate that the adoption of these statements will not have a significant
impact on the Company's financial position.
11. SUBSEQUENT EVENT
Subsequent to September 30, 2002, the Company completed an initial public
offering ("IPO") of 10,952,600 common shares. The Company's common shares began
trading on the New York Stock Exchange on October 10, 2002. This offering raised
approximately $201.2 million in net proceeds, which was subsequently contributed
to Montpelier Re.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
The following discussion should be read in conjunction with the attached
unaudited combined financial statements and accompanying notes thereto and with
the Company's audited combined financial statements and related notes thereto
for the period ended December 31, 2001 and the Company's Registration Statement
on Form S-1 (Registration No. 333-89408).
It contains forward-looking statements that involve inherent risks and
uncertainties. Statements that are not historical facts, including statements
about the Company's beliefs and expectations, are forward-looking statements.
These statements are based upon current plans, estimates and projections. Our
actual results may differ materially from those projected in these
forward-looking statements as a result of various factors, including those
described in Part II Item 5 of this report, and therefore undue reliance should
not be placed on them.
SUBSEQUENT EVENT - INITIAL PUBLIC OFFERING
Subsequent to September 30, 2002, we completed our initial public offering
("IPO") of 10,952,600 common shares. The Company's shares began trading on the
New York Stock Exchange on October 10, 2002. This offering raised approximately
$201.2 million in net proceeds, which was subsequently contributed to our
principal operating subsidiary, Montpelier Re.
BUSINESS ENVIRONMENT AND OUR FORMATION
The global property and casualty insurance and reinsurance industry has
historically been highly cyclical. During the last half of the 1990s, the
industry experienced excess capacity for writers of insurance and reinsurance,
which resulted in highly competitive market conditions. After this extended
period of intense competition and eroding premium rates, the reinsurance markets
began experiencing improvements in rates, terms and conditions for reinsurers in
the first quarter of 2000. Continuing improvements through 2001 extended to the
primary insurance industry and were accelerated by the September 11th terrorist
attacks, which resulted in losses to the industry estimated to be between $30
and $70 billion, which would make the event the largest catastrophe loss ever
experienced by the industry.
We believe property and other reinsurance premiums have historically often
risen in the short term in the aftermath of significant catastrophic losses. As
claims are reserved, industry surplus is depleted and the industry's capacity to
write new business diminishes. We believe that market trends similar to those
that have occurred in past cycles are developing in the current environment. At
the same time, we believe that there is a heightened awareness that commercial
properties are exposed to a variety of risks resulting in an increase in the
demand for insurance and reinsurance products. We were formed in November 2001
to take advantage of these opportunities, and through Montpelier Re, we seek to
fulfill the need for additional underwriting capacity in the global property and
casualty reinsurance market.
We have observed substantial increases in premium rates for renewals in
2002 compared to 2001 levels. We believe that rate increases will continue
through the remainder of 2002 and through 2003, albeit at a more moderate pace.
Capital provided by new entrants or by the commitment of additional capital by
existing reinsurers may increase the supply of reinsurance which could impact
pricing. An increase in the supply of reinsurance could moderate rate increases.
Since we underwrite global specialty property reinsurance and have large
aggregate exposures to natural and man-made disasters, we expect that our claim
experience will be the result of relatively few
13
events of high magnitude. The occurrence of claims from catastrophic events is
likely to result in substantial volatility in, and could have a material adverse
effect on, our financial condition and results and our ability to write new
business. This volatility will affect our results in the period that the loss
occurs because accounting principles do not permit reinsurers to reserve for
such catastrophic events until they occur. Catastrophic events of significant
magnitude historically have been relatively infrequent, although we believe the
property catastrophe reinsurance market has experienced a high level of
worldwide catastrophic losses in terms of both frequency and severity from 1987
to the present as compared to prior years. We also expect that increases in the
values and concentrations of insured property will increase the severity of such
occurrences in the future. We seek to reflect these trends as we price our
reinsurance.
REVENUES
We derive our revenues primarily from premiums from our reinsurance
contracts and, to a lesser extent, income from our investment portfolio.
Reinsurance premiums are a function of the number and type of contracts we
write, as well as prevailing market prices.
Renewal dates for reinsurance business tend to be concentrated at the
beginning of quarters, particularly the first quarter. In the markets in which
we operate, in general, approximately 40% of gross premiums written relates to
contracts that renew in the first quarter, approximately 25% relates to
contracts that renew in the beginning of the second quarter, approximately 25%
relates to contracts that renew in the beginning of the third quarter with the
remainder renewing at various times throughout the year. Premiums are generally
due in installments and earned ratably over the contract term, which ordinarily
is twelve months.
Our fixed maturity investments are held as available for sale. Under U.S.
GAAP, these securities are carried at fair value, and unrealized gains and
losses on these securities are not included in investment income in our combined
statements of income, but are included in Accumulated other comprehensive income
as a separate component of shareholders' equity.
Our only equity investment is in Exali Reinsurance Holdings Limited
("Exali"), the unquoted holding company of Wellington Re Limited ("Wellington
Re"). Under U.S. GAAP, such unquoted investments are carried at fair value.
EXPENSES
Our expenses consist primarily of three types: loss and loss adjustment
expenses, policy acquisition costs and general and administrative expenses. In
the period ended December 31, 2001, our first period of operations, we also
incurred organizational expenses, interest expense and an expense associated
with the issuance of warrants.
Loss and loss adjustment expenses are a function of the amount and type of
reinsurance contracts we write and of the loss experience of the underlying
risks. We estimate loss and loss adjustment expenses based on an actuarial
analysis of the estimated losses we expect to be reported on contracts written.
As described above, we will reserve for catastrophic losses as soon as a loss
event is known to have occurred. The ultimate loss and loss adjustment expenses
will depend on the actual costs to settle claims. We will increase or decrease
our initial loss estimates as actual claims are reported and settled. Our
ability to estimate loss and loss adjustment expenses accurately at the time of
pricing our contracts will be a critical factor in determining our
profitability.
14
Acquisition costs consist principally of brokerage and commissions that
represent a percentage of the premiums on reinsurance contracts written, and
vary depending upon the amount and types of contracts written, and to a lesser
extent ceding commissions paid to ceding insurers and excise taxes.
General and administrative expenses consist primarily of salaries,
benefits, professional fees and related costs, including costs associated with
awards under our performance unit plan and our share option plan. Other than
performance units and share options, expenses are primarily fixed in nature and
do not vary with the amount of premiums written or claims incurred.
We have awarded, and will in the future award, performance units to some
of our employees. The ultimate value of these performance units to employees is
dependent upon our achievement of specified performance targets over the course
of overlapping three-year periods. We accrue the projected value of these units
and expense the value to our income statement over the course of each three-year
performance period. We recalculate our liability under the performance units as
our financial results evolve, and reflect such adjustments in our income
statement in the period in which they are determined.
As part of our formation, we granted 2,040,000 share options to our
President and Chief Executive Officer, Anthony Taylor. In September 2002,
510,000 additional options for common shares were granted to other senior
executives. From inception, we have adopted FAS 123 "Accounting for Stock-Based
Compensation," which requires the recognition of compensation expense for the
fair value of stock compensation awards.
RESULTS OF OPERATIONS
Montpelier Re Holdings Ltd. and Montpelier Re were formed on November 14,
2001, and Montpelier Re commenced insurance operations on December 16, 2001.
Neither company had any prior operating history. Accordingly, we have no
comparable results from prior periods. Our fiscal year ends on December 31. Our
financial statements are prepared in accordance with U.S. GAAP. Certain aspects
of our business have loss experience characterized as low frequency and high
severity. This may result in volatility in both Montpelier Re's results of
operations and financial condition.
Montpelier Re Holdings Ltd. ended the third quarter of 2002 with a fully
converted book value per share (as defined below) of $18.22, an increase of
$0.71 from June 30, 2002 and an increase of $1.81 from December 31, 2001. This
increase of 11.0% (not annualized), resulted from a relatively low level of
catastrophes during the three and nine months ended September 30, 2002 and a
positive total return on its investment portfolio.
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
The following table summarizes our current and prior book values per common
share:
AS OF AS OF
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Book value per share (1) $ 18.46 $ 16.41
Fully converted book value per share (2) 18.22 16.41
(1) Based on total shareholders' equity divided by basic shares outstanding
(2) Based on total shareholders' equity plus the assumed proceeds from the
exercise of dilutive options and warrants, divided by fully converted
shares outstanding
15
The following table summarizes the Company's combined financial results for the
three and nine months ended September 30, 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
($ IN MILLIONS) ($ IN MILLIONS)
Net operating income (1) ............................. $ 22.6 $ 72.8
Net realized gains on fixed maturity investments ..... 4.0 5.5
Net income ........................................... 26.6 78.3
Earnings per share - basic ........................... 0.51 1.49
-------- --------
Earnings per share - diluted ......................... 0.50 1.49
======== ========
(1) Net operating income represents net income excluding net realized gains
and losses on fixed maturity investments.
GROSS PREMIUMS WRITTEN
Details of gross premiums written by line of business and by geographic area of
risk insured are provided below:
GROSS PREMIUMS WRITTEN BY LINE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
($ IN MILLIONS) ($ IN MILLIONS)
Property Catastrophe .............. $ 29.5 15.3% $ 140.3 26.2%
Other Property .................... 98.6 50.9 184.0 34.5
Qualifying Quota Share ............ 42.0 21.7 153.5 28.8
Specialty and Other ............... 23.6 12.1 56.0 10.5
------- ----- ------- -----
Total ............................. $ 193.7 100.0% $ 533.8 100.0%
======= ===== ======= =====
GROSS PREMIUMS WRITTEN BY GEOGRAPHIC AREA OF RISK INSURED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
($ IN MILLIONS) ($ IN MILLIONS)
Worldwide risks (1).............................................. $ 78.1 40.4% $ 274.2 51.4%
USA and Canada................................................... 91.9 47.4 186.1 34.9
Japan............................................................ 3.8 2.0 20.4 3.8
Worldwide risks, excluding USA and Canada (2).................... 1.3 0.7 10.7 2.0
United Kingdom or Ireland........................................ 5.4 2.8 10.4 1.9
Western Europe excluding Scandinavia, the United Kingdom and
Ireland ......................................................... 1.8 0.9 8.4 1.6
Other (1.0% or less)............................................. 11.4 5.8 23.6 4.4
-------- ----- -------- -----
Total $ 193.7 100.0% $ 533.8 100.0%
======== ===== ======== =====
16
(1) "Worldwide risks" comprise individual policies that insure risks on a
worldwide basis.
(2) "Worldwide risks, excluding USA and Canada" comprise individual policies
that insure risks on a worldwide basis but specifically exclude the USA
and Canada.
Overall we expect that gross premiums written for 2003 will be greater
than 2002, based on our assumptions that both rate and volume increases will
occur.
Property catastrophe reinsurance - These contracts are typically "all
risk" in nature, providing protection against losses from earthquakes and
hurricanes, as well as other natural and man made catastrophes such as floods,
tornadoes, fires and storms. The predominant exposures covered are losses
stemming from property damage, and business interruption coverage resulting from
a covered peril. Certain risks, such as war and nuclear contamination, are
generally excluded from all contracts. Property catastrophe reinsurance is
generally written on an excess of loss basis, which provides coverage to primary
insurance companies when aggregate claims and claim expenses from a single
occurrence from a covered peril exceed a certain amount specified in a
particular contract.
We also write retrocessional coverage contracts, which is reinsurance
protection to other reinsurers or retrocedents. Coverage is focused on
catastrophe protection for property portfolios. Retrocessional coverage
typically carries a higher degree of volatility versus reinsurance as it covers
the concentration of catastrophe exposure written by retrocedents, which in turn
may have an aggregation of losses from a single catastrophic event.
The main renewal periods for property catastrophe insurance are January 1,
April 1 and July 1. Generally, gross premiums written for the fourth quarter are
proportionally less than for each of the first three quarters of the fiscal
year. The proportion of property catastrophe gross premium written as a
percentage of total gross premiums written is greater in the nine months ended
September 30, 2002 than in the three months ended September 30, 2002 because
proportionally higher volumes of property catastrophe business are traditionally
written in the first quarter, as compared to other quarters in the fiscal year.
During the three and nine months ended September 30, 2002, Montpelier Re
has recorded gross reinstatement premiums of approximately $3.2 million,
primarily due to reinstated coverages on assumed contracts impacted by losses
arising from the flooding which occurred in central Europe in August 2002
("European floods"). The reinstatement premiums have been included in the
property catastrophe category. We expect to record additional reinstatement
premiums as additional losses are notified consistent with our loss estimates
discussed below.
Other Property - This category includes risk excess of loss business,
property pro-rata and direct and facultative lines. Risk excess of loss on
reinsurance protects insurance companies on their primary insurance risks and
facultative reinsurance transactions on a "single risk" basis. Coverage is
triggered by a large loss sustained by an individual risk rather than by
smaller losses which fall below the specified attachment point of the
reinsurance contract.
Direct and facultative contracts cover commercial property risks where the
reinsurer assumes all or part of a risk under a single insurance contract.
Property pro-rata contracts comprise property risk programs written on a
proportional basis rather than on an excess of loss basis.
The proportion of Other Property premium as a percentage of total gross
premiums written is greater in the three months to September 30, 2002 than in
the nine month period primarily because we did not begin to write significant
volumes of some lines of business, such as direct and facultative insurance and
reinsurance, until the second quarter of 2002. Montpelier Re commenced
operations in December 2001 but we did not have our full complement of
underwriters until the end of the first quarter of 2002.
17
Accordingly, we would not anticipate that the relatively low level of premium
volumes written in certain lines of business, including facultative insurance
and reinsurance, in the first quarter of 2002 would be repeated in the first
quarter of 2003.
Qualifying Quota Share ("QQS") - This represents whole account quota share
reinsurance to select Lloyd's syndicates and specialty insurance companies.
Under the quota share reinsurance contracts, a specified portion of the risk on
a specified coverage is assumed in exchange for an equal proportion of the
premiums. The QQS business incepting in the three and nine months of 2002 is
based on annual projections supplied by the underlying syndicates, together with
actual reported results for the six months ended June 30, 2002. Estimated annual
premiums can change, based on revised projections supplied by the underlying
syndicates. The resulting changes in accrued premium are recorded in the period
in which they are determined. Gross premiums written related to QQS arrangements
have been recorded gross of original commissions to the syndicates. This
accounting treatment, when compared to recording such premiums net of original
commissions, has the effect of increasing gross premiums written and increasing
acquisition costs by an equal amount.
Specialty and Other - Risks such as aviation, liability, aviation war,
marine, personal accident catastrophe, casualty and other reinsurance business
is included in this category. The marine and aviation business is primarily
written on a retrocessional excess of loss basis. A limited number of terrorism
specific risks, reinsurance treaties and national pools were written as well
during the period.
REINSURANCE PREMIUMS CEDED. Reinsurance premiums ceded for the three and
nine months ended September 30, 2002 were $20.9 million and $39.7 million
respectively, which was attributable to the reinsurance purchased by the QQS
syndicates with respect to the contracts in which we participate. Reinsurance
premiums ceded represented approximately 50% and 26% of gross premiums assumed
from the syndicates for the three and nine months ended September 30, 2002,
respectively. The increase in reinsurance premium ceded for the three months to
September 30, 2002 arose as a result of one of the syndicates notifying
Montpelier Re during the third quarter that they had purchased more underlying
reinsurance than originally anticipated. To date, we have not directly purchased
any reinsurance. We will continue to assess the need for retrocessional coverage
and may purchase such coverage in future periods.
NET PREMIUMS WRITTEN. Net premiums written for the three and nine months
ended September 30, 2002 were $172.9 million and $494.0 million respectively.
NET CHANGE IN UNEARNED PREMIUMS. Net change in unearned premiums for the
three and nine months ended September 30, 2002 were $66.4 million and $269.5
million, respectively, comprising a change in unearned premiums of $70.8 million
and $285.5 million and a change in unearned ceded premium of $4.4 million and
$16.0 million, respectively. This reflects that most of our contracts are
written on an annual basis, with the premiums earned over the course of the
contract period.
NET PREMIUMS EARNED. Net premiums earned for the three and nine months
ended September 30, 2002 were $106.5 million and $224.5 million. The large
difference between net premiums written and net premiums earned during the three
and nine months ended September 30, 2002 reflects that most of our contracts are
written on an annual basis, with the premiums earned over the course of the
contract period. The majority of our business is written at the January 1, April
1, and July 1 renewal periods and therefore it is reasonable to anticipate that
the earned premium would generally increase over the course of the fiscal year
as premiums written in earlier months are increasingly earned. A minority of our
business, principally some underlying business in the QQS contracts, is written
on a risks attaching basis, which is generally earned over a longer period.
18
LOSS AND LOSS ADJUSTMENT EXPENSES
The underwriting results of a reinsurance company are often measured by
reference to its loss ratio and expense ratio. The loss ratio is the result of
dividing losses and loss adjustment expenses incurred (including estimates for
incurred but not reported losses) by net premiums earned. The expense ratio is
the result of dividing acquisition costs combined with general and
administrative expenses by net premiums earned. The combined ratio is the sum of
the loss ratio and the expense ratio.
The table below sets forth our combined ratio and components thereof for
the three and nine months ended September 30, 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Loss ratio 64.8% 54.5%
Expense ratio 24.7% 25.6%
---- ----
Combined ratio 89.5% 80.1%
---- ----
Loss and loss adjustment expenses for the three and nine months ended
September 30, 2002 were $69.0 million and $122.4 million, respectively. The loss
ratio represents our estimate of expected losses on premiums earned. The loss
ratios for the three and nine months ended September 30, 2002 were impacted by
the European floods. Overall, for the nine months ended September 30, 2002, we
have benefited from the relatively low level of catastrophes, as evidenced by
our relatively low overall loss ratio. Loss and loss expenses comprise losses
incurred but not reported ("IBNR") of $50.1 million and $100.7 million for the
three and nine months ended September 30, 2002, respectively, combined with
claims that were reported to us with total unadjusted net losses of $18.6
million and $21.2 million, respectively. Reinsurance recoverable related to the
QQS business written of $5.3 million and $10.6 million was netted against loss
and loss adjustment expenses for the three and nine months ended September 30,
2002, respectively. We paid losses of $0.3 million and $0.5 million,
respectively, for the three and nine months ended September 30, 2002. The
majority of our reported claims were notified to us in the three months ended
September 30, 2002 and relate to the European floods.
IBNR for the three and nine months ended September 30, 2002 was $50.1
million and $100.7 million, respectively. In order to assess our exposure to the
European floods, we have reviewed the estimates of the industry-wide insured
loss, examined our contracts with exposures to risks in the affected areas, and
discussed the likelihood of losses under such contracts with our reinsurance
brokers and cedents. We have relatively small exposures in the affected areas.
We currently have reported claims of approximately $14.1 million and in
addition, based on our analysis, have estimated an additional amount for losses
incurred but not reported of $10.9 million. We experienced immaterial losses or
exposures to the season's hurricane, tropical storm, or typhoon losses through
September 30, 2002. IBNR was actuarially determined, including consideration for
known catastrophic events in the three and nine months ended September 30, 2002.
ACQUISITION COSTS. Acquisition costs for the three and nine months ended
September 30, 2002 were $20.4 million and $41.6 million respectively, which were
principally due to brokerage commissions for our reinsurance contracts of $8.6
million and $17.0 million, respectively and commissions paid to ceding insurers
and other costs of $11.8 million and $24.6 million respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended September 30, 2002 were $5.9 million which were
comprised of fixed expenses of $3.7 million, $0.4 million for the accrued
expense of the performance units granted under our performance incentive
19
plan, $0.5 million for current incentive compensation bonuses accrued, and $1.3
million related to the accrual of the fair value of stock options granted.
General and administrative expenses for the nine months ended September
30, 2002 were $15.9 million which consisted of fixed expenses of $9.9 million,
$1.2 million for the accrued expense of the performance units granted under our
performance incentive plan, $1.0 million for current incentive compensation
bonuses accrued and $3.8 million related to the accrual of the fair value of
stock options granted.
NET INVESTMENT INCOME. Net investment income for the three and nine months
ended September 30, 2002 was $12.5 million and $31.5 million respectively.
Interest on coupon-paying bonds, bank interest and foreign exchange gains
combined totaled $13.8 million and $35.2 million, respectively. This was
partially offset by amortization of premium on bonds and investment management
fees of $1.3 million and $3.7 million, respectively.
NET REALIZED INVESTMENT GAINS. Net realized investment gains for the three
and nine months ended September 30, 2002 were $4.0 million and $5.5 million
respectively, which were due to gains realized from the sale of fixed maturity
investments.
INTEREST ON LONG-TERM DEBT. Interest expensed on the long-term debt
relating to the $150.0 million outstanding balance on our long-term loan
facility described below for the three and nine months ended September 30, 2002
was $1.2 million and $3.3 million respectively, representing an average rate of
3.0% and 2.9% respectively. We paid interest of $nil and $2.3 million during the
three and nine months ended September 30, 2002.
NET INCOME. Net income for the three and nine months ended September 30,
2002 was $26.6 million and $78.3 million respectively, which was principally due
to net underwriting income of $17.1 million and $60.6 million respectively,
primarily reflecting the relatively low level of reported and unreported claims,
net investment income of $12.5 million and $31.5 million and net investment
gains of $4.0 million and $5.5 million, respectively, partially offset by
interest on the long-term debt of $1.2 million and $3.3 million, respectively.
COMPREHENSIVE INCOME. Comprehensive income for the three and nine months
ended September 30, 2002 was $42.1 million and $103.7 million respectively,
which includes the $26.6 million and $78.3 million of net income described
above, and $15.5 million and $25.4 million, respectively, of net unrealized
gains on investments.
The cost or amortized cost, gross unrealized gains and losses, and
carrying values of our investments as of September 30, 2002 were as follows (in
thousands):
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
INVESTMENTS COST GAINS LOSSES CARRYING VALUE
----------- --------- ---------- ---------- --------------
Fixed maturity investments .... $1,077,390 $ 28,321 $ (591) $1,105,120
Equity investment (unquoted) .. 34,543 -- (439) 34,104
Our portfolio of fixed maturity investments comprises investment grade
corporate debt securities (27%), U.S. government bonds (21%), federal agency
bonds (39%) and mortgage-backed securities (13%). All of the fixed maturity
investments currently held by us are publicly traded. Total return for the three
and nine months ended September 30, 2002 was 2.8% and 5.7% respectively. The
average duration of the portfolio was 2.2 years and the average rating of the
portfolio was AA+ at September 30, 2002.
20
At September 30, 2002, our only equity investment was in Exali Reinsurance
Holdings Limited ("Exali"), the unquoted holding company of Wellington
Reinsurance Limited. Under U.S. GAAP, such unquoted investments are carried at
fair value. At September 30, 2002, this investment is recorded at estimated fair
value, based on Exali's reported net asset value, with the difference being
recorded as an unrealized loss included within Accumulated other comprehensive
income in shareholders' equity.
We did not experience any material, other-than-temporary, impairment
charges relating to our portfolio of investment securities during the nine
months ended September 30, 2002. In our determination of other-than-temporary
impairment, we consider several factors and circumstances including the issuer's
overall financial condition, the issuer's credit and financial strength ratings,
a weakening of the general market conditions in the industry or geographic
region in which the issuer operates, a prolonged period (typically six months or
longer) in which the fair value of an issuer's securities remains below our cost
and any other factors that may raise doubt about the issuer's ability to
continue as a going concern.
Other-than-temporary impairment is recorded as a realized loss which
serves to reduce net income and earnings per share. Temporary losses are
recorded as unrealized losses which do not impact net income and earnings per
share but reduce other comprehensive income.
LIQUIDITY AND CAPITAL RESOURCES
We are a holding company that conducts no operations of its own. We rely
primarily on cash dividends and service fees from Montpelier Re to pay our
operating expenses, interest on debt facilities and dividends, if any. There are
restrictions on the payment of dividends from Montpelier Re to Montpelier Re
Holdings Ltd., which are described in more detail below. It is our initial
policy to retain earnings to support the growth of our business. We do not
currently intend to pay dividends.
In the period from November 14, 2001, our date of incorporation, to
December 31, 2001, we received $848.2 million in cash from a private placement
of our common shares, which was partially offset by equity raising costs of $5.2
million. Substantially all of these funds were contributed to Montpelier Re to
provide capital for its underwriting operations. During this period we used $3.9
million of cash in operating activities, largely because Montpelier Re did not
commence insurance operations until mid December 2001. Montpelier Re invested
$638.5 million in investments in the period, and had a cash balance of $350.6
million at December 31, 2001.
On December 12, 2001, we also entered into two senior credit facilities
with Bank of America, N.A. and a syndicate of commercial banks, consisting of
the Bank of N.T. Butterfield & Son Limited, Credit Suisse First Boston, The Bank
of Bermuda Ltd., Fleet National Bank, The Bank of New York and Barclays Bank
plc. The credit facilities consist of a 364-day revolving credit facility with a
$50.0 million borrowing limit and a three-year term loan facility with a $150.0
million aggregate borrowing limit. As of September 30, 2002, we had borrowed
$150.0 million under the term loan facility and had not accessed the revolving
credit facility. Substantially all of the $150.0 million was contributed to
Montpelier Re to provide capital for its underwriting operations. These credit
facilities contain covenants which include maintaining: (i) a ratio of debt to
total capital no greater than 30%; (ii) a tangible net worth equal to at least
the sum of: (x) $525.0 million; (y) 50% of positive quarterly net income (with
no deduction for net losses); and (z) 50% of any net equity proceeds, minus
certain dividends; and (iii) the ratio of the aggregate statutory net written
premiums to the net worth of all our insurance subsidiaries at a level no
greater than 1.5 to 1 at the end of any fiscal quarter. Also, these covenants
restrict our other borrowings, the ability of our subsidiaries to merge,
consolidate, make acquisitions, sell any assets or assign any receivables, and
our ability to create liens on any assets, make certain capital expenditures and
to hold margin stock. In addition, a change in control of our Company or final
judgments against us which
21
exceed an aggregate of $5.0 million (excluding any portion thereof which will
likely be recovered through insurance) each constitute an event of default under
our credit facilities.
Furthermore, our ability to pay dividends is limited under these credit
facilities. Under these facilities, we cannot pay dividends to our shareholders
until April 1, 2003. After this date, we can only pay dividends in an amount
equal to 50% of our net income at the end of any quarter, excluding all
extraordinary gains and losses. If we pay dividends in excess of this amount, we
are required to refund simultaneously our debt in an amount equal to at least
43% of the excess dividend payment. This debt repayment would be used to pay any
amounts owing under our term loan facility and then amounts outstanding under
the revolving loan facility.
In the nine months ended September 30, 2002, we generated an operating net
cash inflow of $206.7 million, primarily relating to premiums received by
Montpelier Re. We paid losses of $0.3 million and $0.5 million during the three
and nine months ended September 30, 2002, respectively. We invested a net amount
of $424.0 million during the nine months ended September 30, 2002, and had a
cash balance of $147.2 million at September 30, 2002.
Fixed maturities, unquoted equities and cash and cash equivalents were
$1,286.5 million as of September 30, 2002, compared to $991.0 million at
December 31, 2001. The primary cause of this increase was the receipt of $190.0
million in premiums net of acquisition costs, net investment income of $31.5
million, unrealized gains on investments of $25.4 million and the receipt of
$26.0 million in subscriptions for common shares on January 3, 2002, which
related to the second and final closing of our initial capitalization.
For the period from inception until September 30, 2002, we have had
sufficient cash flow from operations to meet our liquidity requirements. The
cash generated from the private placement together with our credit facilities,
have provided us with sufficient liquidity to enable Montpelier Re to meet its
Bermuda statutory requirements under The Insurance Act 1978, related Regulations
and amendments thereto (the "Insurance Act"), as described below.
Subsequent to September 30, 2002, we completed our initial public offering
("IPO") of 10,952,600 common shares. The Company's shares began trading on the
New York Stock Exchange on October 10, 2002. This offering raised approximately
$201.2 million in net proceeds, which was subsequently contributed to Montpelier
Re.
In the third quarter, we moved to larger office premises in Bermuda.
Approximately $2.0 million in related costs were incurred for the nine months
ended September 30, 2002, the majority of which were capitalized.
LIQUIDITY. On an ongoing basis, our sources of funds primarily consist of
premiums written, investment income and proceeds from sales and redemptions of
investments.
Cash is used primarily to pay losses and loss adjustment expenses,
brokerage commissions, excise taxes, and general and administrative expenses and
to purchase new investments. In the future, we may also use cash to pay for any
premiums retroceded and any authorized share repurchases.
Our cash flows from operations represent the difference between premiums
collected and investment earnings realized, and the losses and loss adjustment
expenses paid, underwriting and other expenses paid and investment losses
realized. Cash flows from operations may differ substantially, however, from net
income. To date, we have invested all cash flows not required for operating
purposes.
22
The potential for a large claim under one of our reinsurance contracts means
that substantial and unpredictable payments may need to be made within
relatively short periods of time.
We intend to manage these risks by using modeling techniques to structure
our investments in an effort to anticipate the payout patterns of our
liabilities under reinsurance policies. No assurance can be given, however, that
we will successfully match the structure of Montpelier Re's investments with its
liabilities under reinsurance contracts. If our calculations with respect to
these reinsurance liabilities are incorrect, or if we improperly structure our
investments to match such liabilities, we could be forced to liquidate
investments prior to maturity, potentially at a significant loss.
Montpelier Re is registered under the Insurance Act. Under the Insurance
Act, Montpelier Re is required to file on an annual basis, Statutory Financial
Statements and to file a Statutory Financial Return. The Insurance Act also
requires Montpelier Re to meet a minimum solvency margin equal to the greatest
of (i) $100 million, (ii) 50% of net premiums written or (iii) 15% of the
reserve for losses and loss adjustment expenses. To satisfy these requirements,
Montpelier Re was required to maintain a minimum level of statutory capital and
surplus of $100 million at September 30, 2002 and a minimum share capital of $1
million. In the nine months ended September 30, 2002, Montpelier Re satisfied
these requirements.
Bermuda law limits the maximum amount of annual dividends or distributions
payable by Montpelier Re to us and in certain cases requires the prior
notification to, or the approval of, the Bermuda Monetary Authority. Subject to
such laws, the directors of Montpelier Re have the unilateral authority to
declare or not to declare dividends to us. The maximum amount of dividends that
could have been paid by Montpelier Re to us at January 1, 2002, without such
notification, was $39,540. Accordingly, there is no assurance that dividends
will be declared or paid in the future.
Montpelier Re is not licensed or admitted as an insurer or reinsurer in
any jurisdiction other than Bermuda. Because many jurisdictions do not permit
insurance companies to take credit for reinsurance obtained from unlicensed or
non-admitted insurers on their statutory financial statements unless appropriate
security mechanisms are in place, we anticipate that our reinsurance clients
will typically require Montpelier Re to post a letter of credit or other
collateral. In order for Montpelier Re to write Lloyd's Qualifying Quota Share
business, it must provide an evergreen letter of credit in favor of The Society
and Council of Lloyd's ("Lloyd's") in accordance with Lloyd's rules. We have
made arrangements with Fleet National Bank for the provision of a standby letter
of credit in a form acceptable to Lloyd's in an amount of up to $200.0 million,
which we consider sufficient to support Montpelier Re's estimated qualifying
quota share obligations for the next 12 months. Depending on the level of
business written by the QQS syndicates over the next 12 months, the standby
letter of credit may need to be extended. The letter of credit outstanding at
September 30, 2002 was approximately $38.1 million, which is secured by
investments of approximately $41.9 million. Montpelier Re has the ability to
provide sufficient unencumbered assets to support the standby letter of credit.
In May 2002, we signed a subscription and shareholders agreement to invest
in Exali, the Bermuda-based holding company of Wellington Re. Subject to various
conditions, Montpelier Re has agreed to invest up to 40.0 million pounds
sterling, or approximately $60.0 million, in two separate tranches. On June 21,
2002, Montpelier Re invested 22.1 million pounds sterling (or $33.0 million).
The second tranche of up to 17.9 million pounds sterling, or approximately
$26.9 million, is expected to close in November 2002. Payment of the second
tranche is secured by a letter of credit in favor of Exali, in an amount equal
to 110% of the second tranche, or approximately $29.6 million.
As part of the subscription and shareholders agreement, Montpelier Re has
agreed to provide quota share reinsurance to Wellington Re involving annual
ceded premiums to us of approximately $60.0 million for the underwriting years
2003, 2004 and 2005. These arrangements cover mainly property and casualty
risks.
23
Our President and Chief Executive Officer, Anthony Taylor, has
joined the board of directors of Exali and will remain on the board for so long
as we retain a specified level of shareholdings and maintain the quota share
business.
On an ongoing basis, we expect our internally generated funds, together
with the revolving credit agreement and the capital base provided by the IPO and
the private placement, to be sufficient to operate our business and implement
our business strategy. Consequently, we do not presently anticipate that we will
incur any additional material indebtedness in the ordinary course of our
business other than obtaining letters of credit as security for Montpelier Re's
reinsurance agreements. However, there can be no assurance that we will not be
required to incur other indebtedness to implement our business strategy or pay
claims.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that we are principally exposed to three types of market risk:
interest rate risk, foreign currency risk and credit risk.
The use of derivative instruments is expressly prohibited by our Board of
Directors, other than the use of forward currency exchange contracts to minimize
the impact of exchange rate fluctuations.
INTEREST RATE RISK. Our primary market risk exposure is to changes in
interest rates. Our fixed maturity portfolio is exposed to interest rate risk.
Fluctuations in interest rates have a direct impact on the market valuation of
these investments. As interest rates rise, the market value of our fixed
maturity portfolio falls, and the converse is also true. We expect to manage
interest rate risk by selecting investments with characteristics such as
duration, yield, currency and liquidity tailored to the anticipated cash outflow
characteristics of Montpelier Re's reinsurance liabilities.
As of September 30, 2002, the impact on our portfolio from an immediate
100 basis point increase in market interest rates would have resulted in an
estimated decrease in market value of 2.2% or approximately $24.8 million and
the impact on our portfolio from an immediate 100 basis point decrease in market
interest rates would have resulted in an estimated increase in market value of
2.2% or approximately $24.8 million.
As of September 30, 2002, we held $148.2 million, or 13.4% of our total
invested assets in mortgage-related securities. These assets are exposed to
prepayment risk, which occurs when holders of individual mortgages increase the
frequency with which they prepay the outstanding principal before the maturity
date and refinance at a lower interest rate cost. Given the small proportion
that these securities comprise of the overall portfolio, and the current low
interest rate environment, prepayment risk is not considered significant at this
time.
Interest rate movements also affect the economic value of our long-term
debt obligation, on which the interest rate was fixed at 2.96% from April 21,
2002 until October 21, 2002. The average interest rate for the period from
January 1, 2002 until September 30, 2002 was 2.90%. The interest rate has been
fixed at 2.59% for the period from October 21, 2002 until April 21, 2003.
FOREIGN CURRENCY RISK. We attempt to manage our foreign currency risk by
seeking to match our liabilities under reinsurance policies that are payable in
foreign currencies with investments that are denominated in such currencies.
Furthermore, we may use forward foreign currency exchange contracts in an effort
to hedge against movements in the value of foreign currencies relative to the
United States dollar. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specified currency at a future date at a price
set at the time of the contract. Foreign currency exchange contracts will not
eliminate fluctuations in the value of our assets and liabilities denominated in
foreign currencies but rather allow us to establish a rate of exchange for a
future point in time. We do not expect to enter into such contracts with respect
to a material amount of our assets.
CREDIT RISK. We have exposure to credit risk primarily as a holder of
fixed income investments. Our risk management strategy and investment policy is
to invest in debt instruments of high credit quality issuers and to limit the
amount of credit exposure with respect to particular ratings categories and any
one issuer.
25
CURRENCY
Our functional currency is the United States dollar. However, because we
write a portion of our business and receive premiums in currencies other than
United States dollars and may maintain a small portion of our investment
portfolio in investments denominated in currencies other than United States
dollars, we may experience exchange losses to the extent our foreign currency
exposure is not properly managed or otherwise hedged, which in turn would
adversely affect our statement of operations and financial condition.
EFFECTS OF INFLATION
We do not believe that inflation has had a material effect on our combined
results of operations, except insofar as inflation may affect interest rates.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our combined financial statements contain certain amounts that are
inherently subjective in nature and have required management to make assumptions
and best estimates to determine the reported values. Actual events or results
may differ materially from management's underlying assumptions or estimates,
which may result in material adverse effects on our results of operations and
financial condition and liquidity.
We believe that the following critical accounting policies affect the more
significant estimates used in the preparation of our combined financial
statements. The descriptions below are summarized and have been simplified for
clarity. A more detailed description of the significant accounting policies we
use to prepare our combined financial statements is included in the notes to the
December 31, 2001 audited combined financial statements included in the
Company's Registration Statement on Form S-1.
PREMIUMS. Premium income is primarily earned ratably over the term of the
insurance policy. The portion of the premium related to the unexpired portion of
the policy at the end of any reporting period is reflected in unearned premiums.
We write both excess of loss and pro-rata contracts. On excess of loss
contracts, the minimum and deposit premium is defined in the contract wording
and this is the amount we record as written premium in the period the underlying
risks incept. Subsequent adjustments to the minimum and deposit premium are
recorded in the period in which they are determined.
On pro-rata contracts, including QQS arrangements, premiums assumed are
estimated to ultimate levels based on information provided by the ceding
companies. An estimate of premium is recorded in the period in which the
underlying risks incept. When the actual premium is reported by the ceding
company, it may be significantly higher or lower than the estimate. Adjustments
arising from the reporting of actual premium by the ceding companies are
recorded in the period in which they are determined. Estimates of premium are
based on information available, including previously reported premium and
underlying economic conditions. Premiums on pro-rata contracts are earned over
the risk periods of the related reinsurance contracts.
Premiums receivable are recorded at amounts due less any required
provision for doubtful accounts.
26
Where contract terms require the reinstatement of coverage after a ceding
company's loss, the mandatory reinstatement premiums are recorded as written
premiums when the loss event occurs, and are recognized as earned premium
ratably over the remaining contract period.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. Loss and loss adjustment
expense reserves include amounts determined from loss reports on individual
cases losses, provisions for settlement expenses, and provisions for losses
incurred but not reported based on actuarial determinations and management
estimates.
A significant portion of our business is in the property catastrophe
market and programs with higher layers of risks. Reserving for losses in such
programs is inherently complicated in that losses in excess of the attachment
level of the Company's policies are characterized by high severity and low
frequency. This limits the volume of industry claims experience available from
which to reliably predict ultimate loss levels following a loss event.
In addition, there always exists a reporting lag between a loss event
taking place and the reporting of the loss to the Company. These incurred but
not reported losses are inherently difficult to predict.
These factors require us to make significant assumptions when establishing
loss reserves. For losses which have been reported to the Company, we estimate
our ultimate loss. Since the Company has insufficient past loss experience,
management relies on industry data and professional judgment. This industry data
may not match the risk profile of the Company, which introduces a further degree
of uncertainty into the process. For losses which have been incurred but not
reported, the reserving process is further complicated.
These complications, together with the potential for unforeseen adverse
developments, may result in losses and loss expenses significantly greater or
less than the reserve provided. Reserving can prove especially difficult should
a significant loss event take place near the end of an accounting period,
particularly if it involves a catastrophe event.
Loss and loss adjustment reserve estimates are regularly reviewed and
updated, as new information becomes known to us. Any resulting adjustments are
included in income in the period in which they become known.
OTHER THAN TEMPORARY DECLINES IN INVESTMENTS. Investments are reviewed
periodically to determine if they have sustained an impairment of value that is
considered to be other than temporary. The identification of potentially
impaired investments involves significant management judgment, which includes
the determination of their fair value and the assessment of whether any decline
in value is other than temporary. If investments are determined to be impaired,
a loss is charged to the income statement in the period in which it is
discovered. The current economic environment and recent volatility of securities
markets increase the difficulty in determining impairment. For unquoted
investments, fair value is determined using the financial information received
and other economic and market knowledge as appropriate.
LONG-TERM INCENTIVE AWARD ACCRUALS. The Long-Term Incentive Plan provides
for the granting of performance units to management. The performance units
entitle the recipient to receive a specified amount subject to the achievement
of specific financial goals. Performance units vest at the end of a three year
period, and payout is linked to performance targets at the discretion of the
Compensation Committee. The performance targets currently in place, are based on
achieving average combined ratios over the performance period. Management is
required to estimate the average combined ratio in order to accrue an
appropriate expense in the financial statements. Because of the inherent
volatility in short term
27
underwriting results, and the resultant difficulty in estimating future
insurance ratios, management assumes a target combined ratio which results in a
100% realization by the recipients of the allocated performance units. When the
Compensation Committee deems it appropriate, the assumed combined ratio will be
replaced by a combined ratio calculated by the Compensation and Nominating
Committee based on actual results, and any adjustment required will be
recognized in the period in which the adjustment is calculated.
28
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q (the "Evaluation Date"), the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Sections 240.13a-14(c) and 240.15d-14(c)
of the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the Evaluation Date, nor were there any significant
deficiencies or material weaknesses noted in the Company's internal controls. As
a result, no corrective action with regard to significant deficiencies and
material weaknesses was taken.
29
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or
arbitration.
ITEM 5. OTHER INFORMATION
Cautionary Statement under "Safe Harbor" Provision of the Private
Securities Litigation Reform Act of 1995.
This Form 10-Q contains, and the Company may from time to time make,
written or oral "forward-looking statements" within the meaning of the U.S.
federal securities laws. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. All
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside the Company's control that could cause actual results to
differ materially from such statements. Important events that could cause the
actual results to differ include, but are not necessarily limited to, our short
operating history; our dependence on principal employees; the cyclical nature of
the reinsurance business; the levels of new and renewal business achieved; the
possibility of severe or unanticipated losses from natural or man-made
catastrophes; the impact of terrorist activities on the economy; our reliance on
reinsurance brokers; the impact of currency exchange rates and interest rates on
our investment results; competition in the reinsurance industry and rating
agency policies and practices. The Company's forward-looking statements
concerning market fundamentals could be affected by changes in demand, pricing
and policy term trends and competition. For a more detailed description of these
uncertainties and other factors, please see the "Risk Factors" section in the
Company's Form S-1 (Registration No. 333-89408) filed with the Securities and
Exchange Commission. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the dates on which they
are made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Memorandum of Association (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-89408)).
3.2 Bye-Laws (incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No.
333-89408)).
4.1 Specimen Ordinary Share Certificate (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-89408)).
30
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
4.2 Share Purchase Warrant, dated as of January 3, 2002, between the
Registrant and Banc of America Securities LLC, as amended by
Amendment, dated as of February 11, 2002, as further amended by
Amendment, dated as of July 1, 2002. (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-89408)).
4.3 Share Purchase Warrant, dated January 3, 2002, between the
Registrant and Benfield Group plc, as amended by Amendment, dated as
of February 11, 2002, as further amended by Amendment, dated as of
July 1, 2002 (incorporated herein by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-89408)).
4.4 Share Purchase Warrant, dated January 3, 2002, between the
Registrant and White Mountains Insurance Group, Ltd., as amended by
Amendment, dated as of February 11, 2002, as further amended by
Amendment, dated as of July 1, 2002 (incorporated herein by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-1 (Registration No. 333-89408)).
10.1 Shareholders Agreement, dated as of December 12, 2001, among the
Registrant and each of the persons listed on Schedule 1 thereto, as
amended by Amendment No. 1, dated December 24, 2001 (incorporated
herein by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-89408)).
10.2 Service Agreement, dated as of December 12, 2001, between Anthony
Taylor, the Registrant and Montpelier Reinsurance Ltd. (incorporated
herein by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-89408)).
10.3 Service Agreement, dated as of January 24, 2002, between Anthony
Taylor and Montpelier Marketing Services (UK) Limited (incorporated
herein by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-89408)).
10.4 Service Agreement, dated as of January 1, 2002, between C. Russell
Fletcher, III and Montpelier Reinsurance Ltd. (incorporated herein
by reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-1 (Registration No. 333-89408)).
10.5 Service Agreement, dated as of January 1, 2002, between Thomas
George Story Busher and Montpelier Reinsurance Ltd. (incorporated
herein by reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-89408)).
31
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.6 Service Agreement, dated as of January 24, 2002, between Thomas
George Story Busher and Montpelier Marketing Services (UK) Limited
(incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 333-89408)).
10.7 Service Agreement, dated as of January 24, 2002, between Nicholas
Newman-Young and Montpelier Marketing Services (UK) Limited
(incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 333-89408)).
10.8 Credit Agreement, dated as of December 12, 2001, among the
Registrant and Various Financial Institutions, as amended by
Amendment Agreement, dated as of December 26, 2001, by Second
Amendment Agreement, dated as of June 17, 2002 and by Third
Amendment Agreement, dated as of August 1, 2001 (incorporated herein
by reference to Exhibit 10.8 to the Company's Registration Statement
on Form S-1 (Registration No. 333-89408)).
10.9 Share Option Plan (incorporated herein by reference to Exhibit 10.9
to the Company's Registration Statement on Form S-1 (Registration
No. 333-89408)). 10.10 Performance Unit Plan (incorporated herein by
reference to Exhibit 10.10 to the Company's Registration Statement
on Form S-1 (Registration No. 333-89408)).
- --------------
B. Current Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Montpelier Re Holdings Ltd.
(Registrant)
November 8, 2002 By: /s/ Anthony Taylor
---------------- ---------------------------------------------
Date Name: Anthony Taylor
Title: President and Chief Executive Officer
November 8, 2002 By: /s/ Neil McConachie
---------------- ---------------------------------------------
Date Name: Neil McConachie
Title: Financial Controller
(chief accounting officer)
32
CERTIFICATIONS
I, Anthony Taylor, President and Chief Executive Officer of Montpelier Re
Holdings Ltd., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Montpelier Re Holdings
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 By: /s/ Anthony Taylor
------------------------- --------------------------------------------
Name: Anthony Taylor
Title: President and Chief Executive Officer
(principal executive officer)
33
I, K. Thomas Kemp, Chief Financial Officer of Montpelier Re Holdings Ltd.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Montpelier Re Holdings
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 By: /s/ K. Thomas Kemp
------------------------- --------------------------------------------
Name: K.Thomas Kemp
Title: Chief Financial Officer
(principal financial officer)
34