MONTPELIER RE HOLDINGS LTD - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

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

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 [X] No [ ]

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 May 5, 2003, the Registrant had 63,392,600 common voting shares
outstanding, with a par value of 1/6 cent per share.
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MONTPELIER RE HOLDINGS LTD.

INDEX TO FORM 10-Q

PART I FINANCIAL INFORMATION....................................... 1
Item 1. Financial Statements........................................ 1
Consolidated Balance Sheets as at March 31, 2003 (Unaudited)
and December 31, 2002....................................... 1
Consolidated Statements of Operations and Comprehensive
Income for the Three Months Ended March 31, 2003 and 2002
(Unaudited)................................................. 2
Consolidated Statements of Shareholders' Equity for the
Three Months Ended March 31, 2003 and 2002 (Unaudited)...... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 (Unaudited)................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
Item 4. Controls and Procedures..................................... 26

PART II OTHER INFORMATION........................................... 27
Item 1. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
Item 5. Other Information........................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 28
SIGNATURES........................................................... 30
CERTIFICATIONS....................................................... 31

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MONTPELIER RE HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AMOUNTS)

The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements.

1

MONTPELIER RE HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AMOUNTS)

The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements.

2

MONTPELIER RE HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements.

3

MONTPELIER RE HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements.
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MONTPELIER RE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT SHARE AMOUNTS OR AS WHERE OTHERWISE DESCRIBED)
(UNAUDITED)

1. BASIS OF PRESENTATION AND CONSOLIDATION

These interim unaudited consolidated 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, 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.
On December 3, 2002, Montpelier Re established a trust known as the Montpelier
Re Foundation to promote or carry out charitable purposes.

The Company, through Montpelier Re, is a provider of global specialty
property insurance and reinsurance products.

The unaudited consolidated 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 consolidated financial
statements. This report on Form 10-Q should be read in conjunction with
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. In the opinion of management, these unaudited consolidated financial
statements reflect all the normal recurring adjustments considered 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 consolidation.
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.

2. SECURITIES LENDING

During the first quarter of 2003, the Company entered into a Securities
Lending Agreement to participate in a program whereby certain of its fixed
maturity investments are loaned to other institutions for short periods of time
through a lending agent. The Company maintains control over the securities it
lends, retains the earnings and cash flows associated with the loaned securities
and receives a fee from the borrower for the temporary use of the asset.
Collateral is required at a rate of 102-105% of the market value of the loaned
securities, depending on the type of collateral used. The Company does not have
any securities on loan at March 31, 2003.

3. REINSURANCE

For certain pro-rata contracts, including quota share contracts, the
subject direct insurance contracts will carry underlying reinsurance protection
from third party reinsurers. The Company records its pro-rata share of gross
premiums from the direct insurance contracts as gross written premiums and
records amounts incurred by the ceding company for the underlying third party
reinsurance coverage as reinsurance premiums ceded. In addition, during the
three months ended March 31, 2003, the Company purchased retrocessional
protection on

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MONTPELIER RE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

its own account for the direct insurance and facultative reinsurance programs on
an "any one risk" basis to limit the Company's exposure from losses at one
location.

Reinsurance recoverable includes the Company's share of balances due from
the underlying third party reinsurance contracts for paid losses, unpaid loss
and loss adjustment expenses and reserves for losses incurred but not reported.
Initial estimates of reinsurance recoverable are recognized in the period in
which the loss event occurs. Subsequent adjustments, are recorded in the period
they are determined. The earned reinsurance premiums ceded were $6.9 million and
$1.3 million for the three months ended March 31, 2003 and 2002, respectively.
Total recoveries netted against loss and loss adjustment expenses was $(0.3)
million and $0.6 million for the three months ended March 31, 2003 and 2002,
respectively.

The Company remains liable in the event that ceding companies, and the
Company, are unable to collect amounts due from the underlying third party
reinsurers. The Company records provisions for uncollectible underlying
reinsurance recoverable when collection becomes unlikely. There are no such
provisions recorded at March 31, 2003 or 2002.

4. RECENT ACCOUNTING PRONOUNCEMENT

The Financial Accounting Standards Board issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") an interpretation of
ARB No. 51 "Consolidated Financial Statements" in January 2003. FIN 46 clarifies
the accounting and reporting for certain entities in which equity investors do
not have the characteristics of a controlling financial interest. The financial
statements included with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002 were prepared on a combined basis as a result of
the fact that Montpelier Re's and the Company's bye-laws include certain
restrictions relating to the election of directors of Montpelier Re. The Company
adopted FIN 46 in the first quarter of 2003. The impact of adoption of FIN 46 is
that the Company's financial statements are now prepared on a consolidated basis
instead of on a combined basis. There is no impact on the Company's net income
or shareholders' equity as presented in these consolidated financial statements
as a result of the adoption of FIN 46.

5. EARNINGS PER SHARE

The reconciliation of basic and diluted earnings per share is as follows:

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MONTPELIER RE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. SEGMENT REPORTING

Management has determined that the Company operates in one segment only.
The Company focuses on writing global specialty property and other classes of
insurance and 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 for the
periods indicated ($ in millions):

GROSS PREMIUMS WRITTEN BY LINE

GROSS PREMIUMS WRITTEN BY GEOGRAPHIC AREA OF RISKS INSURED

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(1) Includes QQS gross premiums written. Benfield represents gross premiums
written through Benfield Greig Limited and Benfield Blanch, subsidiaries of
Benfield Holdings Limited.

7. LONG-TERM DEBT

On incorporation, the Company entered into a three-year term loan agreement
with Bank of America, N.A. and a syndicate of commercial banks, with an
aggregate borrowing limit of $150.0 million. As of March 31, 2003 and 2002, the
Company had borrowed all $150.0 million under this facility. The term loan
agreement requires that the Company and/or certain of its subsidiaries maintain
specific covenants, including a tangible net worth covenant and a maximum
leverage covenant, and has a final maturity date of December 12, 2004. The
facility also restricts the payment of dividends. The Company has been in
compliance with all covenants throughout the three months ended and as at March
31, 2003 and 2002.

The interest rate was fixed at 2.59% for the period from October 21, 2002
until April 21, 2003. From April 21, 2003, the rate is fixed at 2.07% until July
21, 2003. The Company incurred interest expense for the three months ended March
31, 2003 and 2002 of $965 and $995, respectively, at an average annual interest
rate of 2.59% and 2.65%, respectively, and paid interest of $959 and $1,069,
respectively. In order to hedge the interest rate risk of the loan, the Company
has entered into an interest rate swap contract with Bank of America, which
becomes effective April 22, 2003 and expires on December 11, 2004, the last day
of the term-loan facility. Under the terms of the interest rate swap contract,
the Company pays interest at a fixed rate of 1.88% plus a margin dependent on
leverage, and receives interest at a variable rate equal to the offshore LIBOR
rate.

8. RELATED PARTIES

The Company's Chairman is also the Chairman of the Board of Directors of
White Mountains Insurance Group, which beneficially owns 22.9% and 27.2% of the
Company as at March 31, 2003 and 2002, respectively. The Chief Financial Officer
is also a Director of White Mountains Insurance Group and a director of Amlin,
one of the Company's qualifying quota share cedents.

Four directors, including the Company's Chairman, are employed by White
Mountains Insurance Group.

The Company has engaged White Mountains Advisors LLC, a wholly-owned
indirect subsidiary of White Mountains Insurance Group, to provide investment
advisory and management services. The fees, which vary depending on the amount
of assets under management, are between 0.15% and 0.30% and are included in

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MONTPELIER RE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net investment income. The Company incurred an average fee of 0.17% and 0.20%
for the three months ended March 31, 2003 and 2002, respectively. For the three
months ended March 31, 2003 and 2002, the Company expensed investment management
fees of approximately $692 and $523, respectively, and has recorded an amount
payable for these services of $705 and $525, respectively. The Company's
Chairman of the Finance Committee is Deputy Chairman of the Board of Directors
of White Mountains Insurance Group, the Principal Executive Officer of White
Mountains Advisors LLC and is either general manager or investment manager of
various funds which own less than 5% of the Company.

In January 2002, the Company entered into an agreement with Remetrics, a
subsidiary of Benfield Holdings Limited, which beneficially owns 5.9% of the
Company, for the provision of certain risk management services. This agreement
was no longer in place at December 31, 2002. As a result of this agreement, the
Company accrued approximately $nil and $650 for the three months ended March 31,
2003 and 2002, respectively, for risk management services.

In addition, in the ordinary course of business, the Company entered into
four reinsurance agreements with OneBeacon Insurance Group, a subsidiary of
White Mountains Insurance Group, during the three months ended March 31, 2002.
The Company received $728 in aggregate annual premiums from these contracts
during the year ended December 31, 2002. The Company has not entered into any
reinsurance agreements with OneBeacon Insurance Group during the three months
ended March 31, 2003.

In addition, the Company pays brokerage commissions to Benfield Greig
Limited and Benfield Blanch ("Benfield"), subsidiaries of Benfield Holdings
Limited, on business brought in by Benfield. These commissions are consistent
with commissions paid to other brokers in the ordinary course of business and
totaled $5.8 million and $3.2 million for the three months ended March 31, 2003
and 2002, respectively.

9. COMMITMENTS AND CONTINGENCIES

LETTERS OF CREDIT

In order for the Company 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. The Company 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.
Letters of credit outstanding under this facility at March 31, 2003 were
approximately $125.8 million (L79.6 million) and have been secured by
investments of approximately $138.3 million. There were no letters of credit
outstanding at March 31, 2002.

In addition, as of December 31, 2002, Company has made arrangements with
Barclay's Bank PLC for the provision of an additional evergreen letter of credit
facility in favor of certain U.S. ceding companies in an amount of up to $100.0
million. Letters of credit outstanding under this facility at March 31, 2003
were approximately $20.8 million and are secured by investments of approximately
$22.9 million.

CREDIT FACILITIES

On December 12, 2001, the Company obtained a $50.0 million revolving loan
facility from a syndicate of lenders, with the Company and its subsidiaries as
borrowers and guarantors. The facility is for general corporate purposes, and
requires that the Company and/or certain of its subsidiaries maintain specific
covenants, including a tangible net worth covenant and a maximum leverage
covenant. At March 31, 2003 and 2002, no amounts had been drawn down under this
facility.

10. STATUTORY REQUIREMENTS

Montpelier Re is registered under The Insurance Act 1978 (Bermuda),
Amendments Thereto and Related Regulations ("The Act"). Under The Act,
Montpelier Re is required to annually prepare and file

9

MONTPELIER RE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Statutory Financial Statements and a Statutory Financial Return. The Act also
requires Montpelier Re to maintain a minimum share capital of $1.0 million and
to meet a minimum solvency margin equal to the greater of $100.0 million, 50% of
net premiums written or 15% of the loss and loss adjustment expense reserves.
For the three months ended March 31, 2003 and 2002, Montpelier Re satisfied
these requirements.

The Act limits the maximum amount of annual dividends or distributions paid
by Montpelier Re to the Company without the prior notification to, and in
certain cases the approval of, the Bermuda Monetary Authority of such payment.
The maximum amount of dividends that could be paid by Montpelier Re to the
Company, without such notification, was $255.7 million and $14.3 at March 31,
2003 and 2002, respectively.

Montpelier Re is also required to maintain a minimum liquidity ratio, which
was met for both periods ended March 31, 2003 and 2002.

10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following is a discussion and analysis of our results of operations for
the three months ended March 31, 2003 and financial condition as of March 31,
2003. This discussion and analysis should be read in conjunction with the
attached unaudited consolidated financial statements and accompanying notes
thereto and with our audited combined financial statements and related notes
thereto contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.

This discussion 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.

GENERAL

We provide global specialty property insurance and reinsurance products. We
write the following four lines of business: property specialty, property
catastrophe, qualifying quota share ("QQS") and other specialty.

The property specialty category includes risk excess of loss, property
pro-rata and direct insurance and facultative reinsurance business. Property
catastrophe reinsurance contracts are typically "all risk" in nature and provide
protection against losses from earthquakes and hurricanes, as well as other
natural and man-made catastrophes such as floods, tornadoes, fires and storms.
The property catastrophe category also includes retrocessional coverage
contracts, which is reinsurance protection to other reinsurers, also called
retrocedents. Coverage generally provides catastrophe protection for the
property portfolios of other reinsurers. We also participate in three QQS
arrangements that are whole account quota share reinsurance contracts we provide
to select Lloyd's syndicates. Our other specialty category includes aviation
liability, aviation war, marine, personal accident catastrophe, workers
compensation, terrorism, casualty and other reinsurance business. We will pursue
other opportunities in the upcoming year as they arise.

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 of operations 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.

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

As we only commenced operations on December 16, 2001, March 31, 2002 was
our first complete quarter of operations. We did not have our full complement of
underwriters in place until the end of the second quarter of 2002 and,
therefore, we were unable to fully participate in the January 2002 renewal
season. As a result, some comparisons between the March 31, 2003 and 2002
quarters may not be meaningful.

We ended the first quarter of 2003 with a fully converted book value per
share (as defined below) of $20.81, an increase of $4.28 from March 31, 2002.
This increase of 25.9%, was primarily caused by the following factors:

- Our participation in the 2003 renewal season as a result of having our
full complement of underwriters in place;

- Continued high premium rate levels across the major classes that we
specialize in; and

- Relatively low levels of catastrophe/large loss frequency during the
calendar year 2002, continuing into the first quarter of 2003.

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In addition, investment income was greater in the first quarter of 2003
compared to the first quarter of 2002 due to the positive effect of a larger
capital base, which outweighed the reduction in interest rates earned by our
fixed maturity portfolio.

The following table summarizes our book values per common share as at the
periods indicated:

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(1) Based on total shareholders' equity divided by basic shares outstanding

(2) This is a non-GAAP measure, based on total shareholders' equity plus the
assumed proceeds from the exercise of dilutive options and warrants in the
amount of $168.1 million, divided by fully converted shares outstanding of
9,869,160 shares. The Company believes this to be the best single measure of
the return made by our shareholders as it takes into account the effect of
all dilutive securities.

The following table summarizes our financial results for the periods
indicated ($ in millions):

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(1) Net underwriting income consists of net premiums earned less net loss and
loss adjustment expenses incurred and acquisition costs

Gross Premiums Written

Details of gross premiums written by line of business and by geographic
area of risks insured are provided below ($ in millions):

GROSS PREMIUMS WRITTEN BY LINE

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GROSS PREMIUMS WRITTEN BY GEOGRAPHIC AREA OF RISKS INSURED

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(1) "Worldwide" comprises insurance and reinsurance contracts that insure or
reinsure risks on a worldwide basis.

(2) "Worldwide, excluding USA and Canada" comprises insurance and reinsurance
contracts that insure or reinsure 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 worldwide in nature, with the majority of business related to
North America and Europe.

The volume of gross premiums written has increased during the first quarter
of 2003 compared to the first quarter of 2002, with all four categories of
premium written increasing in volume for the following reasons:

- Property catastrophe has increased as a proportion by only a small
amount, but the total volume has increased compared to 2002 as we
benefited from full participation in the January 1, 2003 renewal season;

- Property specialty has primarily increased because during the three
months ended March 31, 2002 our full complement of direct insurance and
facultative reinsurance underwriters were not yet in place;

- QQS has decreased as a percentage of gross premiums written but the level
of premium written has remained consistent with the prior year. We
renewed the same syndicates as we participated in during 2002; and

- Other specialty has increased as we wrote more specialty lines during the
first quarter of 2003, such as casualty and terrorism compared to the
comparable period in 2002.

The proportion of property catastrophe gross premium written as a
percentage of total gross premiums written is greater in the three months ended
March 31, 2003 than we expect it to be for the remainder of the year because
proportionally higher volumes of property catastrophe business are traditionally
written in the first quarter, as compared to other quarters in the fiscal year.
Other lines of business are written throughout the year, with the least amount
of premiums being written during the fourth quarter.

During the first quarter of 2003, we renewed the three Qualifying Quota
Share ("QQS") contracts that we participated in during 2002. The premium levels
on a dollar basis are expected to be broadly consistent with 2002, but will be a
lower percentage of our total premiums written as we focus on our short-tail
property specialty lines, although ultimate premiums written will depend on the
volume of premium actually written by the syndicates.

As part of a subscription and shareholders agreement with Aspen Insurance
Holdings Limited, a company in which we have a 7% interest in on an undiluted
basis and approximately a 6% interest on a fully diluted basis, Montpelier Re
has agreed to provide quota share reinsurance to a subsidiary company, Aspen
Insurance UK Limited, comprising annual assumed premiums by Montpelier Re of
approximately $60.0 million for the underwriting years 2003, 2004 and 2005. For
the three months ended March 31, 2003,

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$19.0 million was recorded in gross premiums written under these arrangements,
which cover mainly property and casualty risks.

We recorded reinstatement premiums of $0.1 million and $nil during the
three months ended March 31, 2003 and 2002, respectively. The lack of
reinstatement premiums was due to the minimal amount of reported losses during
this period. In the remainder of 2003, we would expect to record greater levels
of reinstatement premiums as additional losses are notified, consistent with our
loss estimates discussed below.

Reinsurance Premiums Ceded

Reinsurance premiums ceded for the three months ended March 31, 2003 and
2002 were $34.3 million and $14.3 million, respectively. Reinsurance purchased
by the QQS syndicates with respect to the contracts in which we participate
accounted for 79% of the reinsurance premiums ceded during the three months
ended March 31, 2003. The remainder relates to the purchase of retrocessional
protection on our own account for our direct insurance and facultative
reinsurance programs. We did not purchase retrocessional protection on our own
account during 2002 and the reinsurance premiums ceded for 2002 were
attributable solely to the reinsurance purchased by the QQS syndicates with
respect to the contracts in which we participate. We may purchase further
retrocessional protection for our own account in 2003.

Reinsurance premiums ceded represented approximately 35.6% and 19.4% of
gross premiums assumed from the QQS syndicates for the three months ended March
31, 2003 and 2002, respectively. The reason for the increase in the ratio of
gross premiums written to reinsurance premiums ceded from 2002 to 2003 is due to
the timing of the purchase of reinsurance by the QQS syndicates. We expect that
this ratio will decrease over 2003 as the majority of reinsurance is purchased
by the QQS syndicates in the earlier months of the year.

Net Premiums Earned

Net premiums earned for the three months ended March 31, 2003 and 2002 were
$184.7 million and $36.6 million, respectively. Approximately two-thirds of
earned premium relates to the 2002 underwriting year and the remainder to
business written in 2003. Net earned premium will continue to lag net premium
written until the level of premium written stabilizes at a constant level year
on year. As our gross premiums written continues to increase, our earned
premiums are catching up with our gross premiums written, which has resulted in
an earned premium to written premium ratio of 50.4% for the three months ended
March 31, 2003, compared to 18.0% for the same period in 2002. In addition, we
continue to write a minority of our business, principally some underlying
business contained in the QQS contracts, on a risks attaching basis, for which
premiums are generally earned over a longer period. These factors combined will
result in an acceleration of earned premium throughout 2003.

Loss and Loss Adjustment Expenses

The underwriting results of an insurance or reinsurance company are often
measured by reference to its loss ratio and expense ratio. The loss ratio is
calculated by dividing loss and loss adjustment expenses incurred (including
estimates for incurred but not reported losses) by net premiums earned. The
expense ratio is calculated by 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.

For comparative purposes, our combined ratio and components thereof are set
out below for the periods indicated:

14

Loss and loss adjustment expenses were $47.7 million and $14.4 million for
the three months ended March 31, 2003 and 2002, respectively. At March 31, 2003
and 2002, net loss and loss adjustment expense reserves were $167.3 million and
$14.4 million, respectively, of which $130.1 million and $13.7 million,
respectively, related to an estimate of losses incurred but not yet reported.
Reinsurance recoveries of $(0.3) million and $0.6 million were netted against
loss and loss adjustment expenses for the three months ended March 31, 2003 and
2002, respectively. Reinsurance recoveries for the three months ended March 31,
2003 related to QQS and the direct and facultative business written. Reinsurance
recoveries for the three months ended March 31, 2002 related to QQS business
written only. We paid losses of $10.1 million and $nil for the three months
ended March 31, 2003 and 2002, respectively.

Minimal losses reported during the first quarter of 2003, combined with
reductions in the estimate of losses incurred in 2002, has resulted in a loss
ratio to 25.8% for the three months ended March 31, 2003, compared to the loss
ratio for the three months ended March 31, 2002 of 39.2% and 40.4% for the year
ended December 31, 2002.

The first quarter of 2003 includes approximately $18.3 million of positive
development of losses incurred during 2002, $3.7 million relating to case
reserves and the remainder relating to a release of IBNR. In total, positive
prior period development benefited the loss ratio in the quarter by
approximately 10%. The positive development relates to reductions in estimates
for 2002 incurred losses due to the receipt of additional information from
ceding companies, including QQS syndicates, which indicated that our reserves
were not required to be at the level originally estimated at December 31, 2002.

At March 31, 2003, we estimated our gross and net reserves for loss and
loss adjustment expenses using the methodology as outlined below and in our
Critical Accounting Policy later in this section. Management has determined that
the best estimate for gross loss and loss adjustment expense reserves at March
31, 2003 and 2002 was $183.6 million and $15.0 million, respectively.
Management's best estimate of a range of likely outcomes around the estimate at
March 31, 2003 is between $197.9 million and $166.3 million. The reserve for
loss and loss adjustment expenses at March 31, 2002 represents our estimate of
expected losses on net premiums earned and was comprised of IBNR of $13.7
million and one claim that was reported to us with an unadjusted net loss of
$0.7 million.

Having regard to the limited number of paid losses arising during our short
operating history, management used the following methodology in determining the
range at March 31, 2003: (1) a combination of actuarial methods; (2) industry
loss information to estimate loss ratios and expected reporting patterns for
companies that write similar lines of business; and (3) professional judgment.
Management calculated a range around our best estimate at March 31, 2003 for
each class of business which reflects the potential variability in our loss
ratio and the reporting pattern assumptions. Due to the lack of individual case
or other data specific to our portfolio, we used industry data and professional
judgment in the reserving process at March 31, 2002.

Management has determined that the best estimate for net loss and loss
adjustment expense reserves at March 31, 2003 and 2002 was $167.3 million and
$14.4 million, respectively. Management's best estimate of a range of likely
outcomes around this estimate at March 31, 2003 is between $180.8 million and
$151.5 million.

15

The following are our net loss and loss adjustment expense reserves and our
net loss ratios by line of business for the periods indicated ($ in millions):

- ---------------

(1) Gross loss and loss adjustment expense reserves per the balance sheet is
$183.6 million which has been reduced by $16.3 million in reinsurance
recoverable to derive the net loss and loss adjustment expense reserves of
$167.3 million noted above.

(2) The gross loss and loss adjustment expense ratio for the three months ended
March 31, 2003 was 24.7%.

- ---------------

(1) Gross loss and loss adjustment expense reserves per the balance sheet are
$15.0 million which has been reduced by $0.6 million in reinsurance
recoverable related to the Qualifying Quota Share programs to derive the net
loss and loss adjustment expense reserves of $14.4 million noted above.

(3) The gross loss and loss adjustment expense ratio for the three months ended
March 31, 2002 was 39.2%.

The variation in loss ratios between the first quarter of 2002 compared to
the first quarter of 2003 results from the fact that in 2002 we did not have the
benefit of prior years' loss history on which to base our loss reserve analysis
and, accordingly, we relied more heavily on industry experience and professional
judgement to estimate our loss and loss adjustment expense reserves. The
negative loss ratio for the property catastrophe category in the 2003 quarter
results from reductions in estimates of losses incurred in 2002, combined with
the fact that we were not materially affected by any catastrophes during the
quarter. Overall, the reduction in loss ratios has resulted from the receipt of
additional information from ceding companies during the first quarter of 2003
which indicates that projected losses are lower than originally expected,
combined with the unusually low level of catastrophes incurred. As our business
has developed over 2002 and into 2003, we have supplemented industry information
with our own specific experience in our actuarial analysis which has led to
reduced projections of ultimate losses.

Net Foreign Exchange Gains

Net foreign exchange gains result from the effect of the fluctuation in
foreign exchange rates on the translation of foreign currency assets and
liabilities combined with realized gains resulting from the receipt of premium
installments in foreign currencies. Net foreign exchange gains were immaterial
at March 31, 2002 and were included in investment income.

Underwriting expenses

Underwriting expenses consist of acquisition costs and general and
administrative expenses. Acquisition costs and general and administrative
expenses were $49.9 million and $10.6 million for the three months ended March
31, 2003 and 2002, respectively, representing expense ratios of 27.0% and 29.3%,
respectively. General

16

and administrative expenses are comprised of fixed expenses which include costs
for salaries and benefits, stock options and office and risk management
expenses. Variable general and administrative expenses include expenses related
to our performance unit plan and bonuses. Acquisition costs are generally driven
by contract terms and are normally a set percentage of premiums. As our premiums
continue to increase in 2003 as anticipated, acquisition costs will also
increase as these costs vary directly with the level of premiums written.

Our premiums earned are increasing at a more rapid pace than general and
administrative expenses, which has contributed to the lower expense ratio for
the three months ended March 31, 2003. Partially offsetting this reduction is an
increase in the accrual for profit commission of $5.0 million for the first
quarter of 2003, which is included in acquisition costs. Depending on the
development of incurred losses in upcoming quarters, we may be required to
record additional profit commission. The expense ratio would have been 24%
excluding the effect of profit commissions.

For the three months ended March 31, 2003 and 2002, acquisition costs
incurred were $41.0 million and $6.4 million, respectively, which were
principally due to brokerage commissions for our insurance and reinsurance
contracts of $24.6 million and $3.1 million respectively, commissions paid to
ceding insurers and other costs of $16.4 million and $3.5 million, respectively,
for the three months ended March 31, 2003. An accrual was not required for
profit commission for the three months ended March 31, 2002.

Acquisition costs as a percentage of premiums earned, excluding reinsurance
and profit commission, was 18.8% and 17.1% for the three months ended March 31,
2003 and 2002, respectively. The ratios are consistent between quarters, with
2003 being slightly higher as a result of an overall increase in pro-rata
business written.

General and administrative expenses for the periods indicated consisted of
the following: ($ in millions):

The increase in general and administrative expenses between the first
quarter of 2002 and the first quarter of 2003 relates to increased employment
costs, premises and office expenses, consistent with the increase in staff
numbers. We may be required to employ additional resources and occupy additional
office space as our business grows.

Net Investment Income

Net investment income for the three months ended March 31, 2003 and 2002
was $11.7 million and $7.6 million, respectively. Net investment income is
primarily composed of interest on coupon-paying bonds and bank interest,
partially offset by accretion of premium on bonds of $2.7 million and $0.9
million, respectively, and investment management and custodian fees of $0.7
million and $0.5 million, respectively, for the three months ended March 31,
2003 and 2002. Investment management fees are paid to White Mountains Advisors
LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, one
of our major shareholders. The fees charged are consistent with those that would
be charged by a non-related party.

Based on the weighted average monthly investments held, and including net
unrealized losses of $0.8 million and $13.6 million for the three months ended
March 31, 2003 and 2002, respectively, the total investment return was 1.02%
(annualized return of 4%), and (0.5%), respectively. In 2003, as expected, our
investment income has increased as a result of our larger capital base, driven
by positive cash flow consistent with the low level of paid claims, offset
somewhat by lower interest rates.

17

We did not experience any other-than-temporary impairment charges relating
to our portfolio of investments for the three months ended March 31, 2003 and
2002.

Interest on Long-Term Debt

For the three months ended March 31, 2003 and 2002, interest expensed
relating to the $150.0 million outstanding balance on our long-term credit
facility was $1.0 million for each period, representing an average rate of 2.59%
and 2.65%, respectively. The interest rate was fixed at 2.59% for the period
from October 21, 2002 until April 21, 2003. From April 21, 2003, the rate is
fixed at 2.07% until July 21, 2003. In order to hedge the interest rate risk of
the loan, the Company has entered into an interest rate swap contract with Bank
of America, which becomes effective April 22, 2003 and expires on December 11,
2004, the last day of the term-loan facility. Under the terms of the interest
rate swap contract, the Company pays interest at a fixed rate of 1.88% plus a
margin dependent on leverage, and receives interest at a variable rate equal to
the offshore LIBOR rate.

We incurred interest expense for the three months ended March 31, 2003 and
2002 of $965 and $995, respectively, and paid interest of $959 and $1,069,
respectively.

Net Realized Investment Gains

Net realized investment gains for the three months ended March 31, 2003 and
2002 were $4.7 million and $0.5 million, respectively, which were due to gains
realized from the sale of fixed maturity investments.

Comprehensive Income

Comprehensive income for the three months ended March 31, 2003 and 2002
were $103.0 million and $5.1 million respectively, which includes the $103.8
million and $18.7 million of net income described above, and $0.8 million and
$13.6 million, respectively, of net unrealized losses on fixed maturity
investments and changes in currency translation adjustments.

The cost or amortized cost, gross unrealized gains and losses, and carrying
values of our investments as at March 31, 2003 were as follows ($ in thousands):

FINANCIAL CONDITION AND LIQUIDITY

We are a holding company that conducts no operations of its own. We rely
primarily on cash dividends and management 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 the Company,
which are described in more detail below. It is our continuing policy to retain
earnings to support the growth of our business. We do not currently intend to
pay dividends.

CAPITAL RESOURCES

The Company's shareholders' equity at March 31, 2003 was $1,356.6 million,
of which $194.2 million was retained earnings. The Company's capital base has
grown since December 31, 2002 as a result of an increase in net earned premium
and the low level of losses incurred.

We maintain two senior credit facilities with a syndicate of commercial
banks. 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. The $50.0 million revolving credit
facility renews in December, 2003. As of March 31, 2003, we had borrowed $150.0
million under the term loan facility and had

18

not accessed the revolving credit facility. These credit facilities contain
various restrictions and covenants, which have all been met during the three
months ended and as at March 31, 2003 and 2002. Under these facilities, we
cannot pay dividends to our shareholders until April 1, 2003. After this date,
if we pay dividends exceeding 50% of our net income at the end of any quarter,
excluding all extraordinary gains and losses, we would be required to reduce the
term loan facility by an amount equal to at least 43% of the excess payment. We
do not intend to pay dividends in the foreseeable future.

Montpelier Re is registered under The Insurance Act 1978 (Bermuda),
Amendments Thereto and Related Regulations ("The Act"). Under the Insurance Act,
Montpelier Re is required to annually prepare and file Statutory Financial
Statements and a Statutory Financial Return. The Act also requires Montpelier Re
to meet minimum solvency requirements. For the three months ended March 31, 2003
and 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 March 31, 2003, without such
notification, was $255.7 million. There is no assurance that dividends will be
declared or paid in the future.

We have made arrangements with two banks for the provision of standby
letters of credit totaling $300.0 million at March 31, 2003. Total letters of
credit outstanding under these facilities at March 31, 2003 were approximately
$146.6 million and have been secured by investments of approximately $161.2
million. There were no letters of credit outstanding at March 31, 2002.

INVESTMENTS

The table below shows the aggregate amounts of investments available for
sale, equity investment and cash and cash equivalents comprising our portfolio
of invested assets ($ in thousands):

Because a significant portion of our contracts provide short-tail
reinsurance coverage for damages resulting mainly from natural and man-made
catastrophes, it is possible that we could become liable for a significant
amount of losses on short-term notice. Accordingly, we have structured our
investment portfolio to preserve capital and provide us with a high level of
liquidity, which means that the large majority of our investment portfolio
contains shorter term fixed maturity investments, such as U.S. government bonds,
corporate bonds and mortgage-backed and asset-backed securities.

The market value of our portfolio of fixed maturity investments comprises
investment grade corporate debt securities (26%), U.S. government and agency
bonds (62%) and mortgage-backed and asset-backed securities (12%). All of the
fixed maturity investments currently held by us were publicly traded at March
31, 2003. Based on the weighted average monthly investments held, and including
unrealized gains, our total return for the three months ended March 31, 2003 was
1.02%. The average duration of the portfolio was 1.9 years and the average
rating of the portfolio was AA+ at March 31, 2003.

The Company has invested a total of L40.0 million (or $60.8 million) in the
common shares of Aspen Insurance Holdings Limited ("Aspen"), the Bermuda-based
holding company of Aspen Insurance UK Limited ("Aspen Re"). At March 31, 2003,
Montpelier Re held approximately 7% of Aspen on an undiluted basis and
approximately 6% on a fully diluted basis.

19

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

For most insurance and reinsurance companies, the most significant judgment
made by management is the estimation of loss and loss adjustment expense
reserves. Due to the short-tail nature of our business, generally we expect that
the majority of our losses will be paid relatively quickly. However, this can be
affected by such factors as the event causing the loss, the location of the
loss, and whether our losses are from policies with insurers or reinsurers.
Accordingly, it is necessary to estimate, as part of the loss and loss
adjustment expense reserve, an amount for losses incurred but not reported
("IBNR").

A significant portion of our business is property catastrophe and other
classes with high attachment points of coverage. 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, which can sometimes be several
years, particularly on longer-tail classes of business such as casualty. During
this period, additional facts and trends will be revealed and as these factors
become apparent, reserves will be adjusted. These incurred but not reported
losses are inherently difficult to predict. Changes to our prior year loss
reserves can impact our current underwriting results by improving our results if
the prior year reserves prove to be redundant or reducing our results if the
prior year reserves prove to be insufficient. Because of the variability and
uncertainty associated with loss estimation, it is possible that our individual
case reserves for each catastrophic event and other case reserves are incorrect,
possibly materially. This volatility will affect our results in the period that
the loss occurs because GAAP does not permit reinsurers to reserve for such
catastrophic events which may give rise to a claim, until they occur. As a
result, no allowance for the provision of a contingency reserve to account for
expected future losses can be recorded. Claims arising from future catastrophic
events can be expected to require the establishment of substantial reserves from
time to time.

These factors require us to make significant assumptions when establishing
loss and loss adjustment expense reserves. For losses which have been reported
to the Company, we estimate our ultimate loss using the following: (1) claims
reports from insureds; (2) our underwriters and management experience in setting
claims reserves; and (3) the use of computer models where applicable. Since the
Company has insufficient past loss experience, management supplements this
information with industry data. 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.

On pro-rata contracts, including QQS arrangements, we estimate ultimate
losses based on loss ratio forecasts as reported quarterly by cedents, which is
normally on a quarterly lag. We also review historical loss ratios from prior
years as provided by each cedent, as well as public reports. We base our
estimate of the ultimate losses on both of these factors. Estimated losses can
change, based on revised projections supplied by the underlying cedents and
actuarial support of the underwriting year forecasts. The resulting changes in
incurred losses are recorded in the period in which they are determined.

These complications, together with the potential for unforeseen adverse
developments, may result in loss and loss adjustment 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 catastrophic 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.

CASH FLOWS

Cash flows for three months ended March 31, 2003 and 2002. Cash flows from
operations for the three months ended March 31, 2003 were $160.0 million
compared to $35.6 million for 2002. This increase principally relates to a
substantial increase in operating income in the 2003 period. Offsetting this
increase is

20

an increase in loss and loss adjustment expense reserves in excess of paid
losses of $10.1 million. We invested a net amount of $211.5 million during the
three months ended March 31, 2003, compared to $282.8 million during the same
period in 2002. At March 31, 2003, we had a cash balance of $107.0 million.
During the three months ended March 31, 2002, we received approximately $26.0
million in cash from the completion of our private placement of our common
shares which occurred in December, 2001, which contributed to the higher cash
balance at March 31, 2002.

Our liquidity depends on operating, investing and financing cash flows as
described below.

Our sources of funds primarily consist of the receipt of premiums written,
investment income and proceeds from sales and redemptions of investments. Our
operating subsidiary since inception has produced sufficient cash flows to meet
expected claim payments, pay operational expenses and purchase retrocessional
protection.

Cash is used primarily to pay loss and loss adjustment expenses, brokerage
commissions, excise taxes, general and administrative expenses, to purchase new
investments and to pay interest on our long-term debt facility. We also use cash
to pay for any premiums retroceded and any authorized share repurchases. In 2003
we have purchased specific retrocessional protection for our direct insurance
and facultative reinsurance programs on an "any one risk" basis to limit our
exposure from losses at one location. We may purchase further retrocessional
protection for our own account in 2003.

Our cash flows from operations represent the difference between premiums
collected and investment earnings realized, and the loss 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 substantially all cash flows not required for
operating purposes.

Certain business written by the Company has loss experience generally
characterized as having low frequency and high severity. This may result in
volatility in both the Company's results and operational cash flows. The
potential for a large claim under one of our insurance or 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 structuring our investments in an effort
to anticipate the payout patterns of our liabilities under insurance or
reinsurance policies. No assurance can be given, however, that we will
successfully match the structure of Montpelier Re's investments with its
liabilities under insurance or 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.

The market value of fixed maturity investments, our unquoted equity
investment and our cash and cash equivalents balance was $1,738.2 million as at
March 31, 2003, compared to $1,581.5 million at December 31, 2002. The primary
cause of this increase was the receipt of $161.5 million in premiums net of
acquisition costs, net investment income of $11.6 million, the change in net
unrealized losses on investments of $0.8 million offset by paid claims of 10.1
million.

We anticipate leasing additional office space in Bermuda later in 2003, and
may incur additional related costs which we would expect to be less than those
incurred in 2002.

For the period from inception until March 31, 2003, we have had sufficient
cash flow from operations to meet our liquidity requirements. The cash generated
from the private placement in 2001 and the successful completion of our IPO in
October 2002, together with our credit facilities, and our positive operating
results for 2002 and during the first quarter of 2003 have provided us with
sufficient liquidity to enable Montpelier Re to meet its Bermuda statutory
requirements under The Act.

OUTLOOK

In general, in 2003 we have experienced premium rate levels that are more
stable than in 2002 for the "short-tail" insurance and reinsurance products that
we write. In addition, premium rate levels are comparable to those of 2002
levels and we expect both of these trends to continue for the remainder of 2003.
Prices for the
21

specific reinsurance contracts we write continue to be affected primarily by the
supply of, and demand for, capacity in the global reinsurance market which is
driven by: (1) the continued decline in the U.S. and global equity markets; (2)
significant reserve strengthening in insurance and reinsurance companies; (3)
poor investment performance; and (4) rating agency downgrades of competitors.
While we believe that overall price levels are currently favorable for
reinsurers and better than they have been in many years, capital provided by
newly-formed reinsurers or additional capital raised by existing reinsurers may
increase the supply of reinsurance capacity which could impact negatively the
prices that we receive for the products we write.

Our financial results in 2003 continue to be affected positively by the
unusually relatively low frequency of large natural catastrophic events
impacting our business. We would anticipate that we may be impacted in future
periods on average by a higher frequency of large natural catastrophic events
than those experienced in 2002 and into 2003. Such events could have a material
adverse impact on our financial position and results of operations. The
worldwide property and casualty insurance and reinsurance industry continues to
be highly competitive and some of our competitors possess significantly greater
financial and other resources than we do. This competition could also affect our
financial condition and results of operations.

RECENT ACCOUNTING PRONOUNCEMENT

The Financial Accounting Standards Board issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") an interpretation of
ARB No. 51 "Consolidated Financial Statements" in January 2003. FIN 46 clarifies
the accounting and reporting for certain entities in which equity investors do
not have the characteristics of a controlling financial interest. The financial
statements included with the Company's December 31, 2002 Form 10-K were prepared
on a combined basis as a result of the fact that Montpelier Re's and the
Company's bye-laws include certain restrictions relating to the election of
directors of Montpelier Re. The Company adopted FIN 46 in the first quarter of
2003. The impact of adoption of FIN 46 is that the Company's financial
statements are now prepared on a consolidated basis instead of on a combined
basis. There is no impact on the Company's net income or shareholders' equity as
presented in these consolidated financial statements as a result of the adoption
of FIN 46.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The preparation of financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect reported
and disclosed amounts of assets and liabilities, as well as disclosure of
contingent assets and liabilities as at the balance sheet date and the reported
amounts of revenues and expenses during the reporting period. We believe the
following accounting policies are critical to our operations as their
application requires management to make the most significant judgments.

Other significant accounting policies that we use to prepare our
consolidated financial statements are included in Note 2 to the December 31,
2002 Combined Financial Statements included in the Company's filing on Form
10-K.

Premiums. Premium income is primarily earned ratably over the term of the
insurance policy. We also write certain pro-rata reinsurance policies on a risks
attaching basis which are generally earned over a 24 month period, consistent
with industry practice. The portion of the premium related to the unexpired
portion of the policy at the end of any reporting period is reflected in
unearned premium.

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, therefore no management judgment is necessary. 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, which may

22

be reported on a quarterly or six month lag, 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.

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. Accrual of reinstatement premiums is
based on our estimate of loss and loss adjustment expense reserves, which
involves management judgment as described below. Reinstatement premiums are not
accrued on reserves for losses incurred but not reported.

Loss and Loss Adjustment Expense Reserves. For most insurance and
reinsurance companies, the most significant judgment made by management is the
estimation of the loss and loss adjustment expense reserve. Due to the
short-tail nature of our business, generally, we expect that the majority of our
losses will be paid relatively quickly; however, this can be affected by such
factors as the event causing the loss, the location of the loss, and whether our
losses are from policies with insurers or reinsurers. Accordingly, it is
necessary to estimate, as part of the loss and loss adjustment expense reserve,
an amount for losses incurred but not reported ("IBNR").

A significant portion of our business is property catastrophe and other
classes with high attachment points of coverage. 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, which can sometimes be several
years. During this period, additional facts and trends will be revealed and as
these factors become apparent, reserves will be adjusted. These incurred but not
reported losses are inherently difficult to predict. Changes to our prior year
loss reserves can impact our current underwriting results by improving our
results if the prior year reserves prove to be redundant or reducing our results
if the prior year reserves prove to be insufficient. Because of the variability
and uncertainty associated with loss estimation, it is possible that our
individual case reserves for each catastrophic event and other case reserves are
incorrect, possibly materially. This volatility will affect our results in the
period that the loss occurs because GAAP does not permit reinsurers to reserve
for such catastrophic events until they occur and may give rise to a claim. As a
result, no allowance for the provision of a contingency reserve to account for
expected future losses can be recorded. Claims arising from future catastrophic
events can be expected to require the establishment of substantial reserves from
time to time. We expect that increases in the values and concentrations of
insured property will increase the severity of worldwide catastrophic losses in
the future.

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 using the following: (1) claims reports from insureds; (2) our
underwriters and management experience in setting claims reserves; and (3) the
use of computer models where applicable. Since the Company has insufficient past
loss experience, management supplements this information with industry data.
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.

We estimate IBNR using actuarial methods. We also utilize historical
insurance industry loss development patterns, as well as estimates of future
trends in claims severity, frequency and other factors, to aid us in
establishing IBNR.

On pro-rata contracts, including QQS arrangements, we estimate ultimate
losses based on loss ratio forecasts as reported quarterly by cedents, which is
normally on a quarterly or six month lag. We also review historical loss ratios
from prior years as provided by each cedent, as well as public reports. We base
our estimate of the ultimate losses on both of these factors. Estimated losses
can change, based on revised projections supplied by the underlying cedents and
actuarial support of the underwriting year forecasts. The resulting changes in
incurred losses are recorded in the period in which they are determined.

23

These complications, together with the potential for unforeseen adverse
developments, may result in loss and loss adjustment 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 catastrophic event.

Management has determined that the best estimate for gross loss and loss
adjustment expense reserves at March 31, 2003 was $183.6 million. Management's
best estimate of a range of likely outcomes around this estimate is between
$197.9 million and $166.3 million.

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 Impairments in Investments. In accordance with our
investment guidelines, our investments consist of high-grade marketable fixed
maturity investments and equity securities. Fixed maturity investments are
classified as available for sale and accordingly are carried at market value as
determined by the most recently traded price of each security at the balance
sheet date. For unquoted investments, estimated fair value is determined using
the financial information received, which includes reported net asset values,
other information available to management, and other economic and market
knowledge as appropriate. Investments are reviewed periodically to determine if
they have sustained an impairment in value that is considered to be other than
temporary. The identification of potentially impaired investments involves
significant management judgment. 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. The current economic environment and recent
volatility of securities markets increases the difficulty in determining
impairment and whether the impairment is considered to be other than temporary.

Unrealized depreciation in the value of individual investments, considered
by management to be other than temporary, is charged to income in the period it
is determined.

CURRENCY

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

The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The anticipated effects on us are
considered in our catastrophe loss models. The effects of inflation are also
considered in pricing and in estimating reserves for loss and loss adjustment
expenses. The actual effects of inflation on our results cannot be accurately
known until claims are ultimately settled.

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 investment
guidelines, other than the use of forward currency exchange contracts to
minimize the impact of exchange rate fluctuations.

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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 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 March 31, 2003, 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 1.9% or approximately $31.9 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
1.9% or approximately $31.9 million.

As of March 31, 2003, we held $189.0 million, or 12.1% of our total
invested assets in mortgage-backed and asset-backed 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
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. The interest rate was fixed at 2.59% for the period from
October 21, 2002 until April 21, 2003. From April 21, 2003, the rate is fixed at
2.07% until July 21, 2003. The average interest rate for the three months ended
March 31, 2003 was 2.59%. In order to hedge the interest rate risk of the loan,
the Company has entered into an interest rate swap contract with Bank of
America, which becomes effective April 22, 2003 and expires on December 11,
2004, the last day of the term loan facility. Under the terms of the interest
rate swap contract, the Company pays interest at a fixed rate of 1.88% plus a
margin dependent on leverage, and receives interest at a variable rate equal to
the offshore LIBOR rate.

Foreign Currency Risk. In the event of a significant loss event which
requires settlement in a currency other than the United States dollar, 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. At March 31, 2003 we do not have any outstanding
forward foreign currency exchange contracts.

Our functional currency is the United States dollar. The British pound is
the functional currency of our wholly-owned subsidiary, Montpelier Marketing
Services (UK) Limited ("MMSL"). Accordingly, MMSL's assets and liabilities are
translated at exchange rates in effect at the balance sheet date. Revenue and
expenses of MMSL are translated at average exchange rates during the period. The
effect of translation adjustments at the end of the period is not included in
our consolidated results of operations but is included in accumulated other
comprehensive income, a separate component of shareholders' equity. On a
consolidated basis, MMSL does not generate material revenue and expenses and,
therefore, the effects of changes in exchange rates during the period are not
material.

Credit Risk. We have exposure to credit risk primarily as a holder of
fixed maturity investments. In accordance with our investment guidelines as
approved by our Board of Directors, 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. At March 31, 2003, all fixed maturity investments
that we held were investment grade.

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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 sec.sec.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.

26

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company, in common with the insurance and reinsurance industry in
general, is subject to litigation and arbitration in the normal course of its
business. We are not currently involved in any material pending litigation or
arbitration proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders during the first
quarter of 2003.

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. In particular, statements using words such as
"may", "should", "estimate", "expect", "anticipate", "intend", "believe",
"predict", "potential", or words of similar import generally involve
forward-looking 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. These and
other events that could cause actual results to differ are discussed in detail
in "Risk Factors" contained in Item 1 of the Company's Annual Report on Form
10-K 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.

27

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. EXHIBITS

B. CURRENT REPORTS ON FORM 8-K

(a) Current Report on Form 8-K filed on January 15, 2003, under Items
7 and 9 thereof, relating to the Company's issuance of a press release on
the 2003 renewal season.

(b) Current Report on Form 8-K filed on February 7, 2003, under Items
7 and 9 thereof, relating to the Company's preliminary financial results
for the year ended December 31, 2002 and providing revised guidance for
2003.

(c) Current Report on Form 8-K filed on February 28, 2003, under Items
5 and 7 thereof, relating to the Company's financial results for the year
ended December 31, 2002.

(d) Current Report on Form 8-K filed on March 21, 2003, under Item 9
thereof, relating to officer certifications.

29

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)

By: /s/ ANTHONY TAYLOR

------------------------------------
Name: Anthony Taylor
Title: President and Chief
Executive Officer

May 5, 2003
- --------------
Date

By: /s/ NEIL MCCONACHIE

------------------------------------
Name: Neil McConachie
Title: Financial Controller and
Treasurer
(chief accounting officer)

May 5, 2003
- --------------
Date

30

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.

By: /s/ ANTHONY TAYLOR
------------------------------------
Name: Anthony Taylor
Title: President and Chief
Executive Officer
(principal executive officer)

Date: May 5, 2003

31

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.

By: /s/ K. THOMAS KEMP
------------------------------------
Name: K. Thomas Kemp
Title: Chief Financial Officer
(principal financial officer)

Date: May 5, 2003

32