MONTPELIER RE HOLDINGS LTD - 10-Q Quarterly Report

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 þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 7, 2003, the Registrant had 63,392,600 common voting shares outstanding, with a par value of 1/6 cent per share.

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

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, is 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 property and casualty reinsurance and insurance 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 the 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.

The Company participates in a securities lending 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 securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is monitored and maintained by the lending agent. The Company had $404.7 million and $nil in securities on loan at September 30, 2003 and 2002, respectively.

During the nine months ended September 30, 2003, the Company purchased retrocessional protection for its own account for the direct insurance and facultative reinsurance programs and the property reinsurance programs, excluding most other specialty lines. For certain pro-rata contracts, including some quota share contracts, the subject direct insurance contracts 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.

Reinsurance recoverable includes the Company’s share of balances due from 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 $16.5 million and $23.7 million for the nine months ended September 30, 2003 and 2002, respectively. Total recoveries netted against loss and loss adjustment expenses was $(8.8) million and $10.6 million for the nine months ended September 30, 2003 and 2002, respectively.

The Company remains liable in the event that it is unable to collect amounts due from its own reinsurers, and with respect to certain contracts that carry underlying reinsurance protection, the Company would be liable in the event that the ceding companies 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 September 30, 2003 or 2002.

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.

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):

During the quarter ended September 30, 2003, the Company refined the classification of gross premiums written for certain pro-rata contracts for the nine months ended September 30, 2002 between the property specialty line and the property catastrophe and other specialty lines. There was no effect on total gross premiums written.

Negative QQS premiums written for the quarter was due to the receipt of new information which indicated that the expected premiums for the QQS business for both the 2002 and 2003 underwriting years will be lower than previous forecasts.


(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 are worldwide in nature, with the majority of business related to North America and Europe.

The following table sets forth a breakdown of the Company’s gross premiums written by broker for the periods indicated ($ in millions):

As part of the Company’s formation and funding, the Company entered into a three-year term loan facility with Bank of America, N.A. and a syndicate of commercial banks, with an aggregate borrowing limit of $150.0 million. The Company borrowed $150.0 million under this facility at the Company’s formation. On August 4, 2003, using the net proceeds from the issuance of $250.0 million in Senior Notes (see below), the Company repaid the full amount under this facility. The term loan facility required that the Company and/or certain of its subsidiaries comply with specific covenants, including a tangible net worth covenant and a maximum leverage covenant, and had a final maturity date of December 12, 2004. The facility also restricted the payment of dividends. The Company was in compliance with all covenants during the time that the facility was in place.

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 was for general

corporate purposes, and required that the Company and/or certain of its subsidiaries maintained specific covenants, including a tangible net worth covenant and a maximum leverage covenant. No amounts had been drawn down under this facility which was cancelled concurrently with the repayment of the term loan facility on August 4, 2003.

In order to hedge the interest rate risk of the loan, the Company entered into an interest rate swap contract, which became effective April 22, 2003 and was scheduled to expire on December 12, 2004, the maturity date of the term loan facility. Under the terms of the interest rate swap contract, the Company paid interest at a fixed rate of 1.88% plus a margin dependent on leverage, and received interest at a variable rate equal to the offshore LIBOR rate. Under the terms of the swap contract, the contract was cancelled simultaneously with the repayment of the term loan facility, resulting in a realized loss on termination of $1,003 which is included in realized gains (losses) on investments.

The Company incurred interest expense for the term loan facility for the nine months ended September 30, 2003 and 2002 of $1,970 and $3,268, respectively, at an average annual interest rate of 2.2% and 2.9%, respectively, and paid interest of $2,773 and $2,298, respectively.

On August 4, 2003, the Company issued $250.0 million aggregate principal amount of senior unsecured debt (the “Senior Notes”) at an issue price of $99.517. The net proceeds were used to repay the amount outstanding under the term loan facility with the remainder used for general corporate purposes. The Senior Notes bear interest at a rate of 6.125%, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2004. Unless previously redeemed, the Senior Notes will mature on August 15, 2013. The Company incurred $2.1 million in expenses related to the issuance of the Senior Notes, which have been expensed during the nine months ended September 30, 2003. The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. The Senior Notes do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company must adhere.

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 September 30, 2003 and 2002, respectively. The Company’s 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 net investment income. The Company incurred an average fee of 0.17% and 0.18% for the nine months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, the Company expensed investment management fees of approximately $2.0 million and $1.5 million, respectively, and has recorded an amount payable for these services of $1.4 million and $0.5 million, 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 the 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 4.2% of the Company at September 30, 2003 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 $650 for the nine months ended September 30, 2002 for risk management services.

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 nine months ended September 30, 2002. The Company received $0.7 million in aggregate annual premiums from these agreements to September 30, 2002. The Company also entered into one reinsurance agreement with OneBeacon Insurance Group during the nine months ended September 30, 2003 and will receive approximately $1.1 million in aggregate premiums from this contract.

For the nine months ended September 30, 2003 and 2002, $63.6 million and $nil, respectively was recorded in gross premiums written under the Company’s reinsurance arrangements with Aspen Re, the unquoted equity investment in which the Company has a 7% interest on an undiluted basis and a 6% interest on a diluted basis. These arrangements cover mainly property and casualty risks.

In addition, the Company pays brokerage commissions on business brought in by Benfield. The Company believes these commissions are consistent with commissions paid to other brokers in the ordinary course of business and totaled $8.2 million and $6.1 million for the nine months ended September 30, 2003 and 2002, respectively.

In order for the Company to write Lloyd’s Qualifying Quota Share business, it must provide a 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 $250.0 million. Letters of credit outstanding under the Fleet facility at September 30, 2003 and 2002 were approximately $173.2 million (£104.4 million) and $38.1 million (£24.6 million), respectively, and were secured by investments of approximately $190.5 million and $41.9 million, respectively.

Effective June 20, 2003, the Company entered into a new Letter of Credit Reimbursement and Pledge Agreement with Fleet National Bank and a syndicate of lending institutions for the provision of a letter of credit facility in favor of Lloyd’s in an amount of up to $250.0 million, and in favor of certain U.S. ceding companies in an amount of up to $200.0 million. Simultaneously, the previously existing Pledge Agreement with Fleet National Bank in favor of Lloyd’s QQS business was superceded by the Letter of Credit Reimbursement and Pledge Agreement, and the letters of credit issued under the previous facility are now issued under the new facility agreement. There have not been any letters of credit issued under the new facility agreement in relation to U.S. ceding companies as at September 30, 2003.

The Company has made arrangements with Barclay’s Bank PLC for the provision of an additional letter of credit facility in favor of certain U.S. ceding companies in an amount of up to $50.0 million. Letters of credit outstanding at September 30, 2003 under the Barclay’s facility were approximately $23.9 million and were secured by investments of approximately $26.3 million. There were no letters of credit outstanding under this facility at September 30, 2002.

On July 1, 2003, the Company completed a secondary offering of 8,050,000 common shares. Certain original investors sold an average of 24.4% of their holdings, which increased the public ownership of the Company’s shares by 12.7%. The secondary offering did not have any impact on common shares outstanding.

The Company did not receive any proceeds from the secondary offering but was required to pay offering expenses of approximately $1.1 million which are included in general and administrative expenses for the nine months ended September 30, 2003.

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 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 nine months ended September 30, 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.

Montpelier Re is also required to maintain a minimum liquidity ratio, which was met for the periods ended September 30, 2003 and 2002.

The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2003 and 2002 and financial condition as at September 30, 2003. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related 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 are not historical facts, including statements about the Company’s beliefs and expectations. 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.

Some comparisons between the nine months ended September 30, 2003, and the same period in 2002 may not be meaningful. 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 renewal business for the first nine months of 2002.

The $64.4 million increase in net income for the three months ended September 30, 2003 compared to the same period in 2002 was primarily the result of the following factors:


	•	An increase in net premiums earned of $56.4 million, due to the earning of 2002 premium and earning of significantly higher gross written premium during the three months ended September 30, 2003 as compared to the three months ended September 30, 2002 as discussed below; and

	•	The relatively low levels of catastrophe/large loss frequency affecting us during the three months ended September 30, 2003.

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

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


(1)	During the quarter ended September 30, 2003, we refined the classification of gross premiums written for certain pro-rata contracts between the Property Specialty line and the Property Catastrophe and Other Specialty lines. There was no effect on total gross premiums written.

(2)	Negative QQS premiums written for the quarter was due to the receipt of new information which indicated that the expected premiums for the QQS business for both the 2002 and 2003 underwriting years will be lower than previous forecasts.


(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 are worldwide in nature, with the majority of business related to North America and Europe.

Overall, the decrease in gross premiums written during the quarter ended September 30, 2003, as compared to the same period in 2002 was due to the receipt of new information which indicated that the expected premiums for the QQS business for both the 2002 and 2003 underwriting years will be lower than previous forecasts. Due to the leveraged effect of these contracts, modest reductions of the syndicate’s ultimate premium estimates resulted in significant reductions in estimated premium for us. During the quarter ended September 30, 2003 we recorded negative gross premiums written for the QQS business related to the 2002 underwriting year of approximately $16.3 million, which was comprised of a reduction in estimate of $19.0 million, offset by gross premiums written of $2.7 million. During the quarter we also recorded negative gross premiums written for the QQS business related to the 2003 underwriting year of approximately

$19.3 million, which was comprised of a reduction in estimate of $41.3 million, offset by gross premiums written of $22.0 million. Ultimate premiums written for the QQS business will depend on the volume of premiums actually written by the syndicates. We do not anticipate writing any QQS contracts in 2004.

Offsetting this decrease are increased gross premiums written in all of the other categories due to increased market penetration resulting mainly from our ability to capitalize on market opportunities due to our enhanced market reputation resulting from the completion of our first year of operations. In our continuing Property and Specialty lines gross premiums written grew 20% from the same quarter in 2002. During the quarter we have continued to experience stable premium rate levels across the major classes of business in which we specialize. In addition, there continues to be increases in our written line sizes and in our average signing percentages during the third quarter of 2003.

As expected, the proportion of Property Catastrophe gross premiums written as a percentage of total gross premiums written is substantially lower than the Property Specialty class during the third quarter of 2003 because proportionally higher volumes of Property Catastrophe business are traditionally written in the first quarter, with some July 1 renewals during the third quarter. Other lines of business, including Property Specialty, are written throughout the year, with the least amount of premiums being written during the fourth quarter. We expect that by the end of the year the Property Specialty category will still account for the largest portion of gross premiums written but that Property Catastrophe category will account for a higher percentage than in the third quarter.

Included in the Other Specialty category is a small but growing level of casualty business. We expect to write a larger amount of casualty reinsurance in 2004 versus 2003 due to improving terms and conditions of casualty reinsurance contracts. In 2004, we may also write professional indemnity casualty reinsurance, predominantly medical malpractice, specialized errors and omissions business, UK Employer’s Liability and catastrophe and/or clash layers for general liability and retrocessional accounts, on an excess of loss basis, which will be included in the Other Specialty category. The Other Specialty category is expected to experience the most growth during 2004, primarily from an increase in casualty writings.

For the three months ended September 30, 2003, $25.7 million was recorded in gross premiums written under our reinsurance arrangements with Aspen Re, a company in which we have a 7% interest on an undiluted basis and a 6% interest on a diluted basis. These arrangements cover mainly property and casualty risks.

We recorded an insignificant amount of reinstatement premiums during the three months ended September 30, 2003 and 2002. The lack of reinstatement premiums continues to be due to the minimal amount of reported losses during these periods. 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 for the three months ended September 30, 2003 and 2002 were $(1.8) million and $20.9 million, respectively. Reinsurance purchased by the QQS syndicates with respect to the contracts in which we participate accounted for ($2.9) million and $20.9 million, respectively, of the reinsurance premiums ceded during the three months ended September 30, 2003 and 2002. The negative balance for the QQS business during the three months ended September 30, 2003 is the result of the receipt of new information which indicated that the expected premiums will be lower than previous forecasts. This has correspondingly reduced our inuring reinsurance premiums related to these programs. As part of our reinsurance arrangements with Aspen Re we also recorded $0.7 million of inuring reinsurance premiums ceded during the three months ended September 30, 2003. The remainder of the reinsurance premiums ceded during the quarter ended September 30, 2003 of $0.4 million related to inuring reinsurance on some smaller programs. Reinsurance premiums ceded for the whole of 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.

Net premiums earned for the three months ended September 30, 2003 and 2002 were $162.9 million and $106.4 million, respectively. Approximately 15.2% of net premiums earned during the quarter relates to the 2002 underwriting year and the remainder to business written in 2003. Net premiums earned for the three months ended September 30, 2003 have surpassed the gross premiums written for the quarter due to reductions in expected ultimate premiums recorded for the QQS business. Absent QQS adjustments, our net premiums earned for the third quarter of 2003 would have been approximately $190 million. This reduction in QQS premium estimates resulted in reductions to ceded premium and net premiums earned for the quarter. Despite negative written premiums for QQS for the quarter, premiums earned are positive for the QQS business, although at a low level due to earning out of the remaining QQS premium in place.

The growth of gross premiums written for other lines of business is slowing and is earning as expected based on the timing of the gross premiums written. These factors have resulted in an earned premium to written premium ratio of 110.3% for the three months ended September 30, 2003, compared to 61.6% for the same period in 2002. In addition, we continue to write a minority of our business, including 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 will continue to result in an acceleration of earned premium throughout the remainder of 2003.

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:

Loss and loss adjustment expenses was $35.1 million and $69.0 million for the three months ended September 30, 2003 and 2002, respectively. Reinsurance recoveries of $(4.9) million and $5.3 million were netted against loss and loss adjustment expenses for the three months ended September 30, 2003 and 2002, respectively. Reinsurance recoveries for the three months ended September 30, 2003 and 2002 related to QQS only. Based on additional information received from the syndicates, we also reduced our estimated recovery ratio on reinsurance purchased by the QQS syndicates. We paid net losses of $13.4 million and $0.3 million for the three months ended September 30, 2003 and 2002, respectively.

The following are our net loss ratios by line of business for the periods indicated:


(1)	The overall gross loss ratio for the three months ended September 30, 2003 was 18.2%.

(2)	The overall gross loss ratio for the three months ended September 30, 2002 was 64.8%.

The variation in loss ratios between the third quarter of 2003 compared to the third quarter of 2002 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 judgment to estimate our loss and loss adjustment expense reserves. As our business continues to develop 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. In addition, the European floods during the third quarter of 2002 mainly contributed to the loss ratio of approximately 71.8% for that quarter. There were several catastrophes during the third quarter of 2003 including the Blackouts on the U.S. East Coast, Hurricanes Fabian and Isabel, and the Puerta Plata and Hokkaido earthquakes. However, our expected losses remain relatively low, resulting in a net loss ratio of 17.5% for the quarter for Property Catastrophe. The Qualifying Quota Share shows a negative loss ratio due to negative incurred losses for the quarter which resulted from both downward revisions in the projected loss ratios by the syndicates as well as reductions in the estimates of ultimate premium. These factors have resulted in the overall net loss ratio of 21.5% for the three months ended September 30, 2003, compared to the overall net loss ratio for the three months ended September 30, 2002 of 64.8%.

The following tables set forth a reconciliation of our gross and net loss and loss adjustment expense reserves by line of business between December 31, 2002 and September 30, 2003 ($ in millions):

The third quarter of 2003 includes approximately $12.5 million of positive development of net losses from the prior year. This positive prior year development benefited the net loss ratio in the quarter by approximately 7.7%.

The positive development during the three months ended September 30, 2003 of losses incurred during 2002 primarily resulted from the following:


	•	In the Property Specialty category, our net estimated ultimate losses for the prior year decreased by $16.3 million during the quarter. Much of this decrease was due to the fact that the reported losses for this category decreased by $2.7 million in the quarter. The reduction in reported losses, combined with the effect of an additional quarter of the development patterns, resulted in a significant decrease in the expected ultimate loss for this category. We also reduced loss ratios for some proportional contracts that have seen little or no reported loss activity. We have received additional information from many of the proportional cedents, enabling us to do more projections on an individual contract basis rather than for the class as a whole. The negative reported losses for the quarter, combined with the increasing weight placed on our actual experience as the prior year matures, has led to the reduction in ultimate losses for the quarter for the Property Specialty category.

	•	For the Property Catastrophe category, our estimate of net losses increased during the quarter. Much of this increase was due to one newly reported claim of nearly $3.2 million. We also revised the loss ratio projections on some of the proportional accounts. We have received additional information from many of the proportional cedents, enabling us to do more projections on an individual contract basis rather than applying a loss ratio to the class as a whole. The result of these factors was an increase of $5.1 million to our estimated net losses in the quarter.

	•	Due to the potential variability in ultimate premiums and the limited availability of underlying loss information for the QQS business, our actuaries selected an expected loss ratio based on a review of the information supplied by cedents. Additionally, since we do not receive report dates for losses on the underlying business, we must allocate the underwriting year results to accident periods using assumptions regarding the premium earning pattern. During the three months ended September 30, 2003, based on additional information provided by ceding companies, we reduced our expected gross loss ratio for the prior year, which resulted in a reduction of $5.2 million in estimated gross ultimate loss and loss adjustment expenses for the quarter. Some of this was due to reductions in the loss ratio projections provided by the syndicates. Much of the decrease in projected ultimate losses was also due to revised ultimate premium estimates that were considerably lower than those at December, 31 2002. Offsetting much of the change in gross losses however, based on additional information received from the ceding companies, was a reduction in our estimated recovery ratio on reinsurance purchased by the QQS syndicates. This resulted in a $0.8 million decrease in net losses for the prior year.

	•	Reported losses for the Other Specialty category only increased by $1.3 million during the quarter. The lack of development in the quarter combined with the increasing weight placed on our actual experience in selecting a loss ratio resulted in a reduction of $0.5 million in prior period losses.

Other than the matters described above, we did not make any significant changes in the assumptions used in our reserving process during the three months ended September 30, 2003. Because of our short operating history, our loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take years to develop.

Net foreign exchange gains (losses) result from the effect of the fluctuation in foreign currency exchange rates on the translation of foreign currency assets and liabilities combined with realized gains (losses) resulting from the receipt of premium installments in foreign currencies.

Underwriting expenses consist of acquisition costs (including profit commission) and general and administrative expenses. Acquisition costs and general and administrative expenses were $45.1 million and $26.2 million for the three months ended September 30, 2003 and 2002, respectively, representing expense

ratios of 27.7% and 24.7%, respectively. General and administrative expenses are comprised of fixed expenses which include salaries and benefits, stock options and office and risk management expenses, and variable expenses which include costs related to our performance unit plan and bonuses. Acquisition costs are generally driven by contract terms and are normally a set percentage of premiums. Acquisition costs will increase over the year as these costs vary directly with the level of premiums written.

The accrual for profit commission increased by $5.3 million during the three months ended September 30, 2003, which is included in acquisition costs. Profit commission was not required to be accrued for the three months ended September 30, 2002. Depending on the development of incurred losses in upcoming quarters, we may be required to record additional profit commission. The expense ratio for the three months ended September 30, 2003 would have been 24.5% excluding the effect of profit commission.

For the three months ended September 30, 2003 and 2002, acquisition costs incurred were $32.3 million and $20.4 million, respectively, which were principally due to brokerage commissions on our insurance and reinsurance contracts of $20.7 million and $10.2 million respectively, as well as commissions paid to ceding insurers and other costs of $11.6 million and $10.2 million, respectively.

Acquisition costs as a percentage of premiums earned, excluding reinsurance and profit commission, were 16.2% and 16.6% for the three months ended September 30, 2003 and 2002, respectively. The 2003 ratio is slightly lower as a result of the lower proportion of QQS business written which traditionally has higher acquisition costs.

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

The increase in general and administrative expenses between the third quarter of 2003 and the third quarter of 2002 partially relates to an increase in fixed expenses consisting of 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. In addition, in the three months ended September 30, 2003 we incurred costs related to our debt offering in the amount of $2.1 million. Concurrent with the repayment of our term loan facility during the quarter, deferred financing costs of $0.9 million were expensed. The performance unit plan expense for the three months ended September 30, 2003 was higher than the same period in 2002 as the 2003 period includes an accrual for both the 2002-2004 performance period and the 2003-2005 performance period. In addition, our book value at September 30, 2002 was used in estimating the 2002 period expense, compared to the use in the 2003 period of our September 30, 2003 share price, which is significantly higher than the September 30, 2002 book value. Other factors could also affect the expense ratio, including the mix of business written and the amount of acquisition costs incurred.

Net investment income for the three months ended September 30, 2003 and 2002 was $12.3 million and $12.2 million, respectively. Net investment income was primarily composed of interest on coupon-paying bonds and bank interest, partially offset by accretion of premium on bonds of $4.2 million and $0.7 million, respectively, and investment management and custodian fees of $0.7 million and $0.5 million, respectively, for the three months ended September 30, 2003 and 2002. Investment management fees were paid to White Mountains Advisors LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, one of

Because we provide short-tail insurance and reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, it is possible that we could become liable to pay substantial claims on short notice. Accordingly, we have structured our investment portfolio to preserve capital and to 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 and agency bonds, corporate debt securities and mortgage-backed and asset-backed securities.

Based on the weighted average monthly investments held, and including net unrealized gains of $1.6 million and $15.5 million for the three months ended September 30, 2003 and 2002, respectively, the total investment return was 2.1%, and 2.8%, 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.

We did not experience any other than temporary impairment charges relating to our portfolio of investments for the three months ended September 30, 2003 and 2002.

As a result of the repayment of our term loan facility we did not incur interest expense for the full quarter. For the three months ended September 30, 2003 and 2002, interest expensed relating to the term loan facility and revolving loan facility represented an average rate of 1.71% and 3.0%, respectively.

On August 4, 2003, the Company issued $250.0 aggregate principal amount of senior unsecured debt (the “Senior Notes”) at an issue price of $99.517. The Senior Notes bear interest at a rate of 6.125%, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2004. Interest expensed during the quarter represents interest from the date of issuance until September 30, 2003.

Fees for the letter of credit facilities relates to the Letters of Credit that we have in place with Fleet Bank and Barclay’s Bank as detailed in the Capital Resources section.

We paid interest expense for the three months ended September 30, 2003 and 2002 of $0.8 million and $nil, respectively which related to the term loan facility and revolving loan facility only.

Net realized gains (losses) on investments for the three months ended September 30, 2003 and 2002 were $(3.0) million and $4.0 million, respectively, which were due to net gains (losses) realized from the sale of fixed maturity and equity investments and a realized loss of $1.0 million during the third quarter of 2003 which resulted from the termination of the interest rate swap contract, cancelled simultaneously with the repayment of the term loan facility on August 4, 2003.

Comprehensive income for the three months ended September 30, 2003 and 2002 was $94.1 million and $42.1 million respectively, which includes the $91.0 million and $26.6 million of net income described above, $1.6 million and $15.5 million, respectively, of net change in unrealized gains on investments and currency

We ended the third quarter of 2003 with a fully converted book value per share (which is a non-GAAP measure as defined below) of $23.72, an increase of $5.50 from September 30, 2002. This increase of 30.2% was primarily caused by the following factors:


	•	An increase in gross premiums written as discussed below, combined with a more than corresponding increase in net premiums earned, as gross premiums written in 2002 and 2003 continue to earn; and

	•	Relatively low levels of catastrophe/large loss frequency affecting us during the calendar year 2002, continuing into the first nine months of 2003.

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


(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 73,261,760 shares for 2003 and 61,544,160 shares for 2002. The Company believes this to be the best single measure of the return made by its 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):

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


(1)	During the nine months ended September 30, 2003, we refined the classification of gross premiums written for certain pro-rata contracts between the Property Specialty line and the Property Catastrophe and Other Specialty lines. There was no effect on total gross premiums written.


(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 are worldwide in nature, with the majority of business related to North America and Europe.

Overall, the increase in gross premiums written during the nine months ended September 30, 2003, as compared to the same period in 2002 was primarily due to increased market penetration resulting from having our full underwriting team in place, combined with our ability to capitalize on market opportunities because of our enhanced market reputation resulting from the completion of our first year of operations. In our continuing Property and Specialty lines gross premiums written grew 75% as compared to the same nine month period in 2002. We have continued to experience stable premium rate levels across the major classes of business in which we specialize during the nine months ended September 30, 2003. In addition, there has been a substantial increase in our written line sizes and in the average signing percentages during the first nine months of 2003 as compared to the same period in 2002.

The proportion of Property Catastrophe gross premiums written as a percentage of total gross premiums written continues to be higher during the nine months ended September 30, 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, with some July 1 renewals during the third quarter, as compared to the fourth quarter of the fiscal year. Other lines of business are written throughout the year, with the least amount of premiums being written for all lines during the fourth quarter. We expect that by the end of the year the Property Specialty category will account for the largest portion of the gross premiums written.

Overall, the decrease in QQS gross premiums written during the nine months ended September 30, 2003, as compared to the same period in 2002 is due to the receipt of new information which indicated that the expected premiums will be lower than previous forecasts for the QQS business for both the 2002 and 2003 underwriting years. Due to the leveraged effect of the syndicates, modest reductions of the syndicates ultimate premium estimates have resulted in significant reductions in estimated premium for us. The premium levels on a dollar basis for QQS business in 2003 will be less than in 2002, and they will also be a lower percentage of our total gross premiums written, although ultimate premiums written will depend on the volume of premium actually written by the syndicates. We expect QQS business to represent only 6% of gross premiums written in 2003. We do not anticipate writing any QQS contracts in 2004.

For the nine months ended September 30, 2003, $63.6 million was recorded in gross premiums written under our reinsurance arrangements with Aspen Re, a company in which we have a 7% interest on an undiluted basis and a 6% interest on a diluted basis. These arrangements mainly cover mainly property and casualty risks.

We recorded an insignificant amount of reinstatement premiums during the nine months ended September 30, 2003 and 2002. The lack of reinstatement premiums results from the minimal amount of reported losses during these periods. In the remainder of 2003, we expect to record greater levels of reinstatement premiums as additional losses are notified, consistent with our loss estimates discussed below.

Reinsurance premiums ceded for the nine months ended September 30, 2003 and 2002 were $39.9 million and $39.7 million, respectively. Reinsurance purchased by the QQS syndicates with respect to the contracts in which we participate accounted for $12.9 million and $39.7 million, respectively, of the reinsurance premiums ceded during the nine months ended September 30, 2003 and 2002. This balance is significantly lower in 2003 than in 2002 because during the nine months ended September 30, 2003 we received new information which indicated that the expected QQS premium will be lower than previous forecasts. This has correspondingly reduced our inuring reinsurance premiums related to these programs. Based on additional information received from the ceding companies, we also reduced our estimated recovery ratio on reinsurance purchased by the QQS syndicates. As part of our reinsurance arrangements with Aspen Re we also recorded $6.3 million of inuring reinsurance premiums ceded during the nine months ended September 30, 2003. The remainder of the reinsurance premiums ceded during the nine months ended September 30, 2003 of $20.7 million relates to the purchase of retrocessional protection for our own account for our direct insurance and facultative reinsurance programs and our property reinsurance programs, excluding most Other Specialty lines. Also included in this amount is a small portion related to inuring reinsurance on some smaller programs. We did not purchase retrocessional protection for our own account during 2002; the reinsurance premiums ceded for the whole of 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 for the QQS syndicates represented approximately 30.4% and 25.9% of gross premiums assumed from the QQS syndicates for the nine months ended September 30, 2003 and 2002, respectively due to the mix of inuring reinsurance premium ceded from the three syndicates.

Net premiums earned for the nine months ended September 30, 2003 and 2002 were $522.0 million and $224.6 million, respectively. Approximately 41.4% of net premiums earned relates to the 2002 underwriting year and the remainder to business written in 2003. Net premiums earned will continue to lag net premiums written until the level of premiums written stabilizes at a constant level year on year. As our gross premiums written continue to increase, our earned premiums continue to catch up with our gross premiums written, which has resulted in a net premiums earned to net premiums written ratio of 78.3% for the nine months ended September 30, 2003, compared to 45.5% for the same period in 2002. In addition, we continue to write a minority of our business, including 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 premiums earned throughout the remainder of 2003.

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

Loss and loss adjustment expenses was $112.9 million and $122.4 million for the nine months ended September 30, 2003 and 2002, respectively. Reinsurance recoveries of $(8.8) million and $10.6 million were netted against loss and loss adjustment expenses for the nine months ended September 30, 2003 and 2002, respectively. Reinsurance recoveries for the nine months ended September 30, 2003 related to QQS, the direct and facultative business written and the property reinsurance programs. Reinsurance recoveries for the nine months ended September 30, 2002 related to QQS business written only. We paid net losses of $30.5 million and $0.5 for the nine months ended September 30, 2003 and 2002, respectively.

The following are our net loss ratios by line of business for the periods indicated:


(1)	The overall gross loss ratio for the nine months ended September 30, 2003 was 19.3%.

(2)	The overall gross loss ratio for the nine months ended September 30, 2002 was 54.5%.

The variation in loss ratios between the nine months ended September 30, 2003 compared to the same period in 2002 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 judgment to estimate our loss and loss adjustment expense reserves. As our business continues to develop 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. We have benefited from a low level

of catastrophe activity during 2003 which, combined with reductions in the prior year loss estimates, has resulted in the net loss ratio of 21.6% for the nine months ended September 30, 2003. That compares to the net loss ratio for the nine months ended September 30, 2002 of 54.5%, which was heavily impacted by the European Floods which occurred in August 2002.

The nine months ended September 30, 2003 includes approximately $45.0 million of positive development of net losses incurred during the prior year. Development of prior year losses benefited the net loss ratio in the nine months by approximately 8.6%.

The positive development during the nine months ended September 30, 2003 of prior year losses primarily resulted from the following (refer to earlier table in Results of Operations for the Three Months Ended September 30, 2003 and 2002 — Loss and Loss Adjustment Expenses):


	•	In the Property Specialty Category, reported losses on 2002 occurrences during the nine months ended September 30, 2003 decreased by $2.1 million. Both the frequency and severity of reported losses were significantly less than the assumed reporting pattern of losses established for this line of business at December 31, 2002. Many of the proportional contracts have continued to have little or no reported loss activity. We have received additional information from many of the proportional cedents, enabling us to do more projections on an individual contract basis rather than for the class as a whole. The reduction in reported losses during the nine months ended September 30, 2003, combined with the increasing weight placed on our actual experience, has led to the reduction in ultimate losses of $33.9 million or 26% of the total reserve balance at December 31, 2002.

	•	Property Catastrophe net loss and loss adjustment expense reserves as at December 31, 2002, included approximately $28.0 million in respect of the European Floods which occurred in August 2002, and Hurricane Lili which occurred in October 2002. The remainder of the Property Catastrophe loss reserve balance at December 31, 2002 related to smaller loss events and several proportional contracts. During the nine months ended September 30, 2003, the development of European Flood losses, Hurricane Lili losses and losses from our proportional catastrophe contracts has been significantly lower than our initial assumptions. These factors led to a reduction in net ultimate losses of $8.6 million during the nine months ended September 30, 2003.

	•	Due to the potential variability in ultimate premiums and the limited availability of underlying loss information with the QQS business, our actuaries selected an expected loss ratio based on a review of the information supplied by cedents and applied it to projected premiums. During the nine months ended September 30, 2003, based on additional information provided by ceding companies, we reduced our expected gross loss ratio, which resulted in a reduction of $10.6 million in gross loss and loss adjustment expense reserves. Some of this was due to reductions in the loss ratio projections provided by the syndicates. Much of the decrease in projected ultimate losses was also due to revised ultimate premium estimates that were considerably lower than those at December 2002. After taking into account the effect of reinsurance purchased by the QQS syndicates with respect to the contracts in which we participate, net loss and loss adjustment expense reserves increased by $0.9 million for the nine months ended September 30, 2003.

	•	The lack of development in the nine months ended September 30, 2003, combined with the increasing weight placed on our actual experience in selecting a loss ratio, led to a decrease in our expected loss ratio attributable to the Other Specialty line during the nine months ended September 30, 2003. The lower selected loss ratio resulted in a reduction of $3.4 million in net loss and loss adjustment expense reserves for our Other Specialty business.

Other than the matters described above, we did not make any significant changes in the assumptions used in our reserving process during the nine months ended September 30, 2003. Because of our short operating history, our loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take years to develop.

At September 30, 2003, we estimated our gross and net reserves for loss and loss adjustment expenses using the methodology as outlined 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 September 30, 2003 and 2002 was $220.3 million and $132.5 million, respectively.

Management has determined that the best estimate for net loss and loss adjustment expense reserves at September 30, 2003 and 2002 was $212.7 million and $121.9 million, respectively.

The following are management’s best estimate of a range of likely outcomes around their best estimate of gross and net loss and loss adjustment expense reserves by line of business ($ in millions):

Underwriting expenses were $140.1 million and $57.5 million for the nine months ended September 30, 2003 and 2002, respectively, representing expense ratios of 26.8% and 25.6%, respectively. As our premiums

The accrual for profit commission increased by $16.4 million during the nine months ended September 30, 2003, which is included in acquisition costs. Profit commission was not required to be accrued for the nine months ended September 30, 2002. Depending on the development of incurred losses in upcoming quarters, we may be required to record additional profit commission. The expense ratio for the nine months ended September 30, 2003 would have been 23.7% excluding the effect of profit commission.

For the nine months ended September 30, 2003 and 2002, acquisition costs incurred were $107.2 million and $41.6 million, respectively, which were principally due to brokerage commissions for our insurance and reinsurance contracts of $62.0 million and $21.5 million respectively, as well as commissions paid to ceding insurers and other costs of $45.2 million and $20.1 million, respectively.

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

The increase in general and administrative expenses between the nine months ended September 30, 2003 and the same period in 2002 primarily relates to an increase in fixed expenses consisting of 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. In addition, in the nine months ended September 30, 2003 we incurred costs related to our shareholders’ secondary offering in the amount of $1.1 million, and costs related to our debt offering in the amount of $2.1 million. Concurrent with the repayment of our term loan facility on August 4, 2003, deferred financing costs of $0.9 million were expensed. The performance unit plan expense for the nine months ended September 30, 2003 was higher than the same period in 2002 as the 2003 period includes an accrual for both the 2002-2004 performance period and the 2003-2005 performance period. In addition, our book value at September 30, 2002 was used in estimating the 2002 period expense, compared to the use in the 2003 period of our September 30, 2003 share price, which is significantly higher than the September 30, 2002 book value. Other factors could also affect the expense ratio, including the mix of business written and the amount of acquisition costs incurred.

Net investment income for the nine months ended September 30, 2003 and 2002 was $35.7 million and $30.5 million, respectively. Net investment income was primarily composed of interest on coupon-paying bonds and bank interest, partially offset by accretion of premium on bonds of $10.9 million and $2.1 million, respectively, and investment management and custodian fees of $2.1 million and $1.6 million, respectively, for the nine months ended September 30, 2003 and 2002. Investment management fees were paid to White Mountains Advisors LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, one of our major shareholders. Management believes that the fees charged are consistent with those that would have been charged by a non-related party.

Based on the weighted average monthly investments held, and including net unrealized gains of $6.5 million and $25.4 million for the nine months ended September 30, 2003 and 2002, respectively, the total investment return was 2.48%, and 5.66%, respectively. Despite lower investment yields, our investment income

We did not experience any other than temporary impairment charges relating to our portfolio of investments for the nine months ended September 30, 2003 and 2002.

As a result of the repayment of our term loan facility, we did not incur interest expense for the full nine months. For the nine months ended September 30, 2003 and 2002, interest expensed relating to the term loan facility represented an average rate of 2.2% and 2.9%, respectively.

On August 4, 2003, the Company issued $250.0 million aggregate principal amount of senior unsecured debt (the “Senior Notes”) at an issue price of $99.517. The Senior Notes bear interest at a rate of 6.125%, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2004. Interest expensed during the nine months represents interest from the date of issuance until September 30, 2003.

Fees for the letter of credit facilities relates to the Letters of Credit that we have in place with Fleet Bank and Barclay’s bank as detailed in the Capital Resources section.

We paid interest expense for the nine months ended September 30, 2003 and 2002 of $2.8 million and $2.3 million, respectively, which related to the term loan facility.

Net realized gains (losses) on investments for the nine months ended September 30, 2003 and 2002 were $6.3 million and $5.5 million, respectively, which were due to gains realized from the sale of fixed maturity and equity investments and a realized loss of $1.0 million during the nine months ended September 30, 2003 which resulted from the termination of the interest rate swap contract, cancelled simultaneously with the repayment of the term loan facility on August 4, 2003.

Comprehensive income for the nine months ended September 30, 2002 and 2002 was $313.8 million and $103.8 million respectively, which includes the $307.3 million and $78.4 million of net income described above, $6.5 million and $25.4 million, respectively, of net change in unrealized gains on investments and currency translation adjustments.

The cost or amortized cost, gross unrealized gains and losses, and carrying values of our investments as at September 30, 2003 were as follows ($ in thousands):

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 our debt 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. We have never declared or paid any cash dividends on our common shares. Any determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends, and any other factors our Board of Directors deems relevant.

The Company’s shareholders’ equity at September 30, 2003 was $1,569.3 million, of which $397.7 million was retained earnings. The Company’s capital base has grown since December 31, 2002 primarily as a result of an increase in net premiums earned, the low level of losses incurred and the increase in capital resulting from the net proceeds from the issuance of $250.0 million in Senior Notes as described below.

We previously maintained two senior credit facilities with a syndicate of commercial banks. The credit facilities consisted 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 was set to renew in December, 2003. On August 4, 2003, using the proceeds from the issuance of $250.0 million in Senior Notes (see below), we repaid the $150.0 million outstanding under this facility and cancelled the revolving credit facility. These credit facilities contained various restrictions and covenants, which were all met during the time that the facilities were in place. In order to hedge the interest rate risk of the loan, we had entered into an interest rate swap contract, which became effective April 22, 2003 and was scheduled to expire on December 12, 2004, the maturity date of the term loan facility. The swap contract was cancelled simultaneously with the repayment of the term loan facility, resulting in a realized loss on termination of $1.0 million which is included in realized gains (losses) on investments.

On August 4, 2003, we issued $250.0 million aggregate principal amount of senior unsecured debt (the “Senior Notes”) at an issue price of $99.517. The net proceeds were used to repay the term loan facility with the remainder used for general corporate purposes. The Senior Notes bear interest at a rate of 6.125%, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2004. Unless previously redeemed, the Senior Notes will mature on August 15, 2013. We incurred $2.1 million in expenses related to the issuance of the Senior Notes, which have been expensed during the nine months ended September 30, 2003. We may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. The Senior Notes do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which we must adhere.

Montpelier Re is registered under The Insurance Act 1978 (Bermuda), Amendments Thereto and Related Regulations (the “Act”). Under the Act, Montpelier Re is required annually to prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act also requires Montpelier Re to meet minimum solvency requirements. For the nine months ended September 30, 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. There is no assurance that dividends will be declared or paid in the future.

In order for Montpelier Re to write Lloyd’s Qualifying Quota Share business, it must provide a 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 $250.0 million. Letters of credit outstanding under the Fleet facility at September 30, 2003 were approximately $173.2 million (£104.4 million) and were secured by

Effective June 20, 2003, Montpelier Re entered into a new Letter of Credit Reimbursement and Pledge Agreement with Fleet National Bank and a syndicate of lending institutions for the provision of a letter of credit facility in favor of Lloyd’s in an amount of up to $250.0 million, and in favor of certain U.S. ceding companies in an amount of up to $200.0 million. Simultaneously, the previously existing Pledge Agreement with Fleet National Bank in favor of Lloyd’s QQS business was superceded by the Letter of Credit Reimbursement and Pledge Agreement, and the letters of credit issued under the previous facility are now issued under the new facility agreement. There have not been any letters of credit issued under the new facility agreement in relation to U.S. ceding companies as at September 30, 2003. We consider this letter of credit facility sufficient to support Montpelier Re’s estimated obligations for the next 12 months.

Montpelier Re has made arrangements with Barclay’s Bank PLC for the provision of an additional letter of credit facility in favor of certain U.S. ceding companies in an amount of up to $50.0 million. Letters of credit outstanding at September 30, 2003 under the Barclay’s facility were approximately $23.9 million and were secured by investments of approximately $26.3 million. Montpelier Re has the ability to provide sufficient unencumbered assets to support the standby letter of credit.

The table below shows the aggregate amounts of investments available for sale, equity investments 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 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 and agency bonds, corporate debt securities and mortgage-backed and asset-backed securities.

The market value of our portfolio of fixed maturity investments comprises investment grade corporate debt securities (19%), U.S. government and agency bonds (75%) and mortgage-backed and asset-backed securities (6%). All of the fixed maturity investments currently held by us were publicly traded at September 30, 2003. Based on the weighted average monthly investments held, and including unrealized gains, our total return for the nine months ended September 30, 2003 was 2.48%. The average duration of our invested asset portfolio was 2.16 years and the average rating of the portfolio was AA+ at September 30, 2003.

We have invested a total of £40.0 million (or $60.8 million) in the common shares of Aspen, an unquoted investment. At September 30, 2003, Montpelier Re held approximately 7% of Aspen on an undiluted basis and approximately 6% on a fully diluted basis.

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

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 will 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 a limited amount of 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.

Our actuaries use a combination of the following methods in determining our loss and loss adjustment expense reserves:

The Reported Loss Development Method is a widely used actuarial technique for estimating ultimate losses. This method analyzes the reporting pattern for a body of losses over time and uses that pattern to predict future reported incurred losses. The selected reporting pattern is used to create loss development factors which are multiplied by reported losses to date to produce ultimate loss estimates. Due to our limited operating history, we do not have our own historical reporting patterns. Therefore, we have relied on selected industry reporting patterns for similar classes of business.

The Expected Loss Ratio Method assumes that ultimate losses vary proportionately with premiums. Ultimate losses are calculated by multiplying the selected expected loss ratio by the total amount of premium. The method is independent of actual loss experience. This method is particularly useful in the early stages of development for an underwriting year or when limited historical or current loss information is available.

The Bornheutter-Ferguson Reported Method is a combination of the Reported Loss Development Method and the Expected Loss Ratio Method. Estimates of losses incurred but not yet reported are based on an expected loss ratio assumption. The expected loss ratio is modified to the extent that reported losses to date differ from what would be expected based on the selected loss reporting pattern. This method gives more weight to the actual reported loss experience as the underwriting period matures.

Based on the characteristics of each line of business and the amount of loss information available, our actuaries weight the reliance on each reserving methodology. The methods and assumptions used by our actuaries to estimate loss reserves produce a point estimate by class, and we consider these point estimates to be management’s best estimate of reserves. The Company considers these point estimates as its best estimates because the selections of expected loss ratios and expected reporting patterns which underlie the estimates are based on the most current information available to management. We have used these point estimates in

Having regard to the limited amount of loss information available due to our short operating history and low frequency and high severity nature of many of our contracts, management uses the following methodology in determining a range: (1) selection of downward and upward percentage variation bounds around the ultimate loss selection for each class; and (2) establishment of the width of the range around our best point estimate based on management’s estimate of the potential variability for each class and the reporting pattern assumptions.

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 all 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. See discussion of Loss and Loss Adjustment Expenses in Management’s Discussion and Analysis of Financial Condition and Results of Operations for the nine months ended September 30, 2003.

Cash flows for the nine months ended September 30, 2003 and 2002. Cash flows from operations for the nine months ended September 30, 2003 were $458.1 million compared to $206.7 million for the same period in 2002. This increase principally relates to a substantial increase in net income in the 2003 period, combined with an increase in reinsurance premiums receivable. Offsetting these is an increase in loss and loss adjustment expense reserves in excess of paid losses. We invested a net amount of $0.5 million during the nine months ended September 30, 2003, compared to $424.0 million during the same period in 2002. At September 30, 2003, we had a cash balance of $227.5 million.

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.

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 debt. 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 and our property reinsurance programs, excluding most other specialty lines. We may purchase further retrocessional protection for our own account in 2003. Our operating subsidiary since inception has produced sufficient cash flows to meet expected claim payments, pay operational expenses and purchase retrocessional protection.

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 we write has loss experience generally characterized as having low frequency and high severity. This may result in volatility in both our 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 quoted and unquoted equity investments and our cash and cash equivalents balance was $2,218.7 million as at September 30, 2003, compared to $1,581.5 million at December 31, 2002. The primary cause of this increase was the receipt of $469.1 million in premiums net of acquisition costs, net investment income of $35.7 million, and the change in net unrealized gains on investments of $6.5 million offset by paid claims of $30.5 million. In addition, our investments and cash and cash equivalents balance has increased by a net amount of $100.0 million resulting from the repayment of our term loan facility in the amount of $150.0 million and the net proceeds received from the issuance of $250.0 million in Senior Notes.

We will be leasing additional office space in Bermuda later in 2003, and will incur additional related costs.

For the period from inception until September 30, 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 the net proceeds received from the issuance of our Senior Notes, and our positive operating results for 2002 and during the first nine months of 2003 have provided us with sufficient liquidity to enable Montpelier Re to meet its Bermuda statutory requirements under the Act.

In general, for the first nine months of 2003 we experienced premium rate levels which were less volatile than in 2002, but at comparable overall levels with 2002, for the “short-tail” reinsurance and insurance products that we write. We expect both of these trends to continue for the fourth quarter of 2003 and into 2004. Although we still believe that certain areas are starting to see some competitive forces, overall rates remain healthy and we do not expect as much pressure on rates in 2004 as originally anticipated at the beginning of 2003. Even though there have not been as many large catastrophes during the year to date as in prior years, we believe that rate levels will continue to remain stable due to: (1) increasing modeling risk scenarios which is creating additional demand for catastrophe reinsurance coverage in target zones; (2) the continued significant reserve strengthening in other insurance and reinsurance companies mainly related to asbestos and environmental legacy issues but also now on the casualty underwriting conducted between 1997 and 2000; and (3) rating agency downgrades of competitors.

Even though a number of catastrophes occurred during the quarter, none of the events so far has produced a significant market loss and our financial results in 2003 continue to be affected positively by the unusually and still relatively low frequency of large natural catastrophic events impacting our business. We 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 for 2003 to date. Such events could have a material adverse impact on our financial condition and results of operations. In addition, capital provided by newly-formed reinsurers and additional capital raised by existing reinsurers continues to increase the supply of reinsurance capacity which could negatively impact the prices that we receive for the products we write. 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.

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.

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 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. See “— Financial Condition and Liquidity — Loss and Loss Adjustment Expense Reserves.”

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.

We write a portion of our business and receive premiums and pay claims 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. A portion of our loss reserves are also in non-United States currencies. 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.

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.

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.

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 at September 30, 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 2.1% or approximately $42.0 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 2.1% or approximately $42.0 million.

As at September 30, 2003, we held $119.2 million, or 6.0% 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

Interest rate movements also affected the economic value of our term loan facility. We incurred an average interest rate under our term loan facility for the nine months ended September 30, 2003 of 2.2%. In order to hedge the interest rate risk of the loan, we entered into an interest rate swap contract with Bank of America, which became effective April 22, 2003 and was set to expire on December 11, 2004, the maturity date of the term loan facility. Under the terms of the interest rate swap contract, we paid interest at a fixed rate of 1.88% plus a margin dependent upon our leverage, and received interest at a variable rate equal to the offshore LIBOR rate. Following the completion of our Senior Notes offering as described in the Capital Resources section, we repaid the amounts outstanding under the term loan facility and terminated the facility and the related swap contract, resulting in a $1.0 million loss on termination of the swap contract.

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 September 30, 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 September 30, 2003, all fixed maturity investments that we held were investment grade.

Based on their evaluation as of the period end date relating to this Quarterly Report on Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in §§240.13a-15(e) and 240.15d-15(e) 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.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls during the quarter 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.

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.

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.


	(a) Current Report on Form 8-K filed on July 25, 2003, under Items 7 and 9 thereof, announcing the Company’s results for the quarter and six months ended June 30, 2003.

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.


	By:	/s/ ANTHONY TAYLOR



	Name: Anthony Taylor
	Title: President and Chief Executive Officer


	By:	/s/ NEIL MCCONACHIE



	Name: Neil McConachie


	Title:	Treasurer and Chief


	Accounting Officer
	(chief accounting officer)


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-31468


Bermuda		Not Applicable
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as at September 30, 2003 (Unaudited) and December 31, 2002 (Audited)	1
	Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2003 and 2002 (Unaudited)	2
	Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2003 and 2002 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited)	4
	Notes to Consolidated 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	35
Item 4.	Controls and Procedures	37

PART II	OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 5.	Other Information	38
Item 6.	Exhibits and Reports on Form 8-K	39
SIGNATURES		41


			As at		As at
			September 30, 2003		December 31, 2002

			(Unaudited)		(Audited)
ASSETS
Fixed maturities, at fair value (amortized cost:
	2003 — $1,862,386; 2002 — $1,322,256)		$	1,900,586	$	1,354,845
Equity investments, quoted, at fair value (cost: $26,035)				26,873		—
Equity investment, unquoted, at estimated fair value (cost: $60,758)				63,691		63,691

Total investments				1,991,150		1,418,536
Cash and cash equivalents, at fair value				227,512		162,925
Unearned premium ceded				26,839		3,752
Reinsurance premiums receivable				259,991		147,208
Funds withheld				3,760		20,507
Deferred acquisition costs				72,012		44,881
Reinsurance recoverable				7,595		16,656
Accrued investment income				14,271		13,057
Other assets				3,036		6,396

		Total Assets	$	2,606,166	$	1,833,918

LIABILITIES
Loss and loss adjustment expense reserves				220,259		146,115
Unearned premium				411,759		241,000
Reinsurance balances payable				25,488		2,448
Investment trades pending				113,413		34,280
Debt				248,792		150,000
Accounts payable, accrued expenses and other liabilities				17,128		7,540

		Total Liabilities	$	1,036,839	$	581,383

SHAREHOLDERS’ EQUITY
Common voting shares: 1/6 cent par value; authorized 1,200,000,000 shares; issued and outstanding 63,392,600 shares				106		106
Additional paid-in capital				1,129,454		1,126,435
Accumulated other comprehensive income				42,028		35,567
Retained earnings				397,739		90,427

		Total Shareholders’ Equity		1,569,327		1,252,535

		Total Liabilities and Shareholders’ Equity	$	2,606,166	$	1,833,918


			For the Three			For the Three			For the Nine			For the Nine
			Months Ended			Months Ended			Months Ended			Months Ended
			September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002


			(Unaudited)
REVENUES
	Gross premiums written		$	145,931		$	193,736		$	706,577		$	533,754
	Reinsurance premiums ceded			1,731			(20,861	)		(39,924	)		(39,709	)

	Net premiums written			147,662			172,875			666,653			494,045
	Change in net unearned premiums			15,264			(66,379	)		(144,681	)		(269,504	)

	Net premiums earned			162,926			106,496			521,972			224,541
	Net investment income			12,345			12,211			35,744			30,491
	Net realized gains (losses) on investments			(3,009	)		4,005			6,321			5,502
	Net foreign exchange gains			2,077			334			1,897			1,009

	Total Revenues			174,339			123,046			565,934			261,543

EXPENSES
	Loss and loss adjustment expenses			35,097			69,031			112,944			122,373
	Acquisition costs			32,352			20,404			107,201			41,578
	General and administrative expenses			12,838			5,843			32,864			15,956
	Interest expense			2,991			1,155			5,545			3,268

	Total Expenses			83,278			96,433			258,554			183,175

Income before taxes				91,061			26,613			307,380			78,368
Income tax expense				69			50			68			50

NET INCOME			$	90,992		$	26,563		$	307,312		$	78,318


COMPREHENSIVE INCOME
	Net income		$	90,992		$	26,563		$	307,312		$	78,318
	Other comprehensive income			3,102			15,546			6,460			25,447

	Comprehensive income		$	94,094		$	42,109		$	313,772		$	103,765

Per share data
Weighted average number of common and common equivalent shares outstanding:
		Basic		63,392,600			52,440,000			63,392,600			52,440,000
		Diluted		67,779,249			53,129,393			67,132,234			52,523,970
	Basic earnings per common share		$	1.44		$	0.51		$	4.85		$	1.49

	Diluted earnings per common share		$	1.34		$	0.50		$	4.58		$	1.49


			2003			2002


			(Unaudited)
Common voting shares
		Balance — beginning and end of period	$	106		$	87

Additional paid-in-capital
	Balance — beginning of period			1,126,435			920,306
	Direct equity offering expenses			(170	)		(233	)
	Compensation recognized under stock option plan			3,189			3,804

		Balance — end of period		1,129,454			923,877

Accumulated other comprehensive income
	Balance — beginning of period			35,567			1,878
	Net change in currency translation adjustments			10			34
	Net change in unrealized gains on investments			6,451			25,413

		Balance — end of period		42,028			27,325

Retained earnings (accumulated deficit)
	Balance — beginning of period			90,427			(61,618	)
	Net income			307,312			78,318

		Balance — end of period		397,739			16,700

Total Shareholders’ Equity			$	1,569,327		$	967,989


	Three Months		Three Months
	Ended		Ended
	September 30, 2003		September 30, 2002

Basic earnings per common share:
Net income available to common shareholders	$	90,992	$	26,563
Weighted average common shares outstanding — Basic		63,392,600		52,440,000

Basic earnings per common share	$	1.44	$	0.51

Diluted earnings per common share:
Net income available to common shareholders	$	90,992	$	26,563
Weighted average common shares outstanding — Basic		63,392,600		52,440,000
Dilutive effect of warrants		3,450,357		623,864
Dilutive effect of share options		936,292		65,529

Weighted average common and common equivalent shares outstanding — Diluted		67,779,249		53,129,393

Diluted earnings per common and common equivalent share	$	1.34	$	0.50


	Nine Months Ended		Nine Months Ended
	September 30, 2003		September 30, 2002

Basic earnings per common share:
Net income available to common shareholders	$	307,312	$	78,318
Weighted average common shares outstanding — Basic		63,392,600		52,440,000

Basic earnings per common share	$	4.85	$	1.49

Diluted earnings per common share:
Net income available to common shareholders	$	307,312	$	78,318
Weighted average common shares outstanding — Basic		63,392,600		52,440,000
Dilutive effect of warrants		3,021,557		78,500
Dilutive effect of share options		718,077		5,470

Weighted average common and common equivalent shares outstanding — Diluted		67,132,234		52,523,970

Diluted earnings per common and common equivalent share	$	4.58	$	1.49



	Three Months Ended					Three Months Ended
	September 30, 2003					September 30, 2002


Property Specialty	$	100.2		68.6	%	$	81.4	42.0	%
Property Catastrophe		51.1		35.0			44.3	22.9
Qualifying Quota Share		(35.6	)	(24.4	)		42.0	21.7
Other Specialty		30.3		20.8			26.0	13.4

Total	$	146.0		100.0	%	$	193.7	100.0	%


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	Net Loss Ratios			Net Loss Ratios
	Three Months Ended			Three Months Ended
	September 30, 2003(1)			September 30, 2002(2)

Property Specialty		24.9	%		64.1	%
Property Catastrophe		17.5			69.2
Qualifying Quota Share		(63.3	)		72.9
Other Specialty		34.0			28.6
Overall Ratio		21.5	%		64.8	%


									Paid Losses on
			Change in Prior			Change in Prior			Prior Year			Addition of
			Year Estimate			Year Estimate			Reserves for the			Reserves for the
	Gross Reserves at		During the First			During the Third			Nine Months Ended			Nine Months Ended		Gross Reserves at
	December 31, 2002		Six Months of 2003			Quarter of 2003			September 30, 2003			September 30, 2003		September 30, 2003

Property Specialty	$	54.1	$	(17.6	)	$	(16.3	)	$	(5.1	)	$	77.2	$	92.3
Property Catastrophe		32.5		(13.7	)		5.1			(8.7	)		21.3		36.5
Qualifying Quota Share		50.5		(5.4	)		(5.2	)		(6.3	)		29.6		63.2
Other Specialty		9.0		(2.9	)		(0.5	)		(1.0	)		23.6		28.2

Total	$	146.1	$	(39.6	)	$	(16.9	)	$	(21.1	)	$	151.7	$	220.2


	Low End of				High End of
	the Range		Selected		the Range

Property Specialty	$	74.3	$	92.4	$	109.0
Property Catastrophe		30.2		36.5		42.2
Qualifying Quota Share		55.4		63.2		70.4
Other Specialty		22.7		28.2		33.6

Total	$	182.6	$	220.3	$	255.2


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair Value or
Investments	Cost		Gains		Losses		Estimated Fair Value

Fixed maturity investments	$	1,862,386	$	38,794	$	594	$	1,900,586
Equity investments, quoted		26,034		1,273		434		26,873
Equity investment, unquoted		60,758		2,933		—		63,691


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*



	Three Months Ended				Three Months Ended
	September 30, 2003				September 30, 2002


USA and Canada	$	108.1	74.0	%	$	86.2	44.5	%
United Kingdom and Ireland		15.8	10.8			4.8	2.5
Worldwide, excluding USA and Canada (2)		5.0	3.4			0.5	0.3
Western Europe, excluding the United Kingdom and Ireland		4.3	2.9			13.1	6.7
Japan		3.5	2.4			4.5	2.3
Worldwide (1)		—	—			75.5	39.0
Others (2.5% or less)		9.3	6.5			9.1	4.7

Total	$	146.0	100.0	%	$	193.7	100.0	%



	Nine Months Ended				Nine Months Ended
	September 30, 2003				September 30, 2002


USA and Canada	$	348.3	49.3	%	$	180.5	33.9	%
Worldwide(1)		189.0	26.7			271.5	50.9
United Kingdom and Ireland		39.8	5.6			9.8	1.8
Western Europe, excluding the United Kingdom and Ireland		35.7	5.1			19.7	3.7
Japan		31.2	4.4			21.1	4.0
Worldwide, excluding USA and Canada(2)		25.5	3.6			9.9	1.9
Others (1.5% or less)		37.1	5.3			21.3	3.9

Total	$	706.6	100.0	%	$	533.8	100.0	%



	Nine Months Ended				Nine Months Ended
	September 30, 2003				September 30, 2002


Guy Carpenter	$	183.7	28.7	%	$	92.6	17.4	%
Aon Re Worldwide		131.8	20.6			78.1	14.6
Benfield (1)		127.7	20.0			161.6	30.3
Willis Group (1)		111.0	17.4			130.4	24.4
Other brokers		85.1	13.3			71.1	13.3

Total brokers		639.3	100.0	%		533.8	100.0	%

Direct (no broker)		67.3				—

Total	$	706.6			$	533.8



	Three Months Ended				Three Months Ended
	September 30, 2003				September 30, 2002


USA and Canada	$	108.1	74.0	%	$	86.2	44.5	%
United Kingdom and Ireland		15.8	10.8			4.8	2.5
Worldwide, excluding USA and Canada (2)		5.0	3.4			0.5	0.3
Western Europe, excluding the United Kingdom and Ireland		4.3	2.9			13.1	6.7
Japan		3.5	2.4			4.5	2.3
Worldwide (1)		—	—			75.5	39.0
Others (2.5% or less)		9.3	6.5			9.1	4.7

Total	$	146.0	100.0	%	$	193.7	100.0	%


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	Amended and Restated Bye-Laws (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 20, 2003).
	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)).
	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)), as further amended by Amendment 3 dated as of March 31, 2003 (incorporated herein by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	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)), as further amended by Amendment 3 dated as of March 31, 2003 (incorporated herein by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003)
	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)), as further amended by Amendment 3 dated as of March 31, 2003 (incorporated herein by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003).
	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)).
	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)).