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 þ No o

As of July 30, 2004, the Registrant had 62,378,732 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. This trust is not consolidated into the financial statements of the Company. Subsequent to June 30, 2004, on July 23, 2004, the Company incorporated a wholly-owned subsidiary, Montpelier Agency Ltd. (“MAL”), to provide insurance management services. MAL has not yet commenced operations.

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 in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. 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.

Premiums are recognized as written for the full period of the reinsurance contract as of the date that the contract is bound. The Company writes both excess of loss and pro-rata contracts.

For the majority of excess of loss contracts, written premium is based on the deposit premium as defined in the contract. Subsequent adjustments to the deposit premium are recognized in the period in which they are determined. For excess of loss and pro-rata contracts where no deposit premium is specified in the contract, written premiums are recognized based on estimates of ultimate premiums provided by the ceding companies. Initial estimates of written premium are recognized in the period in which the underlying risks incept. Subsequent adjustments, based on reports of actual premium by the ceding companies, or revisions in estimates, are recorded in the period they are determined.

Premiums are earned ratably over the term of the reinsurance contract. The portion of the premium related to the unexpired portion of the contract is reflected in unearned premium.

Premiums receivable are recorded at amounts due less any required provision for doubtful accounts.

Acquisition costs are comprised of ceding commissions, brokerage, premium taxes and other expenses that relate directly to the writing of reinsurance contracts. Deferred acquisition costs are amortized over the terms of the related contracts and are limited to their estimated realizable value based on the related unearned premium, anticipated claims expenses and investment income. Acquisition costs also include profit commission.

During the six months ended June 30, 2004 and 2003, the Company purchased retrocessional protection against large risk losses on the direct insurance and facultative book and against small to medium-size catastrophes on the Company’s overall property writings. For certain pro-rata 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 its pro-rata share of 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 $28.1 million and $11.7 million for the six months ended June 30, 2004 and 2003, respectively. Total recoveries netted against loss and loss adjustment expenses was $(0.5) million and $(3.8) million for the six months ended June 30, 2004 and 2003, 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 June 30, 2004 or 2003.

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% of their principal amount The net proceeds were used to repay the amount outstanding under the term loan facility (see below) 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. Unless previously redeemed, the Senior Notes will mature on August 15, 2013. 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, however, the Company has no current intention of calling the Senior Notes. 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 incurred interest expense on the Senior Notes for the six months ended June 30, 2004 of $7.7 million and paid interest of $8.1 million.

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 above), 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.

The Company incurred interest expense for the term loan facility for the six months ended June 30, 2003 of $1.8 million at an average annual interest rate of 2.33% and paid interest of $2.0 million.

In the normal course of business, the Company provides security to reinsureds as required under contract provisions. Such security takes the form of a letter of credit issued by a bank at the request of the Company. 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. Effective May 27, 2004 the Company entered into a three-year Amended and Restated Letter of Credit Reimbursement and Pledge Agreement with Banc of America Securities LLC 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. The facility also incorporates a $50.0 million revolving line of credit for general corporate purposes. This agreement replaces the Letter of Credit Reimbursement and Pledge Agreement with Fleet National Bank discussed below. Letters of credit issued under this facility at June 30, 2004 were $261.7 million and are secured by cash and investments of approximately $287.8 million. The agreement covering the Company’s letter of credit facility contains covenants that limit the Company’s ability, among other things, to borrow money, make particular types of investments or other restricted payments, sell assets, merge or consolidate. This agreement also requires the Company to maintain specific financial ratios. If the Company fails to comply with these covenants or meet these financial ratios, the lenders under the Company’s credit facility could declare a default and withdraw their support of the facility. For the six month period ended June 30, 2004, the Company was in compliance with all covenants.

Effective June 20, 2003, the Company entered into a 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. This facility has been superseded by the agreement discussed above. Letters of credit outstanding under this facility in favor of Lloyd’s at June 30, 2003 were approximately $165.6 million, and were secured by investments of approximately $182.1 million. There were no letters of credit issued under this facility in relation to U.S. ceding companies as at June 30, 2003.

The Company previously made arrangements with Barclays 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 June 30, 2003 under the Barclays facility were approximately $21.1 million and were secured by cash and investments of approximately $23.2 million. This facility was cancelled on January 31, 2004.

As at June 30, 2004, two directors were employed by White Mountains Insurance Group, which beneficially owned 19.4% and 22.9% of the Company at June 30, 2004 and 2003, respectively.

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 Company pays investment management fees based on the month-end market values held under management. The fees, which vary depending on the amount of assets under management, are included in net investment income. The Company incurred an average annualized fee of 0.09% and 0.17% for the six months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and 2003, the Company expensed investment management fees of approximately $1,009 and $1,367, respectively, and recorded an amount payable for these services of $650 and $1,380, respectively. The Chairman of the Company’s 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 the ordinary course of business, the Company entered into one reinsurance agreement with OneBeacon Insurance Group, a subsidiary of White Mountains Insurance Group during the six months ended June 30, 2004 and 2003. During each of the six months ended June 30, 2004 and 2003, $0.6 million and $1.2 million, respectively, was received in gross premiums related to these contracts.

On March 17, 2004, and April 6, 2004, different shareholders of the Company completed two secondary offerings of 4,785,540 and 4,000,000 common shares, respectively. Certain original investors sold an average of 25.0% and 31.8% of their holdings, respectively. The secondary offerings did not have any impact on common shares outstanding. The Company did not receive any proceeds from the secondary offerings but was required to pay offering expenses of approximately $0.5 million for each secondary offering, which are included in general and administrative expenses for the six months ended June 30, 2004.

On May 26, 2004 the Company’s Board of Directors approved a plan to repurchase up to $150.0 million of the Company’s shares from time to time depending on market conditions during a period of up to 24 months. On June 2, 2004, the Company repurchased 1,263,865 common shares at $34.50 per common share. The closing market price per common share on May 28, 2004 was $34.88. The purchase price totaled $43.6 million.

The Company’s Chairman, President and Chief Executive Officer has adopted a written plan in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934 for the purpose of the exercise of options and the sale of limited amounts of the Company’s shares owned by him. Pursuant to this plan, 122,500 options were exercised during the six months ended June 30, 2004 at the exercise price of $16.67, resulting in an increase in common shares by their par amount and an increase in additional paid-in capital of $2,042. Subsequent to June 30, 2004, an additional 127,500 options were exercised at the exercise price of $16.67. The plan covers the possible exercise of 600,000 options and share sales over a 12 month period commencing March 3, 2004, subject to market conditions and the terms of the plan.

Management has determined that the Company operates in one segment only. The Company focuses on writing global property and casualty reinsurance and insurance products.

The following tables set 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):


(1)	“Worldwide” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area.

(2)	“Worldwide, excluding USA and Canada” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area 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. No such contracts have been written in 2004.

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

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of investments, cash and reinsurance balances. The investment portfolio is managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue or issuer. The Company believes that there are no significant concentrations of credit risk associated with its investments. Concentrations of credit risk with respect to reinsurance balances are limited due to their dispersion across various companies and geographies. The Company did not have an aggregate investment in a single entity, other than the U.S government, in excess of 10% of the Company’s shareholders’ equity at June 30, 2004 or 2003.

The Company also underwrites a significant amount of its reinsurance and insurance business through brokers and a credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of reinsurance and insurance balances to the Company.

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. The Company was not involved in any material pending litigation or arbitration proceedings at June 30, 2004 or 2003.

and thereafter during the construction period and $400 per annum upon finalization of the Project and occupation of the building. Construction commenced during the first quarter of 2004, and at June 30, 2004, no amounts were due or payable by Montpelier Re. During the second quarter of 2004, Montpelier Re initiated discussions with the prospective landlord regarding the possibility of converting the loan and lease arrangement contemplated by the MIU to a straight lease arrangement. These discussions are continuing, and no definitive agreement has been reached with respect to amending the MIU or entering into an alternative arrangement. The terms are subject to final approval by the Board of Directors.

In March 2004 the Company committed to invest an aggregate of $20.0 million as part of an investor group that will acquire the life and investments business of Safeco Corporation for $1.35 billion, subject to adjustments. The Company funded the $20.0 million commitment on July 27, 2004. The transaction is expected to close during the third quarter of 2004 and is subject to regulatory approvals and other customary closing conditions.

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 six months ended June 30, 2004 and 2003, 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 six months ended June 30, 2004 and 2003.

The following is a discussion and analysis of our results of operations for the three and six months ended June 30, 2004 and 2003 and financial condition as at June 30, 2004. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

This discussion contains forward-looking statements that are not historical facts, including statements about our 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.

There has been a lack of major claims activity on “short-tail” lines of business during the first six months of 2004, continuing the trend experienced in 2002 and 2003. As a consequence of this lack of activity the market has become more competitive and we are seeing some reductions in rate levels and loosening of terms and conditions. We expect these trends to continue through 2004 but, unlike previous cycles, we believe that the market has become more disciplined in its underwriting approach which should mitigate the reduction in the trading environment. We expect that “short-tail” lines will comprise 90% or greater of our total gross premiums written in 2004.

“Long-tail” casualty reinsurance business for the classes we underwrite which include medical malpractice, errors and omissions, clash catastrophe, general liability, casualty retrocession protection, and UK employers liability, continues to show improvement in rates and terms and conditions coupled with rate increases on the underlying subject insurance business.

We anticipate that we may be impacted in future periods by a higher frequency of large natural catastrophic events than those experienced in 2003 and during the first six months of 2004. Such events could have a material adverse impact on our financial condition and results of operations.

The $5.5 million decrease in net income for the three months ended June 30, 2004 compared to the same period in 2003 was primarily the result of the following factors:


	•	An increase in loss and loss adjustment expenses partially resulting from an increase in proportional and casualty business written which tend to experience higher loss ratios;

	•	A greater level of reinsurance premiums ceded;

	•	An increase in acquisition costs due to a change in the mix of business written; and

	•	An increase in general and administrative expenses due to increased staffing costs and performance unit plan expense, combined with expenses resulting from two secondary offerings by shareholders.


	•	An increase in net premiums earned;

	•	An increase in net investment income as a result of our higher investment portfolio balance; and

	•	Favorable development of net losses from prior years of approximately $34.3 million for the quarter, compared to the same period in 2003 of $14.2 million.

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

Details of gross premiums written by line of business are provided below ($ in millions):

During the quarter ended June 30, 2004, the environment has become increasingly competitive and we have experienced some reductions in rate levels in certain classes and consequently are declining more renewals each quarter. However, the business which we are renewing remains at rate levels commensurate with achieving an acceptable expected return on equity. Overall, increases in gross premiums written can be attributed to improved signings on renewals as well as increased access to more original programs than in the prior year. There also continued to be increases in our written line sizes and in our average signing percentages during the second quarter of 2004. These factors have more than offset the decline in rates.

Gross premiums written related to the Property Specialty category have increased substantially from the same period in 2003 due the timing of the renewals of certain large contracts and also due to increases in gross premiums written related to improved signings on renewals and increased access to more original programs than in the prior year.

The Property Catastrophe category has shown a decrease in gross written premiums as compared to the prior year due to the reduction in rates as discussed above. As rates have reduced and the market has become more competitive we have continued to exercise our strict underwriting discipline and have not renewed some programs.

The Other Specialty category continues to strengthen as compared to the prior year, partly due to increased market penetration resulting mainly from our ability to capitalize on market opportunities and, we believe, due to the developing reputation of our underwriting and risk management skills. This category has also increased due to the small but growing level of casualty business. As previously stated, we expect to write a larger amount of casualty reinsurance in 2004 as compared to 2003 due to improving terms and conditions of casualty reinsurance contracts. For the three months ended June 30, 2004 and 2003, casualty accounted for approximately 8.7% and 5.7% of gross premiums written, respectively, and we estimate that it will account for between 5% and 10% of our gross premiums written by the end of 2004. The Other Specialty category is expected to experience the most growth during 2004, primarily from an increase in casualty writings, although the growth in this category is expected to be less than the growth seen from 2002 to 2003. We also expect to write a modestly increased level of sabotage and terrorism business during the remainder of 2004 as we have added a dedicated underwriter to focus on this class.

As expected, we have not written QQS business for the 2004 underwriting year and as a result, the gross premiums written for this category has decreased as compared to the same period in 2003. The QQS gross premiums written in 2004 relates to adjustments in estimates made to the 2003 and 2002 underwriting years mainly as a result of the movement in foreign exchange rates.

The proportion of Property Catastrophe gross premiums written as a percentage of total gross premiums written is lower than the Property Specialty category during the second quarter of 2004 because a proportionally higher volume of Property Catastrophe business is traditionally written during the first 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 and Property Catastrophe categories will continue to account for the largest portion of gross premiums written.

Reinsurance premiums ceded for the three months ended June 30, 2004 and 2003 were $28.2 million and $7.4 million, respectively. For the three months ended June 30, 2003 the majority of reinsurance premiums ceded related to QQS business. In the three months ended June 30, 2004, the majority of the reinsurance premiums ceded related to retrocessional protection purchased on our own account and inuring reinsurance as part of our reinsurance arrangements with certain ceding companies. As we have not written any QQS business for the 2004 underwriting year, we do not expect to record a material amount of reinsurance premiums ceded in 2004 related to this business. In 2004 we have continued our limited reinsurance purchasing policy protecting ourselves against large risk losses on our direct and facultative book and small to medium-size catastrophes on our overall property writings. We may also purchase reinsurance protection for our casualty book. For the whole of 2004 we expect that reinsurance premiums ceded will rise modestly as compared to 2003 but are expected to be less than 10% of gross premiums written.

Net premiums earned for the three months ended June 30, 2004 and 2003 were $193.6 million and $174.3 million, respectively. Approximately 49.6% and 33.3% of net premiums earned during the quarter ended June 30, 2004 and 2003, respectively, relates to prior underwriting years and the remainder to business written in the respective underwriting year.

Gross premiums written for the majority of our lines of business has increased during the second quarter of 2004 over 2003 and is expected to continue to marginally increase during the remainder of 2004. This increase results in a gross earned premium to written premium ratio of 99.0% for the three months ended June 30, 2004, compared to 92.3% for the same period in 2003. In addition, we continue to write a minority of our business on a risks attaching basis, for which premiums are generally earned over a longer period. We expect the earned premium to written premium ratio in 2004 to continue to rise modestly from 2003 as the growth rate of gross premiums written slows.

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 $40.2 million and $30.1 million for the three months ended June 30, 2004 and 2003, respectively. Reinsurance recoveries of approximately $0.1 million and $(3.5) million were netted against loss and loss adjustment expenses for the three months ended June 30, 2004 and 2003, respectively. We paid net losses of $6.0 million and $6.9 million for the three months ended June 30, 2004 and 2003, 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 June 30, 2004 was 19.3%.

(2)	The overall gross loss ratio for the three months ended June 30, 2003 was 14.4%.

No major catastrophic events impacted our Property Catastrophe book during the second quarter of 2004. In addition, the reported losses for the August 2002 European floods decreased by approximately $1.4 million during the second quarter of 2004. Some modest increases in reported losses for other events resulted in a loss ratio of only 0.4% for Property Catastrophe for the second quarter of 2004. The Property Specialty loss ratio for the second quarter of 2004 is higher than in the second quarter of 2003 due to a higher initial loss ratio selection on the current underwriting year partly due to reduced rate levels, and partly due to increased levels of pro-rata business. The Other Specialty class continues to experience very low levels of reported losses. The second quarter of 2004 loss ratio is higher than in the second quarter of 2003 primarily due to a higher percentage of longer-tail casualty business included in the Other Specialty category as compared to 2003. The Qualifying Quota Share loss ratio for this quarter is lower than the loss ratio for the second quarter of 2003 as the QQS syndicates have lowered their ultimate loss ratio projections for both the 2002 and the 2003 underwriting years. All of these factors have resulted in the overall net loss ratio of 20.7% for the three months ended June 30, 2004, compared to the overall net loss ratio for the three months ended June 30, 2003 of 17.3%.

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, 2003 and June 30, 2004 ($ in millions):

The second quarter of 2004 and 2003 included approximately $34.3 million and $14.2 million, respectively, of favorable development of net losses from prior years. This favorable prior year development for the quarters ended June 30, 2004 and 2003 benefited the net loss ratio in the quarter by approximately 17.7% and 8.0%, respectively.

The favorable development during the three months ended June 30, 2004 of losses incurred during 2003 and 2002 primarily resulted from the following:


	•	In the Property Specialty category, our net estimated ultimate losses for prior years decreased by $23.4 million during the quarter. The majority of the decrease was due to the fact that actual reported losses for this category continue to be lower than the level predicted by our benchmark development patterns. The low reported losses for the current quarter, combined with the increasing weight placed on our actual experience as the prior years mature, has led to the reduction in ultimate losses for the quarter in this category.

	•	In the Property Catastrophe category, our estimate of net losses for prior years decreased by $3.8 million during the quarter. Much of this decrease was a result of a $1.4 million reduction in claims from the European floods of 2002. In addition, development on other events has been less than expected based on our loss development patterns.

	•	There continues to be few reported claims in our Other Specialty category, and the development of the reported losses in the quarter was less than expected. The low level of loss development, combined with the increasing weight placed on our actual experience in selecting a loss ratio resulted in a reduction in ultimate losses of $5.1 million for prior years.


	•	In the QQS category, during the three months ended June 30, 2004 based on additional information provided by ceding companies, we reduced our expected gross loss ratio for prior years, which resulted in a reduction of $3.6 million in estimated gross ultimate loss and loss adjustment expenses for the quarter. Offsetting some of the change in gross losses however, was a reduction in our estimated recovery ratio on reinsurance purchased by the QQS syndicates. The combined effect of these adjustments was a $2.0 million decrease in net losses related to prior years.

Other than the matters described above, we did not make any significant changes in the assumptions used in our loss reserving process during the three months ended June 30, 2004. 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 and payment of claims in foreign currencies. The foreign exchange loss during the second quarter of 2004 is primarily due to the strengthening of the U.S. dollar resulting in losses on translation arising out of receipts of non-U.S. dollar premium installments. Our premiums receivable and liabilities for losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign exchange rates and may affect our financial results in the future.

Underwriting expenses consist of acquisition costs (including profit commission) and general and administrative expenses. Acquisition costs and general and administrative expenses were $58.7 million and $44.8 million for the three months ended June 30, 2004 and 2003, respectively, representing expense ratios of 30.3% and 25.7%, 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.

Profit commission expensed was $3.7 million and $6.1 million for the three months ended June 30, 2004 and 2003, respectively. The accrual for profit commission has declined as compared to the same period in the prior year mainly due to the fact that a large portion of the cumulative accrual relates to the QQS business the majority of which would have been expensed in 2003. The expense ratio for the three months ended June 30, 2004 and 2003 would have been 28.4% and 22.2%, respectively, excluding the effect of profit commission.

For the three months ended June 30, 2004 and 2003, acquisition costs incurred were $43.9 million and $33.8 million, respectively, which were principally due to brokerage commissions on our insurance and reinsurance contracts of $20.5 million and $16.1 million respectively, as well as commissions paid to ceding insurers and other costs of $23.4 million and $17.7 million, respectively.

Acquisition costs, excluding profit commission as a percentage of gross premiums earned, were 19.3% and 15.5% for the three months ended June 30, 2004 and 2003, respectively. The 2004 ratio is higher than the 2003 ratio as we have written a higher proportion of proportional contracts during the quarter which have higher acquisition costs, and we have also written a small number of large excess of loss contracts with higher than average commission levels. For the remainder of 2004 the acquisition cost ratio, excluding profit commissions, may vary due to the mix of business written and estimated loss experience.

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

The increase in general and administrative expenses between the second quarter of 2004 and the second quarter of 2003 partially relates to an increase in fixed expenses consisting of increased employment costs, and office expenses due to the occupation of additional office space, consistent with the increase in staff numbers. This increase was partially offset by expenses of approximately $1.0 million relating to our shareholders’ secondary offering which occurred during June 2003. We may be required to employ additional resources and occupy additional office space as our business grows.

For the three months ended June 30, 2004, the performance unit plan expense included in current and deferred incentive compensation was higher than the same period in 2003 as a result of a combination of factors. The factors that affect the calculation of the expense in 2004 consist of an increase in the harvest ratio used in calculating the expense for the 2002-2004 and the 2003-2005 periods, as well as an increase in our share price from June 30, 2003 to June 30, 2004. In addition, the 2004 period includes an additional accrual for the 2004-2006 performance period. As our results evolve, we may need to increase or decrease our harvest ratio used in the expense calculation which could either reduce or increase the PUP expense.

The fair value of stock options expense has decreased compared to the prior period as a portion of the outstanding stock options has become fully vested and expensed.

Net investment income for the three months ended June 30, 2004 and 2003 was $16.2 million and $11.7 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 $3.9 million and $4.1 million, respectively, and investment management and custodian fees of $0.7 million and $0.7 million, respectively, for the three months ended June 30, 2004 and 2003. Investment management fees are paid to White Mountains Advisors LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, one of our major shareholders. Management believes that the fees charged were consistent with those that would have been charged by a non-related party. The investment management and custodian fees are consistent with the same period last year even though the asset base has increased as the investment management fee structure has been revised, resulting in a lower expense for our current portfolio mix. The fees could increase during the remainder of 2004 as our mix of investments changes.

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 (losses) of $(47.3) million and $5.7 million for the three months ended June 30, 2004 and 2003, respectively, the total investment return was (1.2%) and 1.3%, respectively. Net unrealized losses for the three months ended June 30, 2004 included ($4.6) million related to our investment in Aspen Insurance Holdings Limited. In 2004, 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 June 30, 2004 and 2003. We believe that the gross unrealized losses relating to our fixed maturity investments at June 30, 2004 resulted primarily from increases in market interest rates from the dates that certain investments within that portfolio were acquired as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in value are viewed as being temporary because we have the intent and ability to retain such investments for a period of time sufficient to allow for any anticipated recovery in market value.

Fees for the letter of credit facilities relate to the Letters of Credit that we have in place as detailed in the Capital Resources section.

We did not pay any interest related to the Senior Notes for the three months ended June 30, 2004. We paid interest for the three months ended June 30, 2003 of $1.0 million related to the term-loan facility and revolving loan facility only and incurred interest expense during this period at an average rate of 2.12%.

Net realized gains on investments for the three months ended June 30, 2004 and 2003 were $1.5 million and $4.6 million, respectively, which were due to net gains (losses) realized from the sale of fixed maturity and equity investments.

Comprehensive income for the three months ended June 30, 2004 and 2003 was $59.7 million and $116.7 million respectively, which includes the $107.0 million and $112.5 million of net income described above, $(47.3) million and $5.7 million, respectively, of net change in unrealized gains (losses) on investments and currency translation adjustments and $nil and $1.5 million of net change in unrealized loss on a hedging transaction for 2004 and 2003, respectively.

Net income was essentially the same for the first six months of 2004 and 2003. This net result was a combination of the following factors:


	•	An increase in net premiums earned;

	•	An increase in net investment income as a result of our higher investment portfolio balance;

	•	Favorable development of net losses from prior years of approximately $57.6 million in 2004 compared to the same period in 2003 of $32.5 million.


	•	An increase in loss and loss adjustment expenses partially resulting from an increase in proportional and casualty business written which tend to experience higher loss ratios;

	•	An increase in acquisition costs due to a change in the mix of business written; and


	•	An increase in general and administrative expenses due to increased staffing costs and performance unit plan expense, combined with expenses resulting from our two secondary offerings.

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)	Fully converted book value per share is a non-GAAP measure, based on total shareholders’ equity plus the assumed proceeds from the exercise of outstanding options and warrants of $166.1 million and $168.1 million at June 30, 2004 and 2003, respectively, divided by the sum of shares, options and warrants outstanding (assuming their exercise) of 71,997,892 and 73,261,757 shares at June 30, 2004 and 2003, respectively. The Company believes that fully converted book value per share more accurately reflects the value attributable to a common share.

We ended the quarter with a fully converted book value per share (as defined above) of $26.81, an increase of $4.39 as compared to the same period ended in 2003. This increase of 19.6% resulted from premium rate levels continuing to remain at relatively healthy levels across the major classes that we specialize in, together with a low level of catastrophes affecting our portfolio during the twelve months. On July 15, 2004 we paid our second dividend in 2004 of $0.34 per share to shareholders of record at June 30, 2004, which resulted in a total return to shareholders, (as defined below) of $2.57 or 10.4% for the six months ended June 30, 2004. We experienced a total return of approximately 0.5% on our investment portfolio for the six months ended June 30, 2004 as compared to a total return for the six months ended June 30, 2003 of 2.3%.

Total return to shareholders is a non-GAAP measure. It is the internal rate of return of the increase in fully converted book value per share from $24.92 at December 31, 2003 to $26.81 at June 30, 2004, including the dividend of $0.34 accrued at March 31, 2004 and $0.34 accrued at June 30, 2004. Management believes that this measure most accurately reflects the return made by its shareholders as it takes into account the effect of all dilutive securities and the effect of dividends.

Management believes that fully converted book value per share and total return to shareholders are measurements which are important to investors and other interested parties, and that these persons benefit from having a consistent basis for comparison with other companies within the industry. However, these measures may not be comparable to similarly titled measures used by companies either inside or outside of the insurance industry. These measures may be incorporated into the formulae applied by our Compensation and Nominating Committee when determining the harvest ratio under our Performance Unit Plan.

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

Details of gross premiums written by line of business are provided below ($ in millions):

The decrease in gross premiums written during the six months ended June 30, 2004 as compared to the same period in 2003 was solely due to the fact that, as expected, we have not written QQS business for the 2004 underwriting year. Disregarding the QQS business, gross premiums written increased during the six months ended June 30, 2004 compared to the same period in 2003 by approximately 11.4%.

During the six months ended June 30, 2004, the environment has become increasingly competitive and we have experienced some reductions in rate levels in certain classes and consequently are declining more renewals each quarter. However, the business which we are renewing remains at rate levels commensurate with achieving an acceptable expected target return on equity. Overall, increases in gross premiums written can be attributed partially to improved signings on renewals as well as increased access to more original programs than in the prior year. There also continued to be increases in our written line sizes and in our average signing percentages during the six months ended June 30, 2004. These factors have more than offset the decline in rates.

Gross premiums written related to the Property Specialty category have increased from the same period in 2003 due to the timing of the renewals of certain large contracts and also due to increases in gross premiums written related to improved signings on renewals and increased access to more original programs than in the prior year.

The Property Catastrophe category has remained flat as compared to the prior year due to the reduction in rates as discussed above. As rates have reduced and the market has become more competitive we have continued to exercise our strict underwriting discipline and have not renewed some programs.

The Other Specialty category continues to strengthen as compared to the prior year, partly due to increased market penetration resulting mainly from our ability to capitalize on market opportunities and, we believe, due to the developing reputation of our underwriting and risk management skills. This category has also increased due to the small but growing level of casualty business. As previously stated, we expect to write a larger amount of casualty reinsurance in 2004 as compared to 2003 due to improving terms and conditions of casualty reinsurance contracts. For the six months ended June 30, 2004 and 2003, casualty accounted for approximately 7.3% and 2.3% of gross premiums written, respectively, and we estimate that it will account for between 5% and 10% of our gross premiums written by the end of 2004. The Other Specialty category is expected to experience the most growth during 2004, primarily from an increase in casualty writings, although the growth in this category is expected to be less than the growth seen from 2002 to 2003. We also expect to write a modestly increased level of sabotage and terrorism business during the remainder of 2004 as we have added a dedicated underwriter to focus on this class.

The proportion of Property Catastrophe gross premiums written as a percentage of total gross premiums written is higher than the Property Specialty class during the six months ended June 30, 2004 because a proportionally higher volume of Property Catastrophe business is traditionally written during the first six months of the year. 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 and Property Catastrophe categories will continue to account for the largest portion of gross premiums written.

Reinsurance premiums ceded for the six months ended June 30, 2004 and 2003 were $64.1 million and $41.7 million, respectively. For the six months ended June 30, 2003, approximately 38% of reinsurance premiums ceded related to QQS business as opposed to the six months ended June 30, 2004, where virtually all of the reinsurance premiums ceded related to retrocessional protection purchased on our own account and inuring reinsurance as part of our reinsurance arrangements with certain ceding companies. As we have not written any QQS business in the 2004 underwriting year, we do not expect to record a material amount of reinsurance premiums ceded in 2004 related to this business. In 2004 we have continued our limited reinsurance purchasing policy protecting ourselves against large risk losses on our direct and facultative book and small to medium-size catastrophes on our overall property writings. We may also purchase reinsurance protection for our casualty book. For the whole of 2004 we expect that reinsurance premiums ceded will rise modestly as compared to 2003 but are expected to be less than 10% of gross premiums written.

Net premiums earned for the six months ended June 30, 2004 and 2003 were $384.4 million and $359.0 million, respectively. Approximately 57.6% and 50.0% of net premiums earned during the six months ended June 30, 2004 and 2003, respectively, relates to prior underwriting years and the remainder to business written in the respective underwriting year.

Gross premiums written for the majority of our lines of business has increased during the first six months of 2004 over 2003 and is expected to continue to marginally increase during the remainder of 2004. This increase results in a gross earned premium to written premium ratio of 75.9% for the six months ended June 30, 2004, compared to 66.1% for the same period in 2003. In addition, we continue to write a minority of our business on a risks attaching basis, for which premiums are generally earned over a longer period. We

expect the earned premium to written premium ratio in 2004 to continue to rise modestly from 2003 as the growth rate of gross premiums written slows.

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

Loss and loss adjustment expenses was $86.4 million and $77.8 million for the six months ended June 30, 2004 and 2003, respectively. Reinsurance recoveries of approximately $(0.5) million and $(3.8) million were netted against loss and loss adjustment expenses for the six months ended June 30, 2004 and 2003, respectively. Based on additional information received from the QQS syndicates indicating a lower level of ultimate loss ratio projections, we reduced our estimated recovery ratio on reinsurance purchased by the QQS syndicates for both the 2002 and 2003 underwriting years, which resulted in the negative reinsurance recovery amount for the first six months of each year. We paid net losses of $25.1 million and $17.0 million for the six months ended June 30, 2004 and 2003, respectively.

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


(1)	The overall gross loss ratio for the six months ended June 30, 2004 was 20.8%.

(2)	The overall gross loss ratio for the six months ended June 30, 2003 was 19.7%.

No major catastrophic events impacted our Property Catastrophe book in the six months ended June 30, 2004. Lower than expected development on prior events, including a reduction of $1.4 million in reported losses for the August 2002 European floods, resulted in a reported loss ratio of only 3.0% for Property Catastrophe for the first six months of 2004. The June 2003 Property Catastrophe loss ratio was similarly low due to the low level of catastrophe activity in the first six months of 2003. The Property Specialty class continues to have low levels of reported losses, and the 2004 loss ratio is just slightly higher than 2003. The 2004 Other Specialty loss ratio is higher than in 2003 primarily due to a higher percentage of longer-tail casualty business included in the Other Specialty category this year as compared to last year. The Qualifying Quota Share loss ratio for the first six months of 2004 is lower than the loss ratio for the first six months of 2003 as the QQS syndicates have lowered their ultimate loss ratio projections for both the 2002 and the 2003 underwriting years. All of these factors have resulted in the overall net loss ratio of 22.5% for the six months ended June 30, 2004, compared to the overall net loss ratio for the six months ended June 30, 2003 of 21.7%.

The six months ended June 30, 2004 and 2003 included approximately $57.6 million and $32.5 million, respectively, of favorable development of net losses from prior years. This favorable prior year development for

the six months ended June 30, 2004 and 2003 benefited the net loss ratio in the period by approximately 15.0% and 9.0%, respectively.

The favorable development during the six months ended June 30, 2004 of losses incurred during prior years primarily resulted from the following:


	•	In the Property Specialty category, our net estimated ultimate losses for prior years decreased by $38.5 million during the first six months of 2004. The majority of the decrease was due to the fact that reported losses for this category continue to be lower than expected based on our development patterns.

	•	In the Property Catastrophe category, our estimate of net losses for prior years decreased by $7.4 million during the first half of 2004. The decrease was a result of claim development on prior events being less than expected based on our loss development patterns.

	•	There continue to be very few reported claims in our Other Specialty category, and the development of the reported losses during the first six months of 2004 was much less than expected. The low level of loss development, combined with the increasing weight placed on our actual experience in selecting a loss ratio resulted in a reduction in ultimate losses of $9.2 million for prior years.

	•	In the QQS category, based on additional information provided by ceding companies, we reduced our expected gross loss ratio for prior years. This resulted in a reduction of $4.6 million in estimated gross ultimate loss and loss adjustment expenses for the first six months of 2004. The reduction was due to downward revisions in the loss ratio projections provided by the syndicates. Offsetting some of the change in gross losses however, was a reduction in our estimated recovery ratio on reinsurance purchased by the QQS syndicates. The combined effect of these adjustments was a $2.5 million decrease in net losses related to prior years.

Other than the matters described above, we did not make any significant changes in the assumptions used in our loss reserving process during the six months ended June 30, 2004. 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 June 30, 2004 we estimated our gross and net reserves for loss and loss adjustment expenses using the methodology as outlined in our Summary of Critical Accounting Policies later in this section.

Management has determined that the best estimate for gross loss and loss adjustment expense reserves at June 30, 2004 and 2003 was $309.8 million and $203.5 million, respectively.

Management has determined that the best estimate for net loss and loss adjustment expense reserves at June 30, 2004 and 2003 was $303.3 million and $191.3 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):

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 our policies are characterized by high severity and low frequency. In addition, as a broker market reinsurer, we must rely on loss information reported to such brokers by primary insurers who must estimate their own losses at the policy level, often based on incomplete and changing information. It is conceivable that in view of the high attachment points of most of our business that there could be no increase in the reserve for losses already incurred at June 30, 2004, and in addition that there may be no further losses reported. Therefore, the IBNR element of the above reserve ranges could turn out to be minimal. By contrast, a minimal amount of new loss advices could cause our ultimate incurred losses to significantly exceed the high end of the reserve ranges. Additionally, the reporting lag associated with our proportional business, including the QQS contracts, further increases the uncertainty of our ultimate loss estimates.

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 and payment of claims in foreign currencies. The small foreign exchange loss in the first six months of 2004 is primarily due to the strengthening of the U.S. dollar resulting in losses on translation arising out of receipts of non-U.S. dollar premium installments. Our premiums receivable and liabilities for losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign exchange rates and may affect our financial results in the future.

Acquisition costs and general and administrative expenses were $108.1 million and $94.5 million for the six months ended June 30, 2004 and 2003, respectively, representing expense ratios of 28.1% and 26.3%, respectively.

Profit commission expensed was $7.9 million and $11.1 million for the six months ended June 30, 2004 and 2003, respectively. The accrual for profit commission has declined as compared to the same period in the prior year mainly due to the fact that a large portion of the cumulative accrual relates to the QQS business and the majority of profit commission related to this business would have been expensed in 2003. The expense ratio for the six months ended June 30, 2004 and 2003 would have been 26.1% and 23.2%, respectively, excluding the effect of profit commission.

For the six months ended June 30, 2004 and 2003, acquisition costs incurred were $79.6 million and $74.8 million, respectively, which were principally due to brokerage commissions on our insurance and reinsurance contracts of $42.6 million and $42.0 million respectively, as well as commissions paid to ceding insurers and other costs of $37.0 million and $32.8 million, respectively.

Acquisition costs, excluding profit commission as a percentage of gross premiums earned, were 17.4% and 17.2% for the six months ended June 30, 2004 and 2003, respectively. The 2004 ratio is fairly similar to the 2003 ratio as during 2003 QQS gross premiums written contributed to a higher ratio and during 2004 we have written a higher proportion of proportional contracts which have higher acquisition costs, and we have also

written a small number of large excess of loss contracts with higher than average commission levels. For the remainder of 2004 the acquisition cost ratio, excluding profit commissions, may vary due to the mix of business written and estimated loss experience.

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

The increase in general and administrative expenses between the first six months of 2004 and the same period in 2003 partially relates to an increase in fixed expenses consisting of increased employment costs, premises and office expenses due to the occupation of additional office space, consistent with the increase in staff numbers. We may be required to employ additional resources and occupy additional office space as our business grows.

For the six months ended June 30, 2004, the performance unit plan expense included in current and deferred incentive compensation was higher than the same period in 2003 as a result of a combination of factors. The factors that affect the calculation of the expense in 2004 consist of an increase in the harvest ratio used in calculating the expense for the 2002-2004 and the 2003-2005 periods, as well as an increase in our share price from June 30, 2003 to June 30, 2004. In addition, the 2004 period includes an additional accrual for the 2004-2006 performance period. As our results evolve, we may need to increase or decrease our harvest ratio used in the expense calculation which could either reduce or increase the PUP expense.

The fair value of stock options expense has decreased compared to the prior period as a portion of the outstanding stock options has become fully vested and expensed.

Net investment income for the six months ended June 30, 2004 and 2003 was $31.5 million and $23.4 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 $7.9 million and $6.7 million, respectively, and investment management and custodian fees of $1.0 million and $1.4 million, respectively, for the six months ended June 30, 2004 and 2003. Investment management fees are paid to White Mountains Advisors LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, one of our major shareholders. Management believes that the fees charged were consistent with those that would have been charged by a non-related party. The investment management and custodian fees have decreased as compared to the same period last year as the investment management fee structure has been revised, resulting in a lower expense for our current portfolio mix. The fees could increase during the remainder of 2004 as our mix of investments changes.

Based on the weighted average monthly investments held, and including net unrealized gains (losses) of $(21.4) million and $4.8 million for the six months ended June 30, 2004 and 2003, respectively, the total investment return was 0.5%, and 2.3%, respectively. Net unrealized gains at June 30, 2004 included $4.5 million related to our investment in Aspen Insurance Holdings Limited. In 2004, 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 six months ended June 30, 2004 and 2003. We believe that the gross unrealized losses relating to our fixed maturity investments at June 30, 2004 resulted primarily from increases in market interest rates from the dates that certain investments within that portfolio were acquired as opposed to fundamental

changes in the credit quality of the issuers of such securities. Therefore, these decreases in value are viewed as being temporary because we have the intent and ability to retain such investments for a period of time sufficient to allow for any anticipated recovery in market value.

Fees for the letter of credit facilities relate to the Letters of Credit that we have in place as detailed in the Capital Resources section.

We paid interest expense for the six months ended June 30, 2004 of $8.1 million related to the Senior Notes. We paid interest expense for the six months ended June 30, 2003 of $2.0 million related to the term-loan facility and revolving loan facility only and incurred interest expense during this period of $1.8 million at an average rate of 2.33%.

Net realized gains (losses) on investments for the six months ended June 30, 2004 and 2003 were $3.2 million and $9.3 million, respectively, which were due to net gains (losses) realized from the sale of fixed maturity and equity investments.

Comprehensive income for the six months ended June 30, 2004 and 2003 was $194.6 million and $219.7 million respectively, which includes the $216.0 million and $216.3 million of net income described above, and $(21.4) million, $4.8 million, respectively, of net change in unrealized gains (losses) on investments and currency translation adjustments and $nil and $1.5 million of net change in unrealized losses on a hedging transaction for 2004 and 2003, respectively.

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. There are restrictions on the payment of dividends from Montpelier Re to the Company, which are described in more detail below. We have initiated a regular dividend program of $0.34 per share per quarter and declared a dividend to shareholders of record at June 30, 2004. We expect to continue the payment of dividends in future but we cannot assure you that such payments will continue. Any determination to pay any future 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.

Our ability to underwrite business is dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In the normal course of business, we evaluate our capital needs to support the volume of business written in order to maintain our claims paying and financial strength ratings. We regularly provide financial information to rating agencies to both maintain and enhance existing ratings.

Our shareholders’ equity at June 30, 2004 was $1,764.3 million, of which $619.3 million was retained earnings. Our capital base has grown since December 31, 2003 primarily as a result of an increase in net premiums earned and the low level of losses incurred. Our contractual obligations and commitments are set out below as at June 30, 2004.

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% of their principal amount. The net proceeds were used to repay a 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. Unless previously redeemed, the Senior Notes will mature on August 15, 2013. 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.

We may issue additional debt or equity as circumstances warrant. In this regard, on February 12, 2004 we filed a universal shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission for the potential future sale of up to $500.0 million of debt, trust preferred and/or equity securities. The registration statement has been declared effective and should provide us with significant flexibility with respect to our access to the public capital markets. Also included in the registration statement were 31,665,460 common shares which may be offered for sale by our shareholders, and from the sale of which we will receive no proceeds. We cannot assure you that additional financing under the universal shelf registration statement or elsewhere will be available at terms acceptable to us.

Under the Form S-3 discussed above, on March 17, 2004, and April 6, 2004, different shareholders of the Company completed two secondary offerings of 4,785,540 and 4,000,000 common shares, respectively. Certain original investors sold an average of 25.0% and 31.8% of their holdings, respectively. The secondary offerings did not have any impact on common shares outstanding. The Company did not receive any proceeds from the secondary offerings but was required to pay offering expenses of approximately $0.5 million for each secondary offering, which are included in general and administrative expenses for the six months ended June 30, 2004.

On May 26, 2004 our Board of Directors approved a plan to repurchase up to $150.0 million of our common shares from time to time depending on market conditions during a period up to 24 months. On June 2, 2004, we repurchased 1,263,865 common shares at $34.50 per common share. The closing market price per share on May 28, 2004 was $34.88. The purchase price totaled $43.6 million and was funded using existing cash on hand. See Part II, Item 2 below.

Our Chairman, President and Chief Executive Officer has adopted a written plan in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934 for the purpose of the exercise of options and the sale of limited amounts of our common shares owned by him. Pursuant to this plan, 122,500 options were exercised during the six months ended June 30, 2004 at the exercise price of $16.67, resulting in an increase in common shares by their par amount and an increase in additional paid-in capital of $2,042. Subsequent to June 30, 2004, an additional 127,500 options were exercised at the exercise price of $16.67. The plan will cover the

possible exercise of 600,000 options and share sales over a 12 month period commencing March 3, 2004, subject to market conditions and the terms of the plan.

Montpelier Re entered into a Memorandum of Intent and Understanding (“MIU”) on December 17, 2003 to develop a construction project (the “Project”) to build a commercial building with a mixture of office, residential and retail use. At the time of entry into the MIU, Montpelier Re intended to finalize the related Construction Loan Agreement and Agreement for Lease during 2004 and obtain consent to hold 20% of the shares of the company which would undertake the Project and own the building. Under the MIU, the terms of the Construction Loan would provide that Montpelier Re loan $19.0 million to the landlord for the costs of the Project during the period of construction, commencing upon finalization of all agreements. Subsequent to the Project’s completion, which is estimated to be thirty months from the commencement of construction, Montpelier Re intended to enter into a 22 year long-term lease for the major portion of the Project, pursuant to which it would be required to pay rent in the amount of $300 per annum upon finalization of all agreements and thereafter during the construction period and $400 per annum upon finalization of the Project and occupation of the building. Construction commenced during the first quarter of 2004, and at June 30, 2004, no amounts were due or payable by Montpelier Re. During the second quarter of 2004, Montpelier Re initiated discussions with the prospective landlord regarding the possibility of converting the loan and lease arrangement contemplated by the MIU to a straight lease arrangement. These discussions are continuing, and no definitive agreement has been reached with respect to amending the MIU or entering into an alternative arrangement. The terms are subject to final approval by the Board of Directors.

The table above excludes estimated future cash flows for loss and loss adjustment expenses as loss and loss adjustment expense reserves represent a best estimate of obligations to pay policyholders but do not have contractual payout terms and, in addition, the amount and timing of the cash flows are uncertain. These estimated obligations will be funded through existing cash and investments.

In the normal course of business, we provide security to reinsureds as required under contract provisions. Such security takes the form of a letter of credit issued by a bank at our request. In order for us to write Lloyd’s Qualifying Quota Share business, we must provide a letter of credit in favor of The Society and Council of Lloyd’s (“Lloyd’s”) in accordance with Lloyd’s rules. Effective May 27, 2004 the Company entered into a three-year Amended and Restated Letter of Credit Reimbursement and Pledge Agreement with Banc of America Securities LLC 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. The facility also incorporates a $50.0 million revolving line of credit for general corporate purposes. This agreement replaces the Letter of Credit Reimbursement and Pledge Agreement with Fleet National Bank discussed below. Letters of credit issued under this facility at June 30, 2004 were $261.7 million and are secured by cash and investments of approximately $287.8 million. We expect this letter of credit facility to be sufficient to support Montpelier Re’s estimated obligations for the next 12 months. The agreement covering our letter of credit facility contains covenants that limit our ability, among other things, to borrow money, make particular types of investments or other restricted payments, sell assets, merge or consolidate. This agreement also requires us to maintain specific financial ratios. If we fail to comply with these covenants or meet these financial ratios, the lenders under our credit facility could declare a default and withdraw their support of the facility. For the six month period ended June 30, 2004 we were in compliance with all covenants.

Effective June 20, 2003, we entered into a 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. This facility has been superseded by the agreement described above.

We previously made arrangements with Barclays 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. This facility was cancelled on January 31, 2004.

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 six months ended June 30, 2004 and 2003, 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.

We are not party to any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party that management believes is reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

The table below shows the aggregate amounts of investments available for sale, other 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 at June 30, 2004 comprises U.S. government and agency bonds (70.0%), investment grade corporate debt securities (24.0%) and mortgage-backed and asset-backed securities (6.0%). All of the fixed maturity investments currently held by us were publicly traded at June 30, 2004. Based on the weighted average monthly investments held, and including net unrealized gains, our total return on fixed maturity investments for the six months ended June 30, 2004 was 0.3%. This return was partially due to the unrealized gain on our investment in Aspen at June 30, 2004 of $4.5 million. The average duration of our invested asset portfolio was 2.2 years and the average rating of the portfolio was AA+ at June 30, 2004. If the right conditions arise in 2004, we may deploy a further limited amount of capital for strategic investments or investment classes other than fixed income.

In March 2004, we committed to invest an aggregate of $20.0 million as part of an investor group that will acquire the life and investments business of Safeco Corporation for $1.35 billion, subject to adjustments. We funded the $20.0 million commitment on July 27, 2004. The transaction is expected to close during the third quarter of 2004 and is subject to regulatory approvals and other customary closing conditions.

For most insurance and reinsurance companies, the most significant judgment made by management is the estimation of the loss and loss adjustment expense reserves. Due to the short-tail nature of our business, generally we expect that the majority of our losses will be paid relatively quickly. However, this can be affected by such factors as the event causing the loss, the location of the loss, and whether our losses are from policies with insurers or reinsurers. Accordingly, it is necessary to estimate, as part of the loss and loss adjustment expense reserve, an amount for IBNR. Net loss and loss adjustment expense reserves at June 30, 2004 was $303.3 million. Management’s best estimate of a range of likely outcomes around this estimate is between $355.6 million and $251.0 million.

Significant assumptions are required to be made when establishing loss reserves. For additional information concerning loss and loss adjustment expenses see the Summary of Critical Accounting Policies section included in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003.

In the six months ended June 30, 2004, we generated an operating net cash inflow of $296.5 million, primarily relating to premiums net of acquisition costs received by Montpelier Re. We paid losses of $25.1 million during the six months ended June 30, 2004. We invested a net amount of $161.8 million during the six months ended June 30, 2004, and had a cash balance of $181.8 million at June 30, 2004. The increase in liquidity has resulted from net premiums received combined with a low level of paid claims as this has been a six month period with a relatively low level of catastrophes.

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

Our sources of funds primarily consist of the receipt of cash dividends from Montpelier Re and their primary sources of funds consist of net premiums received, investment income and proceeds from sales and maturities 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, to pay dividends, to pay for any premiums retroceded and for future authorized share repurchases. In the first six months of 2004 we purchased reinsurance protecting ourselves against large risk losses on our direct and facultative book and small to medium-size catastrophes on our overall property writings. We may also purchase reinsurance protection for our casualty book. For the whole of 2004 we expect that our purchase of reinsurance will rise modestly as compared to 2003 but is expected to be less than 10% of gross premiums written.

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 the majority of cash flows not required for operating purposes but have also paid out dividends and repurchased common shares during June 2004 as discussed above.

We have written certain business that 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. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years.

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 estimated fair value of fixed maturity, equity, other investments and our cash and cash equivalents balance was $2,449.4 million as of June 30, 2004, compared to $2,237.7 million at December 31, 2003. The primary cause of this increase was the receipt of $326.2 million in premiums net of acquisition costs, net investment income of $31.6 million and net realized gains on investments of $3.2 million for the six months ended June 30, 2004, offset by paid claims, the payment of general and administrative expenses, the payment of dividends and the repurchase of some of our common shares.

For the period from inception until June 30, 2004, we have had sufficient cash flow from operations to meet our liquidity requirements. We have generated cash flows from operations since our inception significantly in excess of our operating commitments. To the extent that capital is not utilized in our reinsurance operations we will consider using such capital to invest in new opportunities or consider returning additional capital to shareholders in the form of dividends or share repurchases under certain circumstances.

See also the discussion of the Company’s Critical Accounting Policies included in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003.

Premiums. Premium income is primarily earned ratably over the term of the insurance policy. Premiums derived from pro-rata reinsurance policies and policies written on a risks attaching basis are generally earned over a 24 month period. 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. For the majority of excess of loss contracts, the 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, based on reports of actual premium by the ceding companies, or revisions in estimates, are recorded in the period they are determined.

On pro-rata contracts and certain excess of loss contracts where the deposit premium is not specified in the contract, 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 are 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.

Performance Unit Plan (the “PUP”). The PUP is the Company’s primary executive long-term incentive scheme which is described in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003.

In accordance with the Critical Accounting Policy described in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003, at the end of the sixth quarter and every subsequent quarter, we reassess the projected results for each three year performance period and adjust the accrued PUP liability as necessary.

We recalculate the liability under the PUP as our financial results evolve and the share price changes, and reflect such adjustments in the income statement in the period in which they are determined.

A total of 936,000 performance units were authorized and issued under the PUP at June 30, 2004 (or up to 1,872,000 common shares should the maximum harvest of 200% of units apply) covering the three performance periods, 2002-2004, 2003-2005 and 2004-2006.

For the 2002-2004 cycle, the target combined ratio is 70% for a 100% harvest ratio. To date we have experienced a better than 70% combined ratio for this three-year performance period. Taking into account our results to date as well as the estimated combined ratio for the remainder of the 2004 period, we have adjusted the harvest ratio for this performance period from 150% at March 31, 2004 to 160% at June 30, 2004. This resulted in an increase in the PUP liability and PUP expense during the second quarter of 2004.

For the 2003-2005 cycle, the performance target for a 100% harvest ratio is the achievement of a combined ratio of 72% over the period combined with the achievement of an annual total return to shareholders of 18% as measured over the period. To date we have experienced a better than 72% combined ratio for this three-year performance period. Taking into account our results to date as well as the estimated combined ratio for the remainder of the 2004 and 2005 periods, we have adjusted the harvest ratio for this performance period from 100% at March 31, 2004 to 135% at June 30, 2004. This resulted in an increase in the PUP liability and PUP expense during the second quarter of 2004.

For the 2004-2006 cycle, the performance target for a 100% harvest ratio is the achievement of a combined ratio of 72% over the period combined with the achievement of an annual total return to shareholders of 18% as measured over the period. Consistent with our accounting policy we will reassess the harvest ratio used in the calculation of the PUP liability at June 30, 2005 and each quarter thereafter.

As at June 30, 2004, the following table summarizes the impact of potential share price changes and potential adjustments to the harvest ratio used in the liability calculation on the amount of liability and expense recorded for each of the three-year cycles ($ in millions):

An estimated 5% change in the harvest ratio is approximately equivalent to a 1% change in the estimated combined ratio for the respective performance period.

Depending on our results in the remainder of 2004, the harvest ratio may either be increased or decreased for the 2002-2004 or 2003-2005 performance cycles which would affect the PUP liability and PUP expense in 2004. Final determination of actual performance and the amount of payment is at the sole discretion of the Compensation and Nominating Committee of the Board of Directors.

We write a portion of our business and receive premiums in currencies other than U.S. dollars and may maintain a small portion of our investment portfolio in investments denominated in currencies other than U.S. dollars. We may experience foreign 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 do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect interest rates.

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 currently 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 June 30, 2004, the impact on our portfolio of fixed maturity investments from an immediate 100 basis point increase in market interest rates would have resulted in an estimated decrease in market value of about 2.2% or approximately $46.8 million and the impact on our portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in market value of 2.2% or approximately $46.8 million.

As at June 30, 2004, we held $126.7 million, or 5.2% of our total invested assets in mortgage-related securities. These assets are exposed to prepayment risk, which occurs when holders of individual mortgages increase the frequency with which they prepay the outstanding principal before the maturity date and refinance at a lower interest rate cost. Given the proportion that these securities comprise of the overall portfolio, and the current low interest rate environment, prepayment risk is not considered significant at this time.

Foreign Currency Risk. A significant portion of our business is insuring or reinsuring risks in currencies other than the U.S. dollar. Accordingly, we are exposed to fluctuations in the rates of these currencies. 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 June 30, 2004 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.

Our premiums receivable and liabilities for losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign exchange rates and may affect our financial results in the future.

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 June 30, 2004, all fixed maturity investments that we held were investment grade.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures pursuant to Rule 13a-l5 under the Securities Exchange Act of 1934 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be disclosed in this quarterly report has been made known to them in a timely fashion. There have been no changes in internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls or its internal controls will prevent all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. As a result of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

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.

Below is a summary of stock repurchases for the six months ended June 30, 2004 (in thousands, except average price per share). The Company has authorized a share repurchase program of $150 million. See Note 6 to the Consolidated Financial Statements for information regarding the Company’s stock repurchase plan.

(b) Proxies were solicited by our management pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; there was no solicitation of opposition to our nominees listed in the proxy statement; the nominees for Class B Directors were re-elected for three-year terms as described in item (c)(1) below.


	(1) Proposal for Election of Class B Directors

	Our Bye-laws provide for a classified Board of Directors, divided into three classes of approximately equal size. At the 2004 Annual General Meeting, the Shareholders elected four of our Directors as Class B Directors, who shall serve until our 2007 Annual General Meeting.

The following is a list of the continuing directors in Class A (whose terms expire in 2006) and Class C (whose terms expire in 2005):


	(2) Proposal Regarding Election of Designated Company Directors for Montpelier Reinsurance Ltd., a wholly-owned reinsurance company organized under the laws of Bermuda (“Montpelier Re”).

Bye-law 85 of the Company provides that the Board of Directors for Montpelier Re shall consist of persons who first have been appointed as designated company directors by a resolution at the Annual General Meeting of the Shareholders of the Company. The Board of the Company must then vote all shares of Montpelier Re owned by the Company to elect such designated company directors as Montpelier Re directors. At the 2004 Annual General Meeting, the Shareholders elected three nominees as designated company directors who will serve as Montpelier Re directors.


	(3) Proposals Regarding Approval of the Montpelier Long-Term Incentive Plan

	Our Shareholders voted to approve the Montpelier Long-Term Incentive Plan (the “LTIP”) as approved by our Board of Directors on February 27, 2004.


	(4) Proposal Regarding Appointment of an Independent Auditor

	Our Shareholders voted to approve the appointment of PricewaterhouseCoopers as our independent auditors for the 2004 fiscal year, and have authorized the Company’s Board of Directors to set their remuneration.

This Form 10-Q contains, and Montpelier Re Holdings Ltd. (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 and uncertainties that could cause the actual results, future dividends or future repurchases to differ include, but are not necessarily limited to: market conditions affecting Montpelier’s common share price; our short operating and trading history; our dependence on principal employees; the cyclical nature of the reinsurance business; the levels of new and renewal business achieved; opportunities to increase writings in our core property and specialty reinsurance and insurance lines of business and in specific areas of the casualty reinsurance market; the estimates reported by syndicates under existing QQS contracts; the inherent uncertainties of establishing reserves for loss and loss adjustment expenses, particularly on longer-tail classes of business such as casualty; the possibility of severe or unanticipated losses from natural or man-made catastrophes; the impact of terrorist activities on the economy; 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.


	(1) Current Report on Form 8-K filed on April 1, 2004, under Item 9 thereof, announcing the Company’s agreement to invest an aggregate of $20 million as part of an investor group that will acquire the life and investments business of Safeco Corporation.

	(2) Current Report on Form 8-K filed on April 19, 2004, under Items 5 and 7 thereof, relating to the filing of the Underwriting Agreement in connection with the public offering of 4,000,000 of the Company’s common shares.

	(3) Current Report on Form 8-K filed on April 28, 2004, under Items 7, 9 and 12 thereof, relating to the Company’s press release announcing first quarter 2004 results.

	(4) Current Report on Form 8-K filed on May 18, 2004, under Items 7 and 9 thereof, relating to a proposal to amend the LTIP and to recommend to the Company’s Compensation and Nominating Committee and Board of Directors the adoption of the same.

	(5) Current Report on Form 8-K filed on May 26, 2004, under Items 5 and 7 thereof, relating to the Company’s press release announcing the plan to repurchase up to $150 million of the Company’s common shares.

	(6) Current Report on Form 8-K filed on June 1, 2004, under Items 5 and 7 thereof, relating to the Company’s press release announcing the Company’s agreement to repurchase 1,263,865 of its common shares owned by Vestar AIV Holdings and related entities.

	(7) Current Report on Form 8-K filed on June 2, 2004, under Items 5 and 7 thereof, relating to the filing of the Exhibit, Amended and Restated Letter of Credit Reimbursement and Pledge Agreement.


	(8) Current Report on Form 8-K filed on June 4, 2004, under Items 7 and 9 thereof, announcing the Company’s Investor Day and filing of the Exhibit, Presentation to be made by the Registrant on June 4, 2004 in New York City, New York.

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:	Chairman, 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 June 30, 2004

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

		For the transition period from to


Bermuda		Not Applicable
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
Mintflower Place 8 Par-La-Ville Road Hamilton HM 08 Bermuda (Address of Principal Executive Offices)


PART I FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as at June 30, 2004 (Unaudited) and December 31, 2003 (Audited)	1
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited)	2
	Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2004 and 2003 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II OTHER INFORMATION		38
Item 1.	Legal Proceedings	38
Item 2.	Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 5.	Other Information	40
Item 6.	Exhibits and Reports on Form 8-K	41
SIGNATURES		44
CEO AND CFO CERTIFICATION
CEO AND CFO CERTIFICATION


		As at		As at
		June 30, 2004		December 31, 2003

		(Unaudited)		(Audited)
ASSETS
Fixed maturities, at fair value (amortized cost: 2004 — $2,142,184; 2003 — $1,951,875)		$	2,137,691	$	1,976,165
Equity investments, at fair value (cost: 2004 — $32,356; 2003 — $31,811)			41,014		37,564

Total investments available for sale			2,178,705		2,013,729
Other investments			88,831		84,354

Total investments			2,267,536		2,098,083
Cash and cash equivalents, at fair value			181,846		139,587
Unearned premium ceded			45,860		9,910
Premiums receivable			331,572		207,901
Funds withheld			5,930		3,724
Deferred acquisition costs			76,595		59,817
Reinsurance recoverable			6,468		7,727
Accrued investment income			22,058		20,666
Other assets			5,818		5,174

	Total Assets	$	2,943,683	$	2,552,589


LIABILITIES
Loss and loss adjustment expense reserves			309,800		249,791
Unearned premium			449,735		318,673
Reinsurance balances payable			81,329		24,935
Investment trades pending			34,147		376
Debt			248,903		248,843
Accounts payable, accrued expenses and other liabilities			31,834		28,224
Dividends payable			23,654		24,042

	Total Liabilities	$	1,179,402	$	894,884


SHAREHOLDERS’ EQUITY
Common voting shares: 1/6 cent par value; authorized 1,200,000,000 shares; issued and outstanding at June 30, 2004; 62,251,232 shares (2003 — 63,392,597)			104		106
Additional paid-in capital			1,112,489		1,130,305
Accumulated other comprehensive income			32,343		53,731
Retained earnings			619,345		473,563

	Total Shareholders’ Equity		1,764,281		1,657,705

	Total Liabilities and Shareholders’ Equity	$	2,943,683	$	2,552,589



			For the Three Months						For the Six Months
			Ended June 30,						Ended June 30,

			2004			2003			2004			2003


			(Unaudited)
REVENUES
	Gross premiums written		$	210,418		$	194,082		$	543,643		$	560,645
	Reinsurance premiums ceded			(28,218	)		(7,388	)		(64,073	)		(41,655	)

	Net premiums written			182,200			186,694			479,570			518,990
	Change in net unearned premiums			11,433			(12,303	)		(95,113	)		(159,944	)

	Net premiums earned			193,633			174,391			384,457			359,046
	Net investment income			16,263			11,715			31,545			23,399
	Net realized gains on investments			1,436			4,650			3,172			9,331
	Net foreign exchange losses			(1,033	)		(1,539	)		(24	)		(180	)

	Total revenues			210,299			189,217			419,150			391,596
EXPENSES
	Loss and loss adjustment expenses			40,172			30,157			86,357			77,847
	Acquisition costs			43,862			33,851			79,566			74,849
	General and administrative expenses			14,816			11,016			28,527			19,686
	Interest expense			4,441			1,716			8,611			2,895

	Total expenses			103,291			76,740			203,061			175,277

Income before taxes				107,008			112,477			216,089			216,319
Income tax expense (recovery)				25			(2	)		63			(1	)

NET INCOME			$	106,983		$	112,479		$	216,026		$	216,320

COMPREHENSIVE INCOME
	Net income		$	106,983		$	112,479		$	216,026		$	216,320
	Other comprehensive income (loss)			(47,239	)		4,224			(21,388	)		3,358

	Comprehensive income		$	59,744		$	116,703		$	194,638		$	219,678

Per share data
Weighted average number of common and common equivalent shares outstanding:
		Basic		63,078,809			63,392,597			63,244,036			63,392,597
		Diluted		67,942,191			67,777,953			68,470,120			66,810,878
	Basic earnings per common share		$	1.70		$	1.77		$	3.42		$	3.41

	Diluted earnings per common share		$	1.57		$	1.66		$	3.16		$	3.24



	Three Months Ended June 30,

	2004		2003

Basic earnings per common share:
Net income available to common shareholders	$	106,983	$	112,479
Weighted average common shares outstanding — Basic		63,078,809		63,392,597

Basic earnings per common share	$	1.70	$	1.77

Diluted earnings per common share:
Net income available to common shareholders	$	106,983	$	112,479
Weighted average common shares outstanding — Basic		63,078,809		63,392,597
Dilutive effect of warrants		3,780,365		3,590,734
Dilutive effect of share options		1,083,017		794,622

Weighted average common and common equivalent shares outstanding — Diluted		67,942,191		67,777,953

Diluted earnings per common and common equivalent share	$	1.57	$	1.66

Dividends per common share	$	0.34	$	—



	Six Months Ended June 30,

	2004		2003

Basic earnings per common share:
Net income available to common shareholders	$	216,026	$	216,320
Weighted average common shares outstanding — Basic		63,244,036		63,392,597

Basic earnings per common share	$	3.42	$	3.41

Diluted earnings per common share:
Net income available to common shareholders	$	216,026	$	216,320
Weighted average common shares outstanding — Basic		63,244,036		63,392,597
Dilutive effect of warrants		4,012,803		2,899,244
Dilutive effect of share options		1,213,281		519,037

Weighted average common and common equivalent shares outstanding — Diluted		68,470,120		66,810,878

Diluted earnings per common and common equivalent share	$	3.16	$	3.24

Dividends per common share	$	0.68	$	—


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



	Three Months
	Ended June 30,

	2004			2003

Net premiums earned	$	193.6		$	174.3
Net investment income		16.2			11.7
Net realized gains on investments		1.5			4.6
Net foreign exchange losses		(1.0	)		(1.5	)
Loss and loss adjustment expenses		(40.2	)		(30.1	)
Acquisition costs		(43.9	)		(33.8	)
General and administrative expenses		(14.8	)		(11.0	)
Interest expense		(4.4	)		(1.7	)

Net income	$	107.0		$	112.5
Basic earnings per common share	$	1.70		$	1.77

Diluted earnings per common share	$	1.57		$	1.66



	Three Months
	Ended
	June 30,

	2004			2003

Loss ratio		20.7	%		17.3	%
Expense ratio		30.3	%		25.7	%

Combined ratio		51.0	%		43.0	%



	Net Loss Ratios
	Three Months
	Ended June 30,

	2004(1)			2003(2)

Property Specialty		29.3	%		18.6	%
Property Catastrophe		0.4			6.0
Other Specialty		38.5			17.9
Qualifying Quota Share		36.4			44.4

Overall ratio		20.7	%		17.3	%


			Change in			Change in			Paid Losses			Estimated
			Prior Years			Prior Years			During the			Ultimate
	Gross		Estimates			Estimates			Six Months			Losses for the		Gross
	Reserves at		During the			During the			Ended			2004 Year at		Reserves at
	December 31,		First Quarter			Second Quarter			June 30,			June 30,		June 30,
	2003		of 2004			of 2004			2004			2004		2004

Property Specialty	$	98.8	$	(15.1	)	$	(23.4	)	$	(4.4	)	$	73.1	$	129.0
Property Catastrophe		40.0		(3.6	)		(3.8	)		(6.4	)		11.8		38.0
Other Specialty		42.9		(4.1	)		(5.1	)		(3.8	)		42.3		72.2
Qualifying Quota Share		68.1		(1.0	)		(3.6	)		(11.3	)		18.4		70.6

Total	$	249.8	$	(23.8	)	$	(35.9	)	$	(25.9	)	$	145.6	$	309.8



	As at June 30,

	2004		2003

Book value per share(1)	$	28.34	$	23.25
Fully converted book value per share(2)	$	26.81	$	22.42



	Six Months Ended
	June 30,

	2004			2003

Net premiums earned	$	384.4		$	359.0
Net investment income		31.5			23.4
Net realized gains on investments		3.2			9.3
Net foreign exchange gains (losses)		—			(0.2	)
Loss and loss adjustment expenses		(86.4	)		(77.8	)
Acquisition costs		(79.6	)		(74.8	)
General and administrative expenses		(28.5	)		(19.7	)
Interest expense		(8.6	)		(2.9	)

Net income	$	216.0		$	216.3
Basic earnings per common share	$	3.42		$	3.41

Diluted earnings per common share	$	3.16		$	3.24


	Low End of				High End of
	the Range		Selected		the Range

Property Specialty	$	103.2	$	129.0	$	154.8
Property Catastrophe		32.3		38.0		43.7
Other Specialty		57.8		72.2		86.6
Qualifying Quota Share		63.5		70.6		77.7

Total			$	309.8


1.	Basis of Presentation and Consolidation


2.	Significant Accounting Policies


	*Premiums and related costs*


3.	Reinsurance


			Due in						Due in
			Less than		Due in		Due in		More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years


	($ in thousands)
Debt:
6.125% Senior Notes due 2013	$	250,000	$	—	$	—	$	—	$	250,000
Operating leases:		17,891		2,571		5,476		1,707		8,137
Commitment for new premises (Loan)		19,000		—		19,000		—		—

Total	$	286,891	$	2,571	$	24,476	$	1,707	$	258,137


			Increase/Decrease in PUP
	Increase/Decrease in PUP		Accrual Resulting from a
	Accrual Resulting from a		5% Increase/Decrease in
	$1 Increase/Decrease in		the Estimated Harvest
PUP Performance Period	the Share Price*		Ratio Applied**

2002-04		0.4		0.4
2003-05		0.2		0.3
2004-06		0.1		0.1


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


Item 2.	*Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities*


					Total Number of Shares		Approximate Dollar Value
					Purchased as Part of		of Shares that May Yet
	Shares		Average Price		Publicly Announced		Be Purchased Under the
	Repurchased		Per Share		Plans or Programs		Plans or Programs

May 1, 2004 through May 31, 2004		—	$	—		—	$	150,000,000
June 1, 2004 through June 30, 2004		1,263,865		34.50		1,263,865		106,396,657

Total		1,263,865	$	34.50		1,263,865	$	106,396,657


Item 4.	*Submission of Matters to a Vote of Security Holders*


Nominee	Votes For		Votes Withheld

G. Thompson Hutton		56,931,609		538,136
Kamil M. Salame		56,753,963		715,783
Raymond M. Salter		56,923,603		546,143
John F. Shettle, Jr.		56,853,954		615,792


Class A		Class C

Anthony Taylor Allan Fulkerson K. Thomas Kemp		Raymond Barrette John D. Gillespie Steven J. Gilbert William L. Spiegel


Votes For		Votes Against		Votes Withheld

	47,400,807		1,999,759		97,909


	*Cautionary Statement under “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995.*


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 June 30, 2003 (incorporated herein by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003).
	4	.3	Share Purchase Warrant, dated January 3, 2002, between the Registrant and entities affiliated with White Mountains Insurance Group (originally issued to 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 June 30, 2003 (incorporated herein by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 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 June 30, 2003 (incorporated herein by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003).
	4	.5	Senior Indenture, dated as of July 15, 2003, between the Company, as Issuer, and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-106919))
	4	.6	First Supplemental Indenture to Senior Indenture, dated as of July 30, 2003, between the Company, as Issuer, and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-106919))
	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)).