Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2004

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

For the transition period from              to             

Commission file number: 001-31468

Montpelier Re Holdings Ltd.

(Exact Name of Registrant as Specified in Its Charter)

Mintflower Place

8 Par-La-Ville Road

Hamilton HM 08

Bermuda

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code:

(441) 296-5550

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

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

As of April 30, 2004, the Registrant had 63,492,597 common voting shares outstanding, with a par value of 1/6 cent per share.

Table of Contents

MONTPELIER RE HOLDINGS LTD.

INDEX TO FORM 10-Q

Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

(Expressed in thousands of United States Dollars, except share amounts)

1

Table of Contents

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Expressed in thousands of United States Dollars, except share amounts)

2

Table of Contents

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2004 and 2003

(Expressed in thousands of United States Dollars)

3

Table of Contents

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2004 and 2003

(Expressed in thousands of United States Dollars)

4

Table of Contents

MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars,

except share amounts or as where otherwise described)

(Unaudited)

1. Basis of Presentation and Consolidation

These interim unaudited consolidated financial statements include the accounts of Montpelier Re Holdings Ltd. (the “Company”) and its wholly-owned operating subsidiary Montpelier Reinsurance Ltd. (“Montpelier Re”). Montpelier Re has two subsidiaries: Montpelier Marketing Services (UK) Limited (“MMSL”) and Montpelier Holdings (Barbados) SRL (“MHB”). MMSL provides business introduction and other support services to Montpelier Re. MHB, a Barbados registered Society with Restricted Liability, 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.

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.

2. Significant Accounting Policies

Premiums and related costs

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.

5

Table of Contents

MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Where contract terms require the reinstatement of coverage after a ceding company’s loss, the mandatory reinstatement premiums are recorded as written premiums when the loss event occurs, and are earned ratably over the remaining contract risk period.

Acquisition costs are comprised of ceding commissions, brokerage, premium taxes, profit commission 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.

3. Reinsurance

During the three months ended March 31, 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 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 $13.4 million and $6.9 million for the three months ended March 31, 2004 and 2003, respectively. Total recoveries netted against loss and loss adjustment expenses was $(0.5) million and $(0.3) million for the three months ended March 31, 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 March 31, 2004 or 2003.

4. Debt and Financing Arrangements

Senior Notes

On August 4, 2003, the Company issued $250.0 million aggregate principal amount of senior unsecured debt (the “Senior Notes”) at an issue price of $99.517. The net proceeds were used to repay the amount outstanding under the term loan facility (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 incurred $2.1 million in expenses related to the issuance of the Senior Notes, which were expensed during the year ended December 31, 2003. The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price, however, the Company has no current intention of calling the 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.

6

Table of Contents

MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company incurred interest expense for the Senior Notes for the three months ended March 31, 2004 of $3.8 million and paid interest of $8.1 million.

Term Loan Facility and 364-Day Revolver

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 three months ended March 31, 2003 of $1.0 million at an average annual interest rate of 2.59% and paid interest of $1.0 million.

Letter of Credit Facilities

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. Letters of credit are 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 June 20, 2003, the Company entered into a new Letter of Credit Reimbursement and Pledge Agreement with Fleet National Bank and a syndicate of lending institutions for the provision of a letter of credit facility in favor of Lloyd’s in an amount of up to $250.0 million, and in favor of certain U.S. ceding companies in an amount of up to $200.0 million. Simultaneously, the previously existing Pledge Agreement discussed below was superseded by the Letter of Credit Reimbursement and Pledge Agreement, and the letters of credit issued under the previous facility were then issued under the new facility agreement. Letters of credit issued under this facility at March 31, 2004 were $262.3 million and are secured by cash and investments of approximately $288.5 million.

The Company previously made arrangements with Barclay’s Bank PLC for the provision of an additional letter of credit facility in favor of certain U.S. ceding companies in an amount of up to $50.0 million. Letters of credit outstanding at March 31, 2003 under the Barclay’s facility were approximately $20.8 million and were secured by cash and investments of approximately $22.9 million. This facility was cancelled on January 31, 2004.

Previously the Company had arrangements with Fleet National Bank for the provision of a standby letter of credit in a form acceptable to Lloyd’s in an amount of up to $250.0 million, which was superseded by the Letter of Credit Reimbursement and Pledge Agreement discussed above. Letters of credit outstanding under this Fleet facility at March 31, 2003 were approximately $125.8 million, and were secured by investments of approximately $138.3 million.

7

Table of Contents

MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Related Party Transactions

As at March 31, 2004, one of the members of the Company’s Board of Directors and a member of the Company’s Compensation and Nominating Committee was also a member of the Board of Directors and Chairman of the Executive Committee of White Mountains Insurance Group, which beneficially owned 19.1% and 22.9% of the Company at March 31, 2004 and 2003, respectively. The Company’s Chief Financial Officer was also a Director of White Mountains Insurance Group up until March 31, 2004 and is a director of Amlin, one of the Company’s qualifying quota share cedents.

Up until March 31, 2004, four directors were employed by White Mountains Insurance Group. Effective March 31, 2004, two directors are employed by White Mountains Insurance Group.

The Company has engaged White Mountains Advisors LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, to provide investment advisory and management services. The 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 0.12% and 0.17% for the three months ended March 31, 2004 and 2003, respectively. For the three months ended March 31, 2004 and 2003, the Company expensed investment management fees of approximately $362 and $692, respectively, and recorded an amount payable for these services of $1,254 and $705, 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 has entered into one reinsurance agreement with OneBeacon Insurance Group, a subsidiary of White Mountains Insurance. During the three months ended March 31, 2004 and 2003, $0.3 million and $nil was received in gross premiums related to this contract.

6. Shareholders’ Equity

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 three months ended March 31, 2004.

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 selling limited amounts of the Company’s shares owned by him. Pursuant to this plan, 50,000 options were exercised during the first quarter of 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 $833. Subsequent to March 31, 2004, another 50,000 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 subject to market conditions and the terms of the plan.

8

Table of Contents

MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Earnings Per Share

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

8. Segment Reporting

Management has determined that the Company operates in one segment only. The Company focuses on writing global specialty property and other classes of insurance and reinsurance business.

The following table sets forth a breakdown of the Company’s gross premiums written by line of business and by geographic area of risks insured for the periods indicated ($ in millions):

Gross Premiums Written by Line

9

Table of Contents

MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Gross Premiums Written by Geographic Area of Risks Insured

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

Gross Premiums Written by Broker

9. Commitments and Contingencies

Concentrations of Credit Risk

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

10

Table of Contents

MONTPELIER RE HOLDINGS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 March 31, 2004 or 2003. Concentrations of credit risk with respect to reinsurance balances are limited due to their dispersion across various companies and geographies.

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.

Litigation

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 March 31, 2004 or 2003.

Premises Commitment

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. Montpelier Re anticipates that it will finalize the Construction Loan Agreement and Agreement for Lease during 2004 and obtain consent to hold 20% of the shares of the company which will undertake the Project and own the building. Under the MIU, the terms of the Construction Loan will provide that Montpelier Re loans $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 expects to enter into a 22 year long-term lease for the major portion of the Project. Montpelier Re will be required to pay rent in the amount of $300 per annum upon finalization of all agreements and thereafter during the construction period. Upon finalization of the Project and occupation of the building, Montpelier Re will be required to pay rent in the amount of $400 per annum. Although construction commenced during the first quarter of 2004, as at March 31, 2004, no amounts were due or payable by Montpelier Re.

Investment Commitment

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 transaction is expected to fund and close during the third quarter of 2004 and is subject to regulatory approvals and other customary closing conditions.

10. Statutory Requirements

Montpelier Re is registered under The Insurance Act 1978 (Bermuda), Amendments Thereto and Related Regulations (the “Act”). Under the Act, Montpelier Re is required to annually prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act also requires Montpelier Re to maintain a minimum share capital of $1.0 million and to meet a minimum solvency margin equal to the greater of $100.0 million, 50% of net premiums written or 15% of the loss and loss adjustment expense reserves. For the three months ended March 31, 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 periods ended March 31, 2004 and 2003.

11

Table of Contents

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

The following is a discussion and analysis of our results of operations for the three months ended March 31, 2004 and 2003 and financial condition as at March 31, 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 I 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.

Outlook

The lack of large claims activity on “short-tail” lines of business in the last two and one half years has manifested itself in increased confidence in underwriting conditions for the market as a whole. Consequently, we are seeing increased competition and some reductions in rate levels. We expect these trends to continue through 2004. However, overall rates remain at healthy levels. We believe that rates will continue to remain reasonably stable for the “short-tail” insurance and reinsurance products we write due to: (1) changes in natural peril vendor models which are creating additional demand for catastrophe reinsurance coverage in target zones for clients using such models; (2) the continued significant reserve strengthening in other insurance and reinsurance companies mainly related to asbestos and environmental legacy issues but also now on the casualty underwriting conducted between 1997 and 2000; and (3) rating agency downgrades of competitors.

In market loss terms, 2003 was an active year for catastrophes, especially in North America where there was a significant frequency of tornado, hurricane, and brushfire events in the market loss range of $1 billion to $2.5 billion. However, since our portfolio of business generally attaches in the middle and higher layers of programmes, our largest loss from such events in 2003 was $10 million. 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 quarter of 2004. Such events could have a material adverse impact on our financial condition and results of operations.

Despite no QQS business being renewed in 2004, we anticipate that our volume of business may modestly increase in 2004 over that of 2003 based on our experience during the first quarter of 2004. We believe our gross premiums written increases in 2004 will result from the following factors:

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

12

Table of Contents

Results of Operations

For the Three Months Ended March 31, 2004 and 2003

The $5.2 million increase in net income for the three months ended March 31, 2004 compared to the same period in 2003 was primarily the result of the following factors:

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

We ended the quarter with a fully converted book value per share (as defined above) of $26.44, an increase of $5.63 as compared to the same period ended in 2003. This increase of 27.1% resulted from premium rate levels continuing to remain at relatively stable healthy levels across the major classes that we specialize in, together with a relatively low level of catastrophes affecting our portfolio during the twelve months. On April 15, 2004 we also paid our second dividend of $0.34 per share to shareholders of record at March 31, 2004, which resulted in a total return to shareholders, (as defined below) of $1.86 or 7.5% (1) for the quarter ended March 31, 2004. We also benefited from a positive total return of approximately 1.8% on our investment portfolio for the quarter ended March 31, 2004 as compared to a total return for the quarter ended March 31, 2003 of 1.0%.

(1) Total return to shareholders is a non-GAAP measure. It is the percentage increase in fully converted book value per share (described above) plus dividends accrued. It is calculated as the March 31, 2004 fully converted book value per share of $26.44 plus the accrued dividend of $0.34, less the fully converted book value per share at December 31, 2003 of $24.92, with the result then being divided by $24.92. 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.

13

Table of Contents

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

Gross Premiums Written

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

Gross Premiums Written by Line

The decrease in gross premiums written during the quarter ended March 31, 2004, as compared to the same period in 2003 was due to a combination of two factors. Firstly, as expected, we have not written QQS business in the 2004 underwriting year and as a result, the gross premium written for this category has decreased substantially as compared to the same period in 2003. The QQS premium written in 2004 relates to the 2003 underwriting year.

Secondly, gross premiums written related to the Property Specialty category have decreased marginally from the same period in 2003. Absent a $12.0 million adjustment premium recorded during the first quarter of 2004, gross premiums written would have increased by approximately 10% from the same period last year. This increase is due to improved signings on renewals as well as increased access to more original programs than in the prior year.

Partially offsetting the decreases described above, both the Property Catastrophe and Other Specialty categories have shown increased gross premiums written in 2004 as compared to the same period in 2003 due to increased market penetration resulting mainly from our ability to capitalize on market opportunities due to the developing reputation of our underwriting and risk management skills. During the quarter we have continued to experience stable healthy premium rate levels across the major classes of business in which we specialize. In addition, there continues to be increases in our written line sizes and in our average signing percentages during the first quarter of 2004.

14

Table of Contents

As expected, the proportion of Property Catastrophe gross premiums written as a percentage of total gross premiums written is substantially higher than the Property Specialty class during the first quarter of 2004 because a proportionally higher volume of Property Catastrophe business is traditionally written in 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 category will account for the largest portion of gross premiums written.

Included in the Other Specialty category is a small but growing level of casualty business. As previously stated, we expect to write a larger amount of casualty reinsurance in 2004 versus 2003 due to improving terms and conditions of casualty reinsurance contracts. At March 31, 2004 and 2003, casualty accounted for approximately 6.5% and less than 1% of our gross premiums written, respectively, and we estimate that they will account for approximately 10% of our gross premiums written by the end of 2004. Our casualty portfolio includes quota share of UK Employer’s Liability, U.S. medical malpractice excess of loss programs, some specialized errors and omission programs, trucking excess of loss business, casualty and clash protection of general liability, and whole account casualty programs. The Other Specialty category is expected to experience the most growth during 2004, primarily from an increase in casualty writings, although this growth is expected to be less than the growth seen from 2002 to 2003.

Reinsurance Premiums Ceded

Reinsurance premiums ceded for the three months ended March 31, 2004 and 2003 were $35.9 million and $34.3 million, respectively. In 2003 the majority of reinsurance premiums ceded related to QQS business as opposed to the three months ended March 31, 2004, where the majority of reinsurance premiums ceded related to retrocessional protection purchased on our own account and inuring reinsurance as part of our reinsurance arrangements with Aspen Reinsurance Holdings Ltd. As we have not written any QQS business in the 2004 underwriting year, we do not expect to record a material amount of QQS reinsurance premiums ceded in 2004 related to this business. In 2004 we will continue 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. For the whole of 2004 we expect that reinsurance premiums ceded may rise modestly as compared to 2003 but are expected to be less than 10% of gross premiums written.

Net Premiums Earned

Net premiums earned for the three months ended March 31, 2004 and 2003 were $190.8 million and $184.7 million, respectively. Approximately 65.8% and 67.8% of net premiums earned during the quarter ended March 31, 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 quarter of 2004 over 2003 and is expected to continue to gradually increase during the remainder of 2004. This increase results in a gross earned premium to written premium ratio of 61.3% for the three months ended March 31, 2004, compared to 52.3% 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.

Loss and Loss Adjustment Expenses

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

15

Table of Contents

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

Loss and loss adjustment expenses was $46.2 million and $47.7 million for the three months ended March 31, 2004 and 2003, respectively. Reinsurance recoveries of $(0.5) million and $(0.3) million were netted against loss and loss adjustment expenses for the three months ended March 31, 2004 and 2003, respectively. Based on additional information received from the QQS syndicates during the quarters 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 has resulted in the negative reinsurance recovery amount for each quarter. We paid net losses of $19.1 million and $10.1 million for the three months ended March 31, 2004 and 2003, respectively.

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

No major catastrophic events impacted our Property Catastrophe book in the first quarter of 2004. In addition, the reported losses for the October 2003 California wildfires decreased by approximately $0.4 million during the first quarter of 2004. The combination of these factors produced a loss ratio of only 5.4% for Property Catastrophe for the first quarter 2004. The negative loss ratio for the Property Catastrophe category in the first quarter of 2003 resulted from reductions in estimates of losses incurred in 2002, combined with the fact that we were not materially affected by any catastrophes during the quarter. Low levels of reported losses during the first quarter of 2004 have also led to relatively low loss ratios for the Property Specialty and Other Specialty classes. The Property Specialty loss ratio is lower in 2004 than in 2003 due to the continued reductions in the ultimate loss estimates for the 2002 and 2003 years. The Other Specialty class continues to experience very low levels of reported losses. The 2004 loss ratio is higher than in the first quarter of 2003 primarily due to a slightly higher percentage of longer-tail casualty business included in the Other Specialty category as compared to last year. As our business continues to develop, we will continue to supplement industry information with our own actual loss experience. The Qualifying Quota Share loss ratio this quarter is lower than the loss ratio for first 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 24.2% for the three months ended March 31, 2004, compared to the overall net loss ratio for the three months ended March 31, 2003 of 25.8%.

16

Table of Contents

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 March 31, 2004 ($ in millions):

Gross Loss and Loss Adjustment Expense Reserves

Net Loss and Loss Adjustment Expense Reserves

The first quarter of 2004 and 2003 included approximately $23.3 million and $18.3 million, respectively, of favorable development of net losses from prior years. This favorable prior year development for the quarters ended March 31, 2004 and 2003 benefited the net loss ratio in the quarter by approximately 12.2% and 10.0%, respectively.

The favorable development during the three months ended March 31, 2004 of losses incurred during 2003 and 2002 primarily resulted from the following:

17

Table of Contents

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 March 31, 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 March 31, 2004 we estimated our gross and net reserves for loss and loss adjustment expenses using the methodology as outlined in our Critical Accounting Policy later in this section.

Management has determined that the best estimate for gross loss and loss adjustment expense reserves at March 31, 2004 and 2003 was $276.3 million and $ 183.6 million, respectively.

Management has determined that the best estimate for net loss and loss adjustment expense reserves at March 31, 2004 and 2003 was $269.2 million and $167.3 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):

Gross loss and loss adjustment expense reserves as at March 31, 2004

Net loss and loss adjustment expense reserves as at March 31, 2004

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 March 31, 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

18

Table of Contents

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)

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 gain in the first quarter of 2004 is primarily due to the weakening of the U.S. dollar resulting in gains 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

Underwriting expenses consist of acquisition costs (including profit commission) and general and administrative expenses. Acquisition costs and general and administrative expenses were $49.4 million and $49.9 million for the three months ended March 31, 2004 and 2003, respectively, representing expense ratios of 25.9% and 27.0%, 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 $4.2 million and $5.0 million for the three months ended March 31, 2004 and 2003, respectively. The accrual for profit commission has remained fairly consistent as a result of continued favorable loss experience. The expense ratio for the three months ended March 31, 2004 and 2003 would have been 23.7% and 24.2%, respectively, excluding the effect of profit commission.

For the three months ended March 31, 2004 and 2003, acquisition costs incurred were $35.7 million and $41.0 million, respectively, which were principally due to brokerage commissions on our insurance and reinsurance contracts of $22.2 million and $24.6 million respectively, as well as commissions paid to ceding insurers and other costs of $13.5 million and $16.4 million, respectively.

Acquisition costs, excluding reinsurance and profit commission as a percentage of premiums earned, were 15.4% and 18.8% for the three months ended March 31, 2004 and 2003, respectively. The 2004 ratio is lower than the 2003 ratio as a result of the significantly lower proportion of QQS business earned which traditionally has higher acquisition costs. We anticipate that the acquisition cost ratio, excluding profit commissions, will decline slightly during the remainder of 2004 based on the estimated mix of gross premiums written and estimated loss experience.

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

19

Table of Contents

The increase in general and administrative expenses between the first quarter of 2004 and the first quarter of 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. We also incurred fixed expenses during the first quarter of 2004 related to the two secondary offerings of approximately $1.0 million.

For the three months ended March 31, 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 consist of an increase in the harvest ratio used in calculating the expense for the 2002-2004 period, as well as an increase in our share price from March 31, 2003 to March 31, 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.

Net Investment Income

Net investment income for the three months ended March 31, 2004 and 2003 was $15.3 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 $4.0 million and $2.7 million, respectively, and investment management and custodian fees of $0.4 million and $0.7 million, respectively, for the three months ended March 31, 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.

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 $25.9 million and $(0.8) million for the three months ended March 31, 2004 and 2003, respectively, the total investment return was 1.77.%, and 1.02%, respectively. Net unrealized gains at March 31, 2004 included $9.1 million related to our investment in Aspen Insurance Holdings Ltd. 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 March 31, 2004 and 2003.

Interest Expense