1 November 2010Re/insurance

Montpelier Re: better, not bigger

Bermuda Re: What is it that sets Montpelier apart from the competition? Does it have a USP in the Bermuda market?

Chris Harris: Unlike most of the other Bermuda-based reinsurers, we specialise in a few key areas where we have a competitive advantage, rather than aiming to be all things to all people.

We are a recognised industry leader within property catastrophe reinsurance, and we have a significant presence in short-tail specialty lines within both the Bermuda and London markets. Responsiveness is a key differentiator in our underwriting approach—our small size enables rapid communication, resulting in us being among the most nimble markets. We provide timely quotes for difficult technical risks, and we provide excellent customer and claims service. Independent surveys confirm that our clients notice and value these qualities.

BR: Can you tell us about your product mix and how it has evolved over the last five years? How close is Montpelier to being a monoline supplier of property cat coverage and is it looking to diversify its lines moving forward?

CH: Our primary product focus remains on property and other short-tail lines of business. However, over the last few years, we have expanded our underwriting platform to include offices in London, Switzerland and the US, in order to broaden our access to new clients and distribution sources.

We are proud of the reputation we have earned over the last nine years with brokers and cedants as a leading property catastrophe franchise, and we intend to continue to build on that expertise by investing in both our people and our technology.

Property catastrophe reinsurance will account for approximately 50 percent of our total premium volume in 2010. Other lines where we have built a strong market position include engineering, marine, terrorism, aviation and individual risk property. So we are not a monoline property cat company.

BR: Montpelier has remained small. How has this helped and hindered the company in its development and operations? Are there plans to increase and develop your capital base?

CH: We measure financial success by our ability to grow book value per share over a long period, not by growth in the absolute level of premium or capital.

We believe our current capital size is optimal to execute our specialist short-tail reinsurance strategy. We discount the investment banker-driven ‘bigger is better’ mantra and instead focus on ‘better, not bigger’.

Size in isolation is not a quality valued by our business partners. Rather, they value continuity, responsiveness and security. We view our size as an advantage as it allows us to be more responsive to clients at the individual account level and to be more effective in managing the underwriting cycle at the macro level.

Unlike some of our larger competitors, we managed asset and liability risk well during the financial crisis of 2008 and emerged in a stronger competitive position.

BR: How has the continuing soft market impacted the way you do business and how have you sought to off-set softening rates?

CH: Risk selection is always a key first underwriting priority, but it becomes even more critical in the softer phase of the underwriting cycle. Our objective is to retain and grow with our preferred partners, and we view the current challenging market conditions as an opportunity for us to differentiate ourselves from competitors in the area of risk selection.

From a line of business perspective, we remain underweight in casualty reinsurance due to current pricing conditions. We intend to match the size of our capital to the size of the underwriting opportunity and patiently wait for the right opportunities to deploy capital.

BR: With the suggestion that M&A activity might be on the horizon following a turn in the market, are you concerned that as a smaller player, you might be snapped up by other larger reinsurers?

"Different jurisdictions have different strenghts and weaknesses, and the opportunity for optimising the distribution of resources across a variety of locations has increased. However, Bermuda remains a vibrant underwriting market whose strenghts match well with our focus on short-tail reinsurance lines"

CH: In our experience, M&A transactions tend to be driven by issues in the business plan or investor base of one or both of the parties in a deal rather than by size considerations. Historically, such transactions in our industry have produced decidedly mixed results in terms of generating value for shareholders, so M&A is not automatically a good thing as far as they are concerned. We are continually on the lookout for opportunities to add talent to our franchise, but we feel that executing our business plan and growing book value per share is the best way for us to reward long-term shareholders.

BR: With other reinsurers moving, or expressing an interest in moving, to Europe, is Montpelier considering joining them? And are such moves predominantly just the movement of the holding company, or do you believe that human capital and expertise will also follow suit?

CH: As Bermuda companies have adopted more global business models and the requirements of them in different jurisdictions have developed, their perception of which domicile suits their business model best has evolved. Different jurisdictions have different strengths and weaknesses, and the opportunity for optimising the distribution of resources across a variety of locations has increased. However, Bermuda remains a vibrant underwriting market whose strengths match well with our focus on short-tail reinsurance lines.

BR: What continue to be the major threats to Bermuda and how can companies domiciled on the Island minimise their impact?

"Size in isolation is not a quality valued by our business partners. Rather, they value continuity, responsiveness and security."

CH: People are the most important resource in our business model, so we view any changes in the social or business environment that make it more difficult to attract and retain top quality talent as the biggest threats. Specific potential threats include an increase in the level of local taxation or a deterioration in the Island’s overall security. The Bermuda government and the international business community have had a long and successful partnership, and we believe they can work together to minimise these threats.

BR: How are your preparations for equivalency and Solvency II faring and do you believe that Bermuda’s preparations for global regulation place it ahead of the curve?

CH: We have been focused on enterprise risk management since the inception of the company. We continually refine and improve our economic capital and risk pricing models through investments in people and technology as a means of improving our underwriting risk selection. We view any regulatory compliance as a valuable secondary benefit.

We are very pleased that CEIOPS has recommended Bermuda as one of only two countries to be assessed for first-wave equivalence with EU insurance regulations under Solvency II, and we expect that the Island will be successful in its application.

In terms of its preparation, we believe that the BMA has carefully watched the regimes that have developed in Europe and has devised its own take on how to achieve equivalence that will prove to be both effective and practical.

BR: What are your expectations for 2011? Will rates continue to soften and if they do, what impact will this have upon companies on the Island?

Whatever the market conditions, and they can change very suddenly, we plan to stick to our core underwriting focus and deliver value to our shareholders regardless of the stage of the market cycle.

With industry valuations at a multi-decade low within the Bermuda reinsurance space, investors are not pricing in much confidence in the overall group’s ability to manage risk and capital over the next few years. We intend to prove them wrong.

For Montpelier in 2011, that means taking a more defensive underwriting approach and a more aggressive capital management style in order to wait for better opportunities to deploy capital. When fear returns to the market and dislocations start to occur, we expect our strong balance sheet, broad operating platform and opportunistic underwriting philosophy will serve us well.

Chris Harris is the chief executive officer of Montpelier. He can be contacted at: