A day after Bermuda-based Montpelier Re Holdings announced an $875.1 million loss written in red ink on the bottom line of its income statement, Fitch said it would cut the company's ratings.
Nearly $1 billion in hurricane losses contributed to the third-quarter net loss, which equates to $12.16 per share.
Fitch today downgraded the insurer financial strength rating of Montpelier Reinsurance Ltd to "triple-B" from "A-minus." The Chicago-based rating agency also cut the long-term and senior debt ratings of Montpelier Re Holdings Ltd. to "double-B" from "triple-B-minus."
The net loss for the third quarter reported by Montpelier yesterday included $950 million of losses related to Hurricanes Katrina and Rita.
Montpelier Re also announced that it incurred a further $75-to-$85 million of losses as the result of Hurricane Wilma, which occurred in the fourth quarter.
Fitch noted that losses for Katrina were "materially higher" than Montpelier Re's prior estimate of $450-to-$675 million.
Fitch noted that infrequent large losses are expected from insurers focusing on property catastrophe reinsurance, such as Montpelier, but added that the magnitude of these losses, which represented 70 percent of Montpelier Re's equity as of June 30, 2005, indicated that Montpelier Re had a high concentration of risk that was far beyond Fitch's expectations.
Although Montpelier raised $600 million in capital in a public equity offering in September, the reinsurance operation was also downgraded by A.M. Best in late October–to "A-minus" from "A."
During a conference call yesterday, members of the management team were asked about the ramifications of a further downgrade by Best to the "B"-range, but they expressed optimism that some changes in a business strategy would stave off any further downgrade. The strategy includes significantly reducing exposures and expanding the company's existing program of reinsurance protection. The strategic plan also calls for Montpelier to partner with capital providers involved in non-traditional reinsurance vehicles, executives said.
Providing an example of the latter, Montpelier executives pointed to a pre-Katrina venture with a hedge fund manager, West End Capital Management (Bermuda) Ltd.–the co-founding of Rockridge Reinsurance Ltd., a Caymans Islands reinsurer. Details released during the summer called for Rockridge to assume high-layer short-tail risks from Montpelier, and for the two companies to share equally in fees earned for services on the ceded business and investment fees.
During the conference call yesterday, president and CEO Anthony Taylor was adamant that one component of the firm's strategic direction wouldn't change–namely, its focus on short-tail property reinsurance. "We will not go down the road of diversification," he said, predicting that competition would heat up in casualty lines.
Fitch said that ratings for Montpelier remain on Rating Watch Negative because the rating agency remains concerned about the concentration of risk in Montpelier Re's book of business.
"While Montpelier has indicated that it plans to revise its risk profile going forward, such changes will take time to implement, since reinsurance treaties tend to renew on either January 1 or July 1. Also, Montpelier's ability to successfully execute on such plans remains unclear," Fitch said, adding that possible further development in hurricane loss estimates is another concern.
"Further, Fitch believes there is some risk that Montpelier's near-term financial flexibility, and access to capital, may be impaired," the rating agency said in a statement.
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