We retain our Outperform recommendation on Montpelier Re Holdings Ltd. (MRH) following solid third-quarter results, which reflected 35% positive earnings surprise. This property and casualty insurer with a Zacks Rank #1 (Strong Buy) delivered positive surprises in the last four quarters with an average beat of 13.8%.
Why the Reiteration?
Montpelier’s third-quarter earnings per share outperformed the Zacks Consensus Estimate as well as the year-ago earnings. The quarter experienced solid underwriting results and strong profits across all the segments. Investment income also improved during the reported quarter.
The Zacks Consensus Estimate for 2013 rose 18% to $4.19 while the same for 2014 increased 5.5% to $2.90 over the last 60 days.
The expected long-term earnings growth is 3.5%.
Montpelier continued its trend of outperforming expectations despite a competitive market, riding on the strength of underwriting performances. The company remains well positioned due to its increased exposure in the property catastrophe lines of business, focus on underwriting operations, augmenting capital flexibility, and strengthening its competitive position.
Montpelier has transformed from a Bermuda “monoline” property catastrophe reinsurer to a global diversified catastrophe specialist, expanding its operations in the U.S. and U.K. The company benefits from tax exemptions in Bermuda as no income taxes are levied there.
Additionally, to enhance shareholder value, the company regularly engages in share buybacks as well as dividend hikes. Recently, the board increased its dividend by 9%, marking five straight years of increase. It has grown its dividend at a 5-year CAGR of 11%. Its dividend yield is currently 1.7%. With respect to share buybacks, the board increased the share buyback authorization by $150 million.
As of Nov 15, the company is left with $279 million under its authorization. Sustained operating profitability reflects a strong balance sheet and the company’s ability to generate healthy cash flow, which in turn, support its capital deployment plans. These factors are crucial in retaining investor confidence as well as attracting new investors.
However, Montpelier’s margin contraction keeps us cautious. The company should try to drive the magnitude of revenue increase such that it outdoes that of the increase in expense, failing which operating margin will be hugely affected going forward.
Further, Montpelier’s debt level has been increasing over the years resulting in deterioration of the debt-equity ratio, which is well above the industry average. The company should continue to service the debt uninterruptedly, else creditworthiness could be dented.
Other Stocks to Consider
Other property and casualty insurers which look attractive at present include Alleghany Corp. (Y), Cincinnati Financial Corp. (CINF), CNA Financial Corp. (CNA). All these stocks sport the same Zacks Rank as Montpelier.
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