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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

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

 

**For thefiscal year ended December 31, 2009**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thetransition period from        to        **

 

**Commissionfile number 1-8993**

 

**MONTPELIERRE HOLDINGS LTD.**

(Exact name ofRegistrant as specified in its charter)

 

| **Bermuda**                      | ** ** | **98-0428969**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**Montpelier House, 94 Pitts Bay Road**

**Pembroke, Bermuda  HM 08**

(Address ofprincipal executive offices)

 

Registrant’stelephone number, including area code:  **(441) 296-5550**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 
| **Title of Each Class**                                                  | ** ** | **Name of  Each Exchange on Which Registered**      |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|
| Common Shares, par  value 1/6 cent per share (“Common Shares”) |       | New York Stock Exchange  and Bermuda Stock Exchange |

 

Securities registeredpursuant to Section 12(g) of the Act:  **None**

 

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes  x  No o

 

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act. Yes o  No x

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12 months (or forsuch 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 o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files). Yes o  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

 

| Large accelerated filer x |   | Accelerated filer o         |   |
|---------------------------|--------|-----------------------------|--------|
|                      |   |                        |   |
| Non-accelerated filer o   |   | Smaller reporting company o |   |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

The aggregate market value of voting shares (based on the closing priceof those shares listed on the New York Stock Exchange and the considerationreceived for those shares not listed on a national or regional exchange) heldby non-affiliates of the Registrant as of June 30, 2009, was $712,127,599.

 

As of February 26, 2010, 70,803,395 Common Shares were outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

The definitive proxy statement relating to Montpelier Re Holdings Ltd.’sAnnual Meeting of Shareholders, to be held May 19, 2010, is incorporatedby reference in Part III of this Form 10-K to the extent describedtherein.

 

 

 

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**TABLE OFCONTENTS**

 
| **PART I**                  |                                                                                                                 |
|-----------------------------|----------------------------------------------------------------------------------------------------------------------|
| ** **                  |                                                                                                                 |
| Forward  Looking Statements | 2                                                                                                                    |
|                        |                                                                                                                 |
| Item 1.                     | Business                                                                                                             | 2 |
|                        |                                                                                                                 |   |
|                        | Overview                                                                                                             | 2 |
|                        |                                                                                                                 |   |
|                        | Our Business Focus                                                                                                   | 6 |
|                        |                                                                                                                 |   |
|                        | Lines  of Business                                                                                                   | 10 |
|                        |                                                                                                                 |   |
|                        | Written  Premiums                                                                                                    | 12 |
|                        |                                                                                                                 |   |
|                        | Loss  and LAE Reserves                                                                                               | 14 |
|                        |                                                                                                                 |   |
|                        | Investments, Cash and Cash Equivalents                                                                               | 16 |
|                        |                                                                                                                 |   |
|                        | Ratings                                                                                                              | 17 |
|                        |                                                                                                                 |   |
|                        | Competition                                                                                                          | 18 |
|                        |                                                                                                                 |   |
|                        | Regulation                                                                                                           | 18 |
|                        |                                                                                                                 |   |
|                        | Employees                                                                                                            | 25 |
|                        |                                                                                                                 |   |
|                        | Available  Information                                                                                               | 25 |
|                        |                                                                                                                 |   |
| Item 1A.                    | Risk Factors                                                                                                         | 26 |
|                        |                                                                                                                 |   |
| Item 1B.                    | Unresolved  Staff Comments                                                                                           | 34 |
|                        |                                                                                                                 |   |
| Item 2.                     | Properties                                                                                                           | 34 |
|                        |                                                                                                                 |   |
| Item 3.                     | Legal Proceedings                                                                                                    | 34 |
|                        |                                                                                                                 |   |
| Item 4.                     | Submission  of Matters to a Vote of Security Holders                                                                 | 35 |
|                        |                                                                                                                 |   |
| **PART II**            |                                                                                                                 |   |
|                        |                                                                                                                 |   |
| Item 5.                     | Market for  the Company’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Securities | 35 |
|                        |                                                                                                                 |   |
| Item 6.                     | Selected  Financial Data                                                                                             | 39 |
|                        |                                                                                                                 |   |
| Item 7.                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 40 |
|                        |                                                                                                                 |   |
| Item 7A.                    | Quantitative  and Qualitative Disclosures About Market Risk                                                          | 75 |
|                        |                                                                                                                 |   |
| Item 8.                     | Financial  Statements and Supplementary Data                                                                         | 79 |
|                        |                                                                                                                 |   |
| Item 9.                     | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                                | 79 |
|                        |                                                                                                                 |   |
| Item 9A.                    | Controls and  Procedures                                                                                             | 79 |
|                        |                                                                                                                 |   |
| Item 9B.                    | Other Information                                                                                                    | 79 |
|                        |                                                                                                                 |   |
| **PART III**           |                                                                                                                 |   |
|                        |                                                                                                                 |   |
| Item 10.                    | Directors,  Executive Officers and Corporate Governance                                                              | 79 |
|                        |                                                                                                                 |   |
| Item 11.                    | Executive  Compensation                                                                                              | 80 |
|                        |                                                                                                                 |   |
| Item 12.                    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 80 |
|                        |                                                                                                                 |   |
| Item 13.                    | Certain  Relationships and Related Transactions, and Director Independence                                           | 80 |
|                        |                                                                                                                 |   |
| Item 14.                    | Principal  Accounting Fees and Services                                                                              | 80 |
|                        |                                                                                                                 |   |
| **PART IV**            |                                                                                                                 |   |
|                        |                                                                                                                 |   |
| Item 15.                    | Exhibits  and Financial Statement Schedules                                                                          | 80 |
|                        |                                                                                                                 |   |
| **SIGNATURES**              |                                                                                                                 | 84 |

 

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**PART I**

 

**Forward Looking Statements**

 

This Form 10-K contains forward-looking statements within themeaning of the United States (the “U.S.”) federal securities laws, pursuant tothe safe harbor provisions of the Private Securities Litigation Reform Act of1995, that are not historical facts, including statements about our beliefs andexpectations. These statements are based upon current plans, estimates and projections.Forward-looking statements rely on a number of assumptions concerning futureevents and are subject to a number of uncertainties and various risk factors,many of which are outside our control. See *“RiskFactors”*contained in Item 1A herein for specific important factorsthat could cause actual results to differ materially from those contained inforward looking statements. In particular, statements using words such as “may,”“should,” “estimate,” “expect,” “anticipate,” “intend,” “believe,” “predict,” “potential,”or words of similar importance generally involve forward-looking statements.

 

Important events and uncertainties that could cause our actual results,future dividends or future common share repurchases to differ include, but arenot necessarily limited to: market conditions affecting our common share price;the possibility of severe or unanticipated losses from natural or man madecatastrophes, in particular catastrophes that are weather related; theeffectiveness of our loss limitation methods; our dependence on principalemployees; our ability to execute the business plans of Montpelier Syndicate5151 and Montpelier U.S. Insurance Company effectively, including theintegration of those operations into our existing operations; increases in ourgeneral and administrative expenses due to new business ventures, whichexpenses may not be recoverable through additional profits; the cyclical natureof the insurance and reinsurance business; the levels of new and renewalbusiness achieved; opportunities to increase writings in our core property andspecialty insurance and reinsurance lines of business and in specific areas ofthe casualty reinsurance market and our ability to capitalize on thoseopportunities; the sensitivity of our business to financial strength ratingsestablished by independent rating agencies; the inherent uncertainty of ourrisk management process, which is subject to, among other things, industry lossestimates and estimates generated by modeling techniques; the accuracy of estimatesreported by cedants and brokers on pro rata contracts and certain excess ofloss contracts where a deposit or minimum premium is not specified in thecontract; the inherent uncertainties of establishing reserves for loss and lossadjustment expenses, particularly on longer-tail classes of business such ascasualty; unanticipated adjustments to premium estimates; changes in theavailability, cost or quality of reinsurance or retrocessional coverage;changes in general economic and financial market conditions; changes in andimpact of governmental legislation or regulation, including changes in tax lawsin the jurisdictions where we conduct business; our ability to assimilateeffectively the additional regulatory issues created by our entry into new markets;the amount and timing of reinsurance recoverables and reimbursements weactually receive from our reinsurers; the overall level of competition, and therelated demand and supply dynamics in our markets relating to growing capitallevels in our industry; declining demand due to increased retentions by cedantsand other factors; the impact of terrorist activities on the economy; ratingagency policies and practices; unexpected developments concerning the smallnumber of insurance and reinsurance brokers upon whom we rely for a largeportion of revenues; our dependence as a holding company upon dividends ordistributions from our operating subsidiaries; and the impact of foreigncurrency fluctuation.

 

We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the dates on which they aremade.

 

**Item 1.****          *****Business***

 

**OVERVIEW**

 

**The Company**

 

Montpelier Re Holdings Ltd. (the “Company” or the “Registrant”) wasincorporated as an exempted Bermuda limited liability company under the laws ofBermuda in November 2001.  TheCompany, through its subsidiaries in Bermuda, the U.S., the United Kingdom (the“U.K.”) and Switzerland (collectively “Montpelier”), provides customized andinnovative insurance and reinsurance solutions to the global market.

 

At December 31, 2009 and 2008, the Company had $3,102.3 millionand $2,797.6 million of consolidated total assets, respectively, andshareholders’ equity of $1,728.5 million and $1,357.6 million, respectively.The Company’s headquarters and principal executive offices are located atMontpelier House, 94 Pitts Bay Road, Pembroke, Bermuda HM 08.

 

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**Our Reportable Segments**

 

We currently operate through three reportable segments: MontpelierBermuda, Montpelier Syndicate 5151 and MUSIC. Prior to its liquidation and dissolution in 2009, Blue Ocean constituteda fourth reportable segment.  Each of oursegments is a separate underwriting platform through which we write insuranceand reinsurance business.  Our segmentdisclosures present the operations of Montpelier Bermuda, Montpelier Syndicate5151 and MUSIC prior to the effects of intercompany quota share reinsuranceagreements among them.  In addition toour reportable segments, the activities of the Company, certain of itsintermediate holding and service companies and intercompany eliminationsrelating to inter-segment reinsurance and support services are collectivelyreferred to as “Corporate and Other.”

 

Detailed financial information about each of our reportable segmentsfor the three years ended December 31, 2009 is presented in Note 13 of theNotes to Consolidated Financial Statements.

 

The nature and composition of each of our reportable segments and ourCorporate and Other activities are as follows:

 

*Montpelier Bermuda*

 

Our Montpelier Bermuda segment consists of the collective assets andoperations of Montpelier Reinsurance Ltd. (“Montpelier Re”) and MontpelierMarketing Services Limited (“MMSL”).

 

Montpelier Re, our principal wholly-owned operating subsidiary based inPembroke, Bermuda, is registered as a Bermuda Class 4 insurer. MontpelierRe seeks to identify and underwrite attractive insurance and reinsuranceopportunities by utilizing proprietary risk pricing and capital allocation modelsand catastrophe modeling tools.

 

MMSL, our wholly-owned U.K. subsidiary based in London, providesmarketing services to Montpelier Re.

 

At December 31, 2009 and 2008, our Montpelier Bermuda segment had$2,787.3 million and $2,584.7 million of total assets, respectively, andshareholder’s equity of $2,024.9 million and $1,620.3 million, respectively.

 

*Montpelier Syndicate 5151*

 

Our Montpelier Syndicate 5151 segment consists of the collective assetsand operations of Montpelier Syndicate 5151 (“Syndicate 5151”), MontpelierCapital Limited  (“MCL”),  Montpelier Underwriting Agencies Limited (“MUAL”),Montpelier Underwriting Services Limited (“MUSL”), Montpelier Underwriting Inc.(“MUI”), Montpelier Europa AG (“MEAG”) and Paladin Underwriting Agency Limited(“PUAL”).

 

Syndicate 5151, our wholly-owned Lloyd’s of London (“Lloyd’s”)syndicate based in London, was established in July 2007. Syndicate 5151underwrites primarily short-tail lines, mainly property insurance andreinsurance, engineering, marine hull, cargo and specie and a limited amount ofspecialty casualty classes sourced from the London, U.S. and European markets.

 

MCL, our wholly-owned U.K. subsidiary based in London, serves asSyndicate 5151’s sole corporate member.

 

MUAL, our wholly-owned Lloyd’s Managing Agent based in London, hasmanaged Syndicate 5151 since January 1, 2009. Through December 31,2008, Syndicate 5151 was managed by Spectrum Syndicate Management Limited (“Spectrum”),a third-party Lloyd’s Managing Agent, also based in London.

 

MUSL, our wholly-owned U.K. subsidiary based in London, providessupport services to Syndicate 5151 and MUAL.

 

MUI,  MEAG and PUAL serve as ourwholly-owned Lloyd’s Coverholders.  EachCoverholder is authorized to enter into contracts of insurance and reinsuranceand/or issue documentation on behalf of Syndicate 5151.  MUI, our wholly-owned U.S. subsidiary basedin Hartford, Connecticut, underwrites insurance and reinsurance business onbehalf of Syndicate 5151 through managing general agents and intermediarieswith a focus on treaty business.  MEAG,our wholly-owned Swiss subsidiary based in Zug, Switzerland, focuses oninsurance and reinsurance markets in Continental Europe and the Middle East onbehalf of Syndicate 5151 and Montpelier Re. PUAL, our newly formed, wholly-owned U.K. subsidiary based in London,underwrites business on behalf of both Syndicate 5151 and third parties, with afocus on specialist contractors, recycling and crime classes of business.  PUAL wrote no business that incepted duringthe periods presented herein.

 

At December 31, 2009 and 2008, our Montpelier Syndicate 5151segment had $205.1 million and $96.3 million of total assets, respectively, anda shareholder’s deficit of $2.5 million and $9.1 million, respectively.

 

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*MUSIC*

 

Our MUSIC segment consists solely of the assets and operations ofMontpelier U.S. Insurance Company (“MUSIC”), our wholly-owned U.S. subsidiarybased in Scottsdale, Arizona.

 

MUSIC, formerly known as General Agents Insurance Company of America, Inc.,is an Oklahoma domiciled stock property and casualty insurance corporation thatwe acquired from GAINSCO, Inc. (“GAINSCO”) in November  2007 (the “MUSICAcquisition”).  MUSIC is a domesticsurplus lines insurer in Oklahoma and is authorized as an excess and surpluslines insurer in 47 additional states and the District of Columbia.  At the time of acquisition, MUSIC had no employeesor in force premiums. MUSIC underwrites smaller commercial property andcasualty risks that do not conform to standard insurance lines.

 

At December 31, 2009 and 2008, our MUSIC segment had $77.2 millionand $68.8 million of total assets, respectively, and shareholder’s equity of$45.5 million and $49.1 million, respectively.

 

*Blue Ocean*

 

Our Blue Ocean segment consisted of the collective assets andoperations of Blue Ocean Re Holdings Ltd. (“Blue Ocean”) and Blue OceanReinsurance Ltd. (“Blue Ocean Re”).

 

Blue Ocean, formerly our wholly-owned Bermuda subsidiary based inPembroke, Bermuda, was liquidated and dissolved in December 2009. BlueOcean served as the holding company for Blue Ocean Re which was also based inPembroke, Bermuda. Blue Ocean Re had, in the past, provided propertycatastrophe retrocessional reinsurance and was formerly registered as a BermudaClass 3 insurer. Blue Ocean Re was deregistered as a Bermuda insurer in2008 and was subsequently amalgamated into Blue Ocean.

 

We acquired all the outstanding share capital of Blue Ocean in June 2008(the “Blue Ocean Transaction”).  Prior tothe Blue Ocean Transaction, we owned 42.2% of Blue Ocean’s outstanding commonshares. Prior to Blue Ocean’s repurchase of all its outstanding preferred sharesin January 2008, we owned 33.6% of such preferred shares.

 

Prior to Blue Ocean becoming a wholly-owned subsidiary it wasconsolidated into our financial statements.

 

At December 31, 2008, our Blue Ocean segment had $1.2 million oftotal assets and shareholder’s equity of $1.1 million.

 

*Corporate and Other*

 

Our Corporate and Other activities consist of the collective assets andoperations of the Company and certain of our intermediate holding and servicecompanies, including Montpelier Technical Resources Ltd. (“MTR”) and MontpelierAgency Ltd. (“MAL”).

 

MTR, our wholly-owned U.S. subsidiary with its main offices located inWoburn, Massachusetts and Hanover, New Hampshire, provides accounting, finance,risk management, information technology, internal audit, human resources andadvisory services to many of our subsidiaries.

 

MAL, our wholly-owned Bermuda subsidiary based in Pembroke, Bermuda,provided Blue Ocean Re with underwriting, risk management, claims management,ceded retrocession agreement management, actuarial and accounting services. MALhas conducted no significant operations subsequent to the Blue OceanTransaction.

 

**Our Strategy and Operating Principles**

 

We manage our business bythe following tenets:

 

*Maintaining a Strong Balance Sheet.*  We focus on maintaining a strong balancesheet in support of our underwriting activities and actively manage our capitalwith a view towards maximizing our fully-converted book value per share basedon prudent risk tolerances. Also, as part of our capital management strategy,we may choose to reduce debt or return capital to shareholders through specialdividends or share repurchases.

 

*Enhancing Our Lead Position With Brokers and Cedants.*  Through the use of proprietary underwritingtools, our underwriters seek to identify those exposures which meet ourobjectives in terms of return on capital and underwriting criteria. By leadingreinsurance programs, we believe our underwriters attract, and can selectivelywrite, exposures from a broad range of business in the marketplace.

 

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*Combining Subjective Underwriting Methods WithObjective Modeling Tools.*   We seek to exploit pricing inefficienciesthat may exist in the market from time to time. To achieve this, we disseminatemarket information to our underwriting teams and facilitate personal contactamong our underwriters. Generally, our underwriters use risk modeling tools, bothproprietary and third-party, together with their market knowledge and judgment,and seek to achieve the highest available price per unit of risk assumed.

 

*Developing and Maintaining a Balanced Portfolio ofInsurance and Reinsurance Risks.*  We aim to maintain a balanced portfolio ofrisks, diversified by product, geography and marketing source within eachchosen class of business.  We employ riskmanagement techniques to monitor correlation risk and seek to enhance underwritingreturns through careful risk selection using advanced capital allocationmethodologies. We also actively seek to write more business in classesexperiencing attractive conditions and avoid those classes suffering fromintense price competition or poor fundamentals. We believe a balanced portfolioof risks reduces the volatility of returns and optimizes the growth ofshareholder value, however, we may be overweight in certain classes, productsand geographies from time to time based on market opportunities.

 

*Delivering Customized, Innovative and TimelyInsurance and Reinsurance Solutions for Our Clients.*  We aim to be a premier provider of globalproperty and casualty insurance and reinsurance products and aim to providesuperior customer service. Our objective is to solidify long-term relationshipswith brokers and clients while developing an industry reputation for innovativeand timely quotes for difficult technical risks.

 

**Property and Casualty Insurance and Reinsurance inGeneral**

 

Property and casualty insurers write insurance policies in exchange forpremiums paid by the policyholder.  Aninsurance policy is a contract between the insurance company and thepolicyholder whereby the insurance company agrees to pay for losses suffered bythe policyholder that are covered under the contract.  Property insurance typically covers thefinancial consequences of accidental losses to the policyholder’sproperty.  Casualty insurance typicallycovers the financial consequences of losses to a third-party that are theresult of unforeseen accidents.

 

Property and casualty reinsurers assume, from insurance and reinsurancecompanies (referred to as ceding companies), all or a portion of the insurancerisks that the ceding company has underwritten under one or more insurancepolicies.  In return, the reinsurerreceives a premium for the risks that it assumes from the ceding company.  Reinsurance can benefit a ceding company in anumber of ways, including reducing exposure on individual risks, and providingcatastrophe protections from larger or multiple losses.  Reinsurance can also provide a ceding companywith additional underwriting capacity permitting it to accept larger risksand/or write more business than would be possible without an accompanyingincrease in its capital or surplus. Reinsurers may also purchase reinsurance, known as retrocessionalreinsurance, to cover their own risks assumed from ceding companies.Reinsurance companies often enter into retrocessional agreements for many ofthe same reasons that ceding companies enter into reinsurance agreements.

 

Insurance and reinsurance companies derive substantially all of theirrevenues from earned premiums, net investment income and net gains and lossesfrom investment securities. Earned premiums represent premiums received frompolicyholders and ceding companies, which are recognized as revenue over theperiod of time that coverage is provided (i.e., ratably over the life of thepolicy).  In insurance and reinsuranceoperations, “float” arises when premiums are received before losses are paid,an interval that sometimes extends over many years. During that time, theinsurer invests the money, earns investment income and may generate investmentgains and losses.

 

Insurance and reinsurance companies incur a significant amount of theirtotal expenses from policyholder and assumed reinsurance losses, commonlyreferred to as “claims”. In settling claims, various loss adjustment expenses (“LAE”)are incurred, such as claim adjusters’ fees and litigation expenses. Inaddition, insurance and reinsurance companies incur acquisition costs, such ascommissions paid to agents and brokers and premium and excise taxes.

 

A widely-used measure of relative underwriting performance forinsurance and reinsurance companies is the combined ratio. Our combined ratiois calculated by adding: (i) the ratio of net incurred losses and LAE tonet earned premiums (known as the “loss ratio”); and (ii) the ratio ofacquisition costs and other underwriting expenses to net earned premiums (knownas the “expense ratio”), each computed based on our net losses and LAE,underwriting expenses and net earned premiums, determined in accordance withgenerally accepted accounting principles in the U.S. (“GAAP”).  A GAAP combined ratio under 100% indicatesthat an insurance or reinsurance company is generating an underwritingprofit.  A GAAP combined ratio over 100%indicates that an insurance or reinsurance company is generating anunderwriting loss.

 

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Insurance and reinsurance companies operating at a GAAP combined ratioof greater than 100% can be profitable when investment income and netinvestment gains are taken into account. The length of time between receiving premiums and paying out claims,commonly referred to as the  “tail”, cansignificantly affect how profitable float can be.  Long-tail losses, such as product liability,pay out over longer periods of time providing the insurance or reinsurancecompany the opportunity to generate significant investment earnings fromfloat.  Short-tail losses, such as fireor physical damage, pay out over shorter periods of time providing theinsurance or reinsurance company with a reduced opportunity to generatesignificant investment earnings from float.

 

**OUR BUSINESS FOCUS**

 

**Underwriting and Risk Strategy**

 

Our reinsurance contracts can be written on either a quota share basis(also known as proportional or pro-rata basis), or on an excess-of-loss basis. Inthe case of reinsurance written on an excess-of-loss basis, we receive apremium for the risk assumed and indemnify the cedant against all or aspecified portion of losses and expenses in excess of a specified dollar orpercentage amount. With quota share reinsurance, we share the premiums as wellas the losses and expenses in an agreed proportion with the cedant. In bothtypes of contracts, we may provide a ceding commission to the cedant.

 

Our primary business focus is on short-tail property treaty reinsurancewritten on both an excess-of-loss and proportional basis. We also underwritecertain direct insurance and casualty specialty risks.

 

Prior to 2007, we operated from a single seat of operation in Bermuda.During 2007 we expanded our underwriting platform to include operations locatedin the U.S., the U.K. and Switzerland.

 

Across all our locations and classes of business our operating strategyis to write only those risks which we expect will generate an acceptable returnon allocated capital while seeking to limit our exposure to the potential lossthat may arise from a single or a series of catastrophic events to withinacceptable levels.

 

**Coverage, Risk Selection and Exposure**

 

Our insurance and reinsurance underwriting teams work with proprietary riskanalytic and exposure databases which have been designed to provide consistentpricing, prudent risk selection and real-time portfolio management.  Our underwriters adhere to guidelinesestablished by senior management, as approved by the Underwriting Committee ofour Board of Directors, and seek to: (i) limit the scope of coverage onregular property classes to traditional perils and generally exclude perils orcauses of loss that are difficult to measure such as cyber risks, pollution andnuclear, biological and chemical acts of terrorism; (ii) entertaindifficult risks such as terrorism but only on a specific basis when the risk isadequately priced and exposures are controlled through limits, terms andconditions; (iii) exclude single risk exposures from catastrophe andretrocessional business; and (iv) use risk assessment models to assist inthe underwriting process and to quantify our catastrophe aggregate exposures.

 

**Reinsurance Modeling and Pricing**

 

In the case of our reinsurance pricing and underwriting process, wealso assess a variety of other available factors, including, but not limitedto: (i) the reputation of the ceding company and the likelihood ofestablishing a long-term relationship with them; (ii) the geographicallocation of the ceding company’s original risks; (iii) the historical lossdata of the ceding company; (iv) the historical loss data of the industryas a whole in the relevant regions (in order to compare the ceding company’shistorical catastrophe loss experience to industry averages); and (v) theperceived financial strength of the ceding company.

 

Historically in the reinsurance market, one lead reinsurer would act asthe principal underwriter in terms of negotiating key policy terms and pricingof reinsurance contracts with a broker. In the current environment, brokers generally obtain prices and termssubmitted by select reinsurers, all of which are taken into account during thebinding process. Our financial strength and the experience and reputation ofour underwriters permits us to play an active role in this process.  We believe this provides us with greateraccess to preferred risks and greater influence in negotiation of policy terms,attachment points and premium rates than many other reinsurers.

 

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We have developed a sophisticated proprietary modeling tool, calledCATM, to analyze and manage the reinsurance exposures we assume from cedants.This computer-based underwriting system, the technical components of whichincorporate the fundamentals of modern portfolio theory, is designed to measurethe amount of capital required to support individual contracts based on thedegree of correlation between contracts that we underwrite as well as otherfactors. CATM consists of a set of risk assessment tools which estimate theamount of loss and volatility associated with the contracts we assume. CATM isdesigned to use output from models developed by our actuarial team as well asfrom those of commercial vendors. In addition, CATM serves as an importantcomponent of our corporate enterprise-wide risk model which we use as a guidein managing our exposure to liability, asset and business risk.

 

**Our Treaty Reinsurance Book of Business**

 

The majority of the reinsurance products we currently write are in theform of treaty reinsurance contracts, which are contractual arrangements thatprovide for the automatic reinsurance of a type or category of riskunderwritten by our clients. When we write treaty reinsurance contracts we donot evaluate separately each of the individual risks assumed under thecontracts and are largely dependent on the individual underwriting decisionsmade by the cedant. Accordingly, we consider the cedant’s risk management andunderwriting practices in deciding whether to provide treaty reinsurance and inappropriately pricing the treaty. The majority of our current treatyreinsurance book of business represents short-tail property reinsuranceincluding retrocessional business.  Ourgross short-tail treaty reinsurance writings totaled $471.5 million, $496.8million and $530.1 million during the years ended December 31, 2009, 2008and 2007, respectively.  We also write amodest amount of long-tail treaty reinsurance business, mainly casualty risks,which totaled $52.6 million, $41.0 million and $50.8 million during the yearsended December 31, 2009, 2008 and 2007, respectively.

 

Most of our treaty reinsurance contracts provide protection againstsudden catastrophic losses typically related to natural or man-madecatastrophes. The terms of our reinsurance contracts vary by contract and bytype, whether they are excess-of-loss or proportional. Some of our contractsexclude coverage for terrorism, nuclear events and natural perils. Generally,we provide coverage under excess-of-loss contracts on an occurrence basis or onan aggregate basis. Some contracts also provide coverage on a per risk basis asopposed to a per event basis. Most of our excess-of-loss contracts provide fora reinstatement of coverage following a covered loss event in return for anadditional premium. Many contracts contain cancellation provisions which enablethe cedant to cancel the contract in certain circumstances.

 

We manage certain key risks using a combination of CATM, variousthird-party vendor models and underwriting judgment.  Our three-tiered approach focuses on trackingexposed contract limits, estimating the potential impact of a single naturalcatastrophe event, and simulating our yearly net operating result to reflectaggregate underwriting and investment risk. We seek to refine and improve each of these approaches based onoperational feedback. Underwriting judgment involves important assumptions aboutmatters that are inherently unpredictable and beyond our control and for whichhistorical experience and probability analysis may not provide sufficientguidance.

 

Treaty reinsurance premiums, which are generally due in installments,are a function of the number and type of contracts we write, as well asprevailing market prices. The timing of premiums written varies by line ofbusiness. Most property catastrophe business is written in the January 1, April 1,June 1 and July 1 renewal periods, while the property specialty andother specialty lines are written throughout the year. In the case of pro-ratacontracts and excess-of-loss contracts where no deposit or minimum premium isspecified in the contract, written premium is recognized evenly through theyear based on estimates of ultimate premiums provided by the ceding companies.Subsequent adjustments, based on reports of actual premium or revisions inestimates by ceding companies, are recorded in the period in which they aredetermined.

 

Excess-of-loss contracts are generally written on a losses occurringbasis, which means that they cover losses that occur during the contract term,regardless of when the underlying policies incept. Premiums from excess-of-losscontracts are earned ratably over the contract term, which is ordinarily twelvemonths.  In contrast, most pro-ratacontracts are written on a risks attaching basis, which means that we assume astated percent share of each original policy that the ceding company writesduring the contract term. As a result, the risk period for pro rata contracts,which extends from the inception date of the first policy bound during thecontract term to the termination date of the last policy bound, tends to exceedthe contract term. Premiums from pro rata contracts are earned over theassociated risk periods.

 

**Our Direct Insurance and Facultative Reinsurance Bookof Business**

 

We write a limited amount of direct insurance and facultativereinsurance contracts where we insure and reinsure individual risks on a case-by-casebasis.  Our direct insurance businessconsists of a modest book of short-tail property business written by MontpelierBermuda and Montpelier Syndicate 5151.

 

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Direct property facultative reinsurance involves the selection ofindividual risks and is characterized by large excess-of-loss limits and lowfrequency of losses. Brokered property facultative reinsurance involvesproportional, primary or excess-of-loss positions.

 

Through the formation of Syndicate 5151 and the acquisition of MUSIC,we have expanded our ability to write property facultative reinsurance, whetherproduced by brokers or entered into directly with the ceding companies, as wellas excess and surplus lines risks. Although these risks only represent a modestportion of our current book of business, we expect that these new lines willgradually become a greater portion of our future business.

 

Excess and surplus lines insurance arises from a segment of the marketthat allows customers to buy property and casualty insurance through thenon-admitted market. It grew out of the need for insurance coverage whichstandard carriers (or admitted carriers) elected not to cover for a variety ofreasons. The excess and surplus lines market is not subject to the strictpricing and form regulations applicable to the admitted insurance market,allowing us to tailor insurance contracts for our customers.

 

Our gross short-tail direct insurance and facultative reinsurancewritings totaled $84.8 million, $54.5 million and $65.4 million during theyears ended December 31, 2009, 2008 and 2007, respectively.  We also write long-tail direct insurance andfacultative reinsurance business, mainly casualty risks, which totaled $26.0million, $27.7 million and $7.5 million during the years ended December 31,2009,  2008 and 2007, respectively.

 

**Our Operating Platforms**

 

*Montpelier Re*

 

Montpelier Re focuses on writing large, short-tail U.S. andinternational catastrophe treaty reinsurance on both an excess-of-loss andproportional basis.  Montpelier Respecializes in insurance and facultative reinsurance business as well asspecialty lines such as aviation, personal accident catastrophe, workers’compensation and political violence/terrorism and its insurance and reinsuranceproducts include Property Treaty, Specialty Casualty & Other Classesand Property Direct and Facultative. Prior to 2007, Montpelier Re was our only operating platform and itcontinues to be our primary operating platform.

 

*Syndicate 5151*

 

Syndicate 5151 underwrites a book of property insurance andreinsurance, engineering, marine hull, cargo and specie and a limited amount ofspecialty casualty business with a view to capturing business that would notnormally find its way to our Bermuda underwriters. Syndicate 5151 focusesprimarily on non-catastrophe exposures while remaining within our corecompetency of underwriting short-tailed accounts.  Syndicate 5151’s focus may change from timeto time based on market opportunities. In addition to Syndicate 5151’s U.K.-based underwriting teams, Syndicate5151 also benefits from business generated through MUI, PUAL and MEAG, ourseparate Lloyd’s Coverholders.

 

MUI, our Lloyd’s Coverholder in the U.S., underwrites both treaty andfacultative insurance and reinsurance business on behalf of Syndicate5151.  Currently, MUI’s reinsurancebusiness is produced through three underwriting divisions as follows:

 

(i)           the Property Treaty divisionof MUI underwrites proportional and low layer excess-of-loss treaty business,mostly short-tail. MUI’s target market is regional and specialty insurancecompanies. This division looks for clients who have demonstrated ability toprofitably underwrite their chosen classes and manage the catastrophe exposureassociated with their risks.  TheProperty Treaty division seeks meaningful participations and strives to createand maintain longstanding relationships.

 

(ii)        the Brokered Property Facultativedivision of MUI underwrites a portfolio of North American property exposuresattaching in a proportional, primary or excess-of-loss position.  A large majority of this business iscatastrophe driven, and we rely heavily on our proprietary models to price andaggregate this business.

 

(iii)     the Direct PropertyFacultative division of MUI writes reinsurance business that is producedwithout broker involvement.  The policiesgenerally incorporate low-frequency, high severity risks written on an excess-of-lossbasis. Only a small portion of this business is catastrophe driven. Thisdivision relies on strong customer relationships developed through prompt andconsistent client response.  The DirectProperty Facultative division targets large, national carriers writing largeproperty exposures as well as regional and specialty carriers.

 

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PUAL, our Lloyd’s Coverholder in the U.K., seeks to produce business onbehalf of both Syndicate 5151 and third-party carriers. PUAL is structured toattract niche underwriting teams with access to profitable classes of businessthat PUAL can manage efficiently. Initially, PUAL will produce specialistcontractors, recycling and crime classes of business.

 

MEAG, our Lloyd’s Coverholder in Switzerland, seeks to producecatastrophe, risk excess-of-loss and pro rata business from within ContinentalEurope and Middle Eastern markets on behalf of Syndicate 5151 and MontpelierRe.

 

Since its inception, MCL, Syndicate 5151’s sole corporate member, hasceded 70% of its business to Montpelier Re.

 

*MUSIC*

 

MUSIC, our U.S. excess and surplus lines insurer, writes insurancerisks that do not conform to normal underwriting patterns for standard lines.These risks are written through select general agents and brokers enablingMUSIC to capitalize on the underwriting expertise and the territorial andproduct knowledge of the producer.  Theserisks require specialized treatment with respect to coverage, forms, price andother policy terms.  Generally, MUSICtargets smaller commercial property and casualty risks that are not subject toextreme competitive pressures.  Limitedbinding authority is granted to general agents for low to medium hazard riskswith low severity exposure.  Businesswith medium to high hazard risks and with low frequency and high severityexposure to loss is written through MUSIC’s underwriters.

 

Since its inception, MUSIC has ceded 75% of its business to MontpelierRe.

 

*Blue Ocean*

 

Blue Ocean was formed in the fourth quarter of 2005 in order tocapitalize on the attractive market conditions that existed in the propertycasualty retrocessional market following Hurricanes Katrina, Rita and Wilma.While early pricing conditions for Blue Ocean were strong, increasedcompetition and weaker demand experienced at the end of 2006 and throughout2007 adversely impacted pricing.  During2007 Blue Ocean Re ceased writing new business and during 2008 it wasderegistered as a Bermuda insurer. During 2009 Blue Ocean Re was amalgamated into Blue Ocean and Blue Oceanwas liquidated and dissolved.

 

**Outwards Reinsurance Protection**

 

In the normal course of business, we purchase reinsurance from third partiesin order to manage our exposures.  Theamount of outwards reinsurance that we buy varies from year-to-year dependingon our risk appetite, availability and cost. All of our reinsurance purchases to date have represented prospectivecover, meaning that the coverage has been purchased to protect us against therisk of future losses as opposed to covering losses that have already occurredbut have not yet been paid. The majority of our reinsurance contracts areexcess-of-loss contracts covering one or more lines of business. To a lesserextent, we have also purchased quota share reinsurance with respect to specificlines of our business. We also purchase industry loss warranty policies whichprovide us with coverage for certain losses we incur, provided they aretriggered by events exceeding a specified industry loss size. In addition, forcertain pro-rata contracts that we enter into, the associated direct insurancecontracts carry underlying reinsurance protection from third-party reinsurers,known as inuring reinsurance, which we net against our gross premiums written.

 

We remain liable for losses we incur to the extent that any third-partyreinsurer is unable or unwilling to make timely payments to us under ourreinsurance agreements.  Under our reinsurancesecurity policy, reinsurers are generally required to be rated “A-”(Excellent) or better by A.M. Best (or an equivalent rating with anotherrecognized rating agency) at the time the policy is written. We also considerreinsurers that are not rated or do not fall within the above threshold on acase-by-case basis when collateralized up to policy limits, net of any premiumsowed.  We monitor the financial conditionand ratings of our reinsurers on an ongoing basis.

 

**Claims Management**

 

Our personnel administer claims arising from our insurance andreinsurance contracts, including validating and monitoring claims, posting casereserves and approving payments. Authority for establishing reserves and payingclaims is based upon the level and experience of our claims personnel.

 

Our reinsurance claim specialists work closely with our brokers toobtain specific claims information from ceding companies.  In addition, when necessary, we performon-site claims reviews of the claims handling abilities and reservingtechniques of ceding companies.  Theresults of such claims reviews are shared with our underwriters and actuariesto assist them in pricing products and establishing loss reserves.

 

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As a reinsurer, we recognize that fair interpretation of ourreinsurance agreements and timely payment of covered claims is a valuableservice to our clients and enhances our reputation.

 

**Loss and LAE Reserves**

 

Our loss and LAE reserves are estimates of the future amounts needed topay claims and related expenses for insured events that have occurred.  Our reserving methodology does not lenditself well to a statistical calculation of a range of estimates surroundingthe best point estimate of our loss and loss adjustment expense reserves. Dueto the low frequency and high severity nature of our business, our reservingmethodology principally involves arriving at a specific point estimate for theultimate expected loss on a contract by contract basis, and our aggregate lossreserves are the sum of the individual loss reserves established.

 

Our internal actuaries review our reserving assumptions and ourmethodologies on a quarterly basis. Our third quarter and year-end lossestimates are subject to a corroborative review by independent actuaries usinggenerally accepted actuarial principles. The Audit Committee of our Board ofDirectors receives our quarterly and annual reserve analyses.

 

Our loss and LAE reserves include both a component for outstanding casereserves for claims which have been reported and a component for incurred butnot reported losses (“IBNR”). Our case reserve estimates are initially set onthe basis of loss reports received from third parties and claimants. IBNRconsists of a provision for additional development in excess of the casereserves reported by ceding companies and insureds, as well as a provision forclaims which have occurred but which have not yet been reported to us.

 

The process of establishing our loss reserves can be complex and issubject to considerable variability as it requires the use of informedestimates and judgments based on circumstances known at the date of accrual andis highly dependent on the loss information we receive from our cedants.Estimating loss reserves requires us to make assumptions regarding futurereporting and development patterns, frequency and severity trends, claimssettlement practices, potential changes in the legal environment and otherfactors such as foreign exchange fluctuations and inflation.  In addition, the potential exists, after acatastrophe loss, for the development of inflationary pressures within a localeconomy which are commonly referred to as “demand surge”.

 

We believe that our loss and LAE reserves fairly estimate the lossesthat fall within our assumed coverages. However, there can be no assurance thatactual losses will not exceed our total established reserves. Our loss and LAEreserve estimates and our methodology of estimating such reserves are regularlyreviewed and updated as new information becomes known. Any resultingadjustments are reflected in income in the period in which they become known.

 

**LINES OF BUSINESS**

 

Beginning in 2009, we changed the manner in which we categorized ourlines of business by segregating our treaty business from our individual riskbusiness. As a result of this re-characterization, we renamed our lines ofbusiness to be: (i) Property Catastrophe - Treaty; (ii) PropertySpecialty - Treaty; (iii) Other Specialty - Treaty; and (iv) Propertyand Specialty Individual Risk.  All priorperiods conform with the current presentation.

 

Property Catastrophe - Treaty

 

Our Property Catastrophe reinsurance contracts are typically “all risk”in nature, providing protection to the ceding company against losses fromearthquakes and hurricanes, as well as other natural and man-made catastrophessuch as floods, tornados, fires and storms. The predominant exposures coveredby these contracts are losses stemming from property damage and businessinterruption resulting from a covered peril.

 

Our Property Catastrophe reinsurance contracts are generally written onan excess-of-loss basis, which provides coverage to the ceding company whenaggregate claims and claim expenses from a single occurrence for a coveredperil exceed a certain amount specified in a particular contract. Under thesecontracts, we provide protection to an insurer for a portion of the totallosses in excess of a specified loss amount, up to a maximum amount per lossspecified in the contract. In the event of a loss, most of our PropertyCatastrophe contracts provide the ceding company with an automaticreinstatement of coverage for which we receive a reinstatement premium. Thecoverage provided under excess-of-loss reinsurance contracts may be on aworldwide basis or limited in scope to specific regions or geographical areas.Coverage can also vary from “all natural” perils, which is the most expansiveform, to more limited types such as windstorm-only coverage.

 

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We write retrocessional coverage contracts, which provide reinsuranceprotection to retrocedants. Retrocessional coverage generally providescatastrophe protection for the property portfolios of other reinsurers.Retrocessional contracts protect against concentrations of exposures written byretrocedants, which in turn may experience an aggregation of losses from asingle catastrophic event. In addition, the information available toretrocessional underwriters concerning the original primary risk is typicallyless detailed than the information received directly from the originalinsurance companies. Exposures from retrocessional business can also changewithin a contract term as a retrocedant’s underwriter may alter their book ofbusiness after retrocessional coverage has been bound.

 

Property Specialty - Treaty

 

We write Property Specialty reinsurance contracts that include bothproperty and engineering exposures. These contracts can be written on either an excess-of-loss or pro-ratabasis. Risk excess-of-loss reinsurance protects the ceding company on its primaryinsurance risks and facultative reinsurance transactions on a “single risk”basis. A “risk” in this context might mean the insurance coverage on onebuilding or a group of buildings or the insurance coverage under a singlepolicy which the reinsured treats as a single risk. Such property orengineering risk coverages are written on an excess-of-loss basis, whichprovide the reinsured protection beyond a specified amount up to the limit setwithin the reinsurance contract. Coverage is usually triggered by a large losssustained by an individual risk rather than by smaller losses which fall belowthe specified retention of the reinsurance contract.

 

Other Specialty - Treaty

 

We write Other Specialty reinsurance covering classes such as aviation(including liability), aviation war, space, marine, personal accident, workers’compensation, political violence (which includes terrorism), casualty, crop andother specialty reinsurance business.

 

Our aviation and space business is written either as pro rata or excess-of-losswith a focus on the major airlines and associated liabilities for aviationbusiness and launch plus in-orbit risks for space business.

 

Coverage for workers’ compensation and personal accident contracts aregenerally written to respond to losses in which a minimum of two insuredpersons are involved in the same event. However, we tend to attach at the upperlayers of such reinsurance programs where significantly more insured personswould need to be involved in the same event. We therefore regard our workers’compensation and personal accident classes as being catastrophe exposed andrelatively short-tail in nature.

 

Our casualty portfolio of risks focuses on selected classes with anhistoric emphasis on medical malpractice and casualty clash excess-of-lossreinsurance business. Although we do write excess hospital treaty reinsurance,our medical malpractice book is biased towards excess physicians’ treatyreinsurance, generally single state insurers. In addition, we also write alimited amount of auto liability coverage and professional liability businesson both an excess-of-loss and pro rata basis, and quota share treaties coveringgeneral liability for municipalities in the U.S.  Our current portfolio contains only a modestamount of casualty clash business. Clash is a form of reinsurance that coversthe ceding company’s exposure to multiple retentions that may occur when two ormore of its insureds suffer a loss from the same occurrence.

 

We have written a number of reinsurance contracts providing coveragefor losses arising from acts of terrorism. Most of these contracts excludecoverage protecting against nuclear, biological or chemical attacks. In anumber of countries, outside of the United States, government-backed schemes or“pools” now exist, which provide coverage for stipulated acts ofterrorism.  We reinsure a number of theseinternational terrorism “pools”.  In theUnited States the Terrorism Risk Insurance Act of 2002 (“TRIA”) was enacted toensure the availability of insurance coverage for certain types of terroristacts. TRIA established a federal assistance program to help insurers andreinsurers in the property and casualty insurance industry cover claims relatedto future terrorism losses and regulates the terms of insurance relating toterrorism coverage. In December 2007, the Terrorism Risk Insurance ProgramReauthorization Act of 2007 (“TRIPRA”) was enacted which extended TRIA’sexpiration from December 31, 2007 to December 31, 2014.  In addition, TRIPRA eliminated the distinctionbetween domestic and foreign acts of terrorism and retained the insurerdeductible level of 20% of direct earned premium for insured losses.

 

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Property and Specialty Individual Risk

 

We underwrite direct insurance and facultative reinsurance coverage onindustrial, commercial, and residential property, liability, marine and spacerisks where we assume all or part of a risk under a single insurance contract.We also underwrite a small amount of stand-alone political violence, pandemicand event contingency business. Facultative reinsurance is normally purchased by clients whereindividual risks are not covered by their reinsurance treaties, for amounts inexcess of the dollar limits of their reinsurance treaties or for unusual risks.

 

We also underwrite certain insurance risks, referred to as excess andsurplus lines, coverage of which is not available from insurers licensed by thestate (called admitted insurers) and must be purchased from a non-admittedcarrier. These risks, primarily smaller commercial property and casualty risks,are written through select general agents and brokers enabling us to capitalizeon the underwriting expertise, and the territorial scope and product knowledgeof the producer.  These risks involvespecialized treatment with respect to coverage, forms, price and other policyterms.

 

**WRITTEN PREMIUMS**

 

**By Line of Business and Segment**

 

The following tables present our gross premiums written, by line ofbusiness and reportable segment, during the years ended December 31, 2009,2008 and 2007:

 

(Millions)

 
| **Year Ended December 31, 2009**                | ** ** | **Montpelier********Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC**  | ** ** | **Corporate  and Other** | ** ** | **Total**                     | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | ** **                    | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                    | ** ** |
| Property  Catastrophe - Treaty                       | ** ** | **$**                         | **262.5**  | ** **                      | **$**      | **32.9**   | ** ** | **$**                    | **—** | ** **                    | **$**      | **—** | ** ** | **$** | **295.4** | ** ** |
| Property  Specialty - Treaty                         | ** ** | **68.9**                      | ** ** | **27.7**                        | ** ** | **—** | ** ** | **—**               | ** ** | **96.6**                      | ** ** |
| Other  Specialty - Treaty                            | ** ** | **71.2**                      | ** ** | **49.7**                        | ** ** | **—** | ** ** | **—**               | ** ** | **120.9**                     | ** ** |
| Property  and Specialty Individual Risk              | ** ** | **41.2**                      | ** ** | **56.5**                        | ** ** | **24.3**   | ** ** | **—**               | ** ** | **122.0**                     | ** ** |
| Inter-segment  reinsurance (1)                       | ** ** | **8.6**                       | ** ** | **0.5**                         | ** ** | **—** | ** ** | **(9.1**                 | **)**      | **—**                    | ** ** |
| Total  gross premiums written                        | ** ** | **$**                         | **452.4**  | ** **                      | **$**      | **167.3**  | ** ** | **$**                    | **24.3**   | ** **                    | **$**      | **(9.1** | **)** | **$** | **634.9** | ** ** |
|                                                 | ** ** | ** **                    | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **Year  Ended December 31, 2008**               | ** ** | **Montpelier  Bermuda**       | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC**  | ** ** | **Blue Ocean**           | ** ** | **Corporate  and Other** | ** ** | **Total** | ** ** |
|                                                 |       |                          |       |                            |       |       |       |                     |       |                          |       |   |   |
| Property  Catastrophe - Treaty                       |       | $                             | 305.9      |                            | $          | 30.6       |       | $                        | —     |                          | $          | 0.1 |   | $ | — |   | $ | 336.6 |   |
| Property  Specialty - Treaty                         |       | 86.4                          |       | 15.8                            |       | —     |       | —                   |       | —                        |       | 102.2 |   |
| Other  Specialty - Treaty                            |       | 66.1                          |       | 30.3                            |       | —     |       | —                   |       | —                        |       | 96.4 |   |
| Property  and Specialty Individual Risk              |       | 39.8                          |       | 39.5                            |       | 5.6        |       | —                   |       | —                        |       | 84.9 |   |
| Inter-segment  reinsurance (1)                       |       | 5.3                           |       | —                          |       | —     |       | —                   |       | (5.3                          | )          | — |   |
| Total  gross premiums written                        |       | $                             | 503.5      |                            | $          | 116.2      |       | $                        | 5.6        |                          | $          | 0.1 |   | $ | (5.3 | ) | $ | 620.1 |   |
| ** **                                           | ** ** | ** **                    | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2007** | ** ** | **Montpelier  Bermuda**       | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC**  | ** ** | **Blue Ocean**      | ** ** | **Corporate  and Other** | ** ** | **Total** | ** ** |
|                                                 |       |                          |       |                            |       |       |       |                     |       |                          |       |   |   |
| Property  Catastrophe - Treaty                       |       | $                             | 329.7      |                            | $          | 1.0        |       | $                        | —     |                          | $          | 42.8 |   | $ | — |   | $ | 373.5 |   |
| Property  Specialty - Treaty                         |       | 101.9                         |       | 3.5                             |       | —     |       | —                   |       | —                        |       | 105.4 |   |
| Other  Specialty - Treaty                            |       | 98.9                          |       | 0.3                             |       | —     |       | —                   |       | —                        |       | 99.2 |   |
| Property  and Specialty Individual Risk              |       | 65.2                          |       | 10.5                            |       | —     |       | —                   |       | —                        |       | 75.7 |   |
| Total  gross premiums written                        |       | $                             | 595.7      |                            | $          | 15.3       |       | $                        | —     |                          | $          | 42.8 |   | $ | — |   | $ | 653.8 |   |

 

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(1)          Representsinter-segment reinsurance covers which are eliminated in consolidation.

 

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**By Broker**

 

The majority of our insurance and reinsurance business is originatedthrough independent brokers.  Brokers areintermediaries that assist the ceding company in structuring its reinsuranceprogram and in negotiating and placing risks with third-party reinsurers. Inthis capacity, the broker is selected and retained by the ceding company on atreaty-by-treaty basis, rather than by us. Once the ceding company has approved the terms of a particularreinsurance program, as quoted by the lead underwriter or a group of reinsurersacting as such, the broker will offer participation to qualified reinsurersuntil the program is fully subscribed. The broker is not a party to thereinsurance contract.

 

We seek to build long-term relationships with brokers by providing: (i) promptand responsive service on underwriting submissions; (ii) innovative andcustomized insurance and reinsurance solutions to our clients; and (iii) timelypayment of claims.  Brokers receivecompensation, typically in the form of a commission, based on negotiatedpercentages of the premium they produce and the performance of other necessaryservices.  Broker commissions constitutea significant portion of our total acquisition costs.

 

We monitor our broker concentrations on a company-wide basis ratherthan by individual segment.

 

The following table sets forth a breakdown of our gross premiums writtenby broker:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| **($ in  millions)**                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Aon  Corporation (1)                            | ** ** | **$**                            | **217.3**  | ** ** | **34** | **%** | $ | 198.0 |   | 31 | % | $ | 201.2 |   | 31 | % |
| Marsh &  McLennan Companies, Inc. | ** ** | **163.2**                        | ** ** | **26** |   | 177.9 |   | 29 |   | 202.9 |   | 31 |   |
| Willis  Group Holdings Limited                  | ** ** | **85.7**                         | ** ** | **14** |   | 87.0 |   | 14 |   | 96.1 |   | 15 |   |
| All  other brokers                              | ** ** | **146.8**                        | ** ** | **23** |   | 121.2 |   | 20 |   | 139.5 |   | 21 |   |
|                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross  premiums written through brokers         | ** ** | **613.0**                        | ** ** | **97** |   | 584.1 |   | 94 |   | 639.7 |   | 98 |   |
|                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross  premiums written otherwise               | ** ** | **21.9**                         | ** ** | **3** |   | 36.0 |   | 6 |   | 14.1 |   | 2 |   |
|                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Total  gross premiums written                   | ** ** | **$**                            | **634.9**  | ** ** | **100** | **%** | $ | 620.1 |   | 100 | % | $ | 653.8 |   | 100 | % |

 

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(1)          Aon Corporation acquiredBenfield Group Limited (“Benfield”) in November 2008.  The gross premiums shown as sourced by AonCorporation also include those historically sourced by Benfield.

 

As illustrated above, the majority of our gross premiums written aresourced through a limited number of brokers with Aon Corporation, Marsh &McLennan Companies, Inc. and Willis Group Holdings Limited providing atotal of 74% of our gross premiums written for the year ended December 31,2009.  We are therefore highly dependenton these brokers and a loss of all or a substantial portion of the businessprovided by one or more of them could have a material adverse effect on our financialcondition and results of operations.  See*“Risk Factors”*contained in Item1A herein.

 

**By Geographic Area of Risks Insured**

 

We seek to diversify our exposure across geographic zones around theworld in order to obtain a prudent spread of risk. The spread of theseexposures is also a function of market conditions and opportunities.

 

We monitor our geographic exposures on a company-wide basis rather thanby segment.

 

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The following table sets forth a breakdown of our gross premiumswritten by geographic area of risks insured:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| **($ in  millions)**                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  and Canada                                | ** ** | **$**                            | **353.6**  | ** ** | **56** | **%** | $ | 314.2 |   | 50 | % | $ | 338.5 |   | 52 | % |
| Worldwide  (1)                                  | ** ** | **118.0**                        | ** ** | **19** |   | 121.2 |   | 19 |   | 133.5 |   | 20 |   |
| Worldwide,  excluding U.S. and Canada (2)       | ** ** | **37.7**                         | ** ** | **6** |   | 41.5 |   | 7 |   | 33.8 |   | 5 |   |
| Western  Europe, excluding the U.K. and Ireland | ** ** | **32.2**                         | ** ** | **5** |   | 59.7 |   | 10 |   | 51.6 |   | 8 |   |
| U.K.  and Ireland                               | ** ** | **25.0**                         | ** ** | **4** |   | 24.4 |   | 4 |   | 34.2 |   | 5 |   |
| Japan                                           | ** ** | **22.4**                         | ** ** | **3** |   | 23.1 |   | 4 |   | 25.0 |   | 4 |   |
| Other                                           | ** ** | **46.0**                         | ** ** | **7** |   | 36.0 |   | 6 |   | 37.2 |   | 6 |   |
|                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Total  gross premiums written                   | ** ** | **$**                            | **634.9**  | ** ** | **100** | **%** | $ | 620.1 |   | 100 | % | $ | 653.8 |   | 100 | % |

 

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(1)    “Worldwide” comprises insurance andreinsurance contracts that insure or reinsure risks in more than one geographicarea and do not specifically exclude the U.S. and Canada.

 

(2)    “Worldwide, excluding U.S. and Canada”comprises insurance and reinsurance contracts that insure or reinsure risks inmore than one geographic area but specifically exclude the U.S. and Canada.

 

**LOSS AND LAE RESERVES**

 

Loss and LAE reserves consist of estimates of future amounts needed topay claims and related expenses for insured events that have occurred.  The process of estimating these reservesinvolves a considerable degree of judgment and, as of any given date, isinherently uncertain.  See *“Summary of Critical Accounting Estimates”*contained in Item 7 herein for a full discussion regarding our loss and LAEreserving process.  We do not discountany of our loss and LAE reserves for time value.

 

The following information presents (i) our loss and LAE reservedevelopment over the preceding eight years (the “Loss Table”) and (ii) areconciliation of reserves in accordance with accounting principles andpractices prescribed or permitted by insurance authorities (“Statutory” basis)to such reserves determined in accordance with GAAP, each as prescribed bySecurities Act Industry Guide No. 6.

 

The Loss Table represents the development of our loss and LAE reservesfor 2001 (the year of our inception) through December 31, 2009.  The top line of the table shows the grossloss and LAE reserves at the balance sheet date for each of the indicatedyears. This represents the estimated amounts of loss and LAE reserves, bothcase and IBNR, arising in the current year and all prior years that are unpaidat the balance sheet date. The table also shows the re-estimated amount of thepreviously recorded reserves based on experience as of the end of eachsucceeding year. The estimate changes as more information becomes known aboutthe frequency and severity of claims for individual years. The “cumulativeredundancy (deficiency) on net reserves” represents the aggregate change todate from the indicated estimate of the gross reserve for claims and claimexpenses, net of losses recoverable on the third line of the table. The tablealso shows the cumulative net paid amounts as of successive years with respectto the net reserve liability.

 

The Loss Table does not reflect any loss development relating to MUSICfor periods prior to the date we acquired the company. We acquired MUSIC, whichhad no employees or in force premium, on November 1, 2007 solely for thepurpose of obtaining its multi-state insurance licenses and its excess andsurplus lines authorizations. See *“AcquiredLoss Reserves - MUSIC”* contained in Item 1 herein.

 

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| ** **                                                                                      | ** ** | **Consolidated Loss and LAE  Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(Millions)**                                                                                  | ** ** | **2001**                                                     | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| ENDING UNPAID LOSS AND LAE RESERVES:                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross balance                                                                                   |       | $                                                            | —     |   | $ | 146.0 |   | $ | 249.8 |   | $ | 549.5 |   | $ | 1,781.9 |   | $ | 1,089.2 |   | $ | 860.7 |   | $ | 808.9 |   | $ | 680.8 |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less: reinsurance recoverables onunpaid losses                                                  |       | —                                                       |       | (16.7 | ) | (7.7 | ) | (94.7 | ) | (305.7 | ) | (197.3 | ) | (152.5 | ) | (122.9 | ) | (69.6 | ) |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net liability                                                                                   |       | $                                                            | —     |   | $ | 129.3 |   | $ | 242.1 |   | $ | 454.8 |   | $ | 1,476.2 |   | $ | 891.9 |   | $ | 708.2 |   | $ | 686.0 |   | $ | 611.2 |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CUMULATIVE NET LIABILITY PAID:                                                                  |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1 year later                                                                                    |       | $                                                            | —     |   | $ | 23.2 |   | $ | 41.3 |   | $ | 214.2 |   | $ | 716.1 |   | $ | 335.2 |   | $ | 192.5 |   | $ | 182.8 |   |   |   |
| 2 years later                                                                                   |       | —                                                       |       | 35.9 |   | 87.3 |   | 309.7 |   | 1,026.5 |   | 480.3 |   | 304.4 |   |   |   |   |   |
| 3 years later                                                                                   |       | —                                                       |       | 52.5 |   | 109.1 |   | 325.2 |   | 1,150.4 |   | 570.9 |   |   |   |   |   |   |   |
| 4 years later                                                                                   |       | —                                                       |       | 53.7 |   | 114.1 |   | 334.1 |   | 1,229.7 |   |   |   |   |   |   |   |   |   |
| 5 years later                                                                                   |       | —                                                       |       | 56.2 |   | 117.0 |   | 353.2 |   |   |   |   |   |   |   |   |   |   |   |
| 6 years later                                                                                   |       | —                                                       |       | 56.2 |   | 117.2 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 7 years later                                                                                   |       | —                                                       |       | 56.3 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 8 years later                                                                                   |       | —                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NET LIABILITY RE-ESTIMATED:                                                                     |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1 year later                                                                                    |       | $                                                            | —     |   | $ | 71.9 |   | $ | 144.5 |   | $ | 437.7 |   | $ | 1,452.4 |   | $ | 855.5 |   | $ | 604.1 |   | $ | 610.3 |   |   |   |
| 2 years later                                                                                   |       | —                                                       |       | 61.6 |   | 131.8 |   | 407.8 |   | 1,447.7 |   | 783.1 |   | 555.7 |   |   |   |   |   |
| 3 years later                                                                                   |       | —                                                       |       | 61.5 |   | 130.7 |   | 400.3 |   | 1,398.4 |   | 764.4 |   |   |   |   |   |   |   |
| 4 years later                                                                                   |       | —                                                       |       | 59.2 |   | 129.4 |   | 390.6 |   | 1,383.4 |   |   |   |   |   |   |   |   |   |
| 5 years later                                                                                   |       | —                                                       |       | 59.2 |   | 128.0 |   | 385.4 |   |   |   |   |   |   |   |   |   |   |   |
| 6 years later                                                                                   |       | —                                                       |       | 58.4 |   | 126.1 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 7 years later                                                                                   |       | —                                                       |       | 57.7 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 8 years later                                                                                   |       | —                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CUMULATIVE NET REDUNDANCY                                                                       |       | $                                                            | —     |   | $ | 71.6 |   | $ | 116.0 |   | $ | 69.4 |   | $ | 92.8 |   | $ | 127.5 |   | $ | 152.5 |   | $ | 75.7 |   | $ | — |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RECONCILIATION OF NET LIABILITY RE-ESTIMATED AS OF  THE END OF THE LATEST RE-ESTIMATION PERIOD: |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross re-estimated liability                                                                    |       | $                                                            | —     |   | $ | 60.3 |   | $ | 132.1 |   | $ | 514.6 |   | $ | 1,698.1 |   | $ | 941.4 |   | $ | 683.7 |   | $ | 699.9 |   | $ | — |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less: re-estimatedreinsurance  recoverable                                                      |       | —                                                       |       | (2.6 | ) | (6.0 | ) | (129.2 | ) | (314.7 | ) | (177.0 | ) | (128.0 | ) | (89.6 | ) | — |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net re-estimated liability                                                                      |       | $                                                            | —     |   | $ | 57.7 |   | $ | 126.1 |   | $ | 385.4 |   | $ | 1,383.4 |   | $ | 764.4 |   | $ | 555.7 |   | $ | 610.3 |   | $ | — |   |
|                                                                                            |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CUMULATIVE GROSS REDUNDANCY                                                                     |       | $                                                            | —     |   | $ | 85.7 |   | $ | 117.7 |   | $ | 34.9 |   | $ | 83.8 |   | $ | 147.8 |   | $ | 177.0 |   | $ | 109.0 |   | $ | — |   |

 

See *“Management’s Discussion andAnalysis of Financial Condition and Results of Operations”* and *“Summary of Critical Accounting Estimates”*,each contained in Item 7 herein, for an analysis of our aggregate loss and LAEreserves for each of the latest three years, including a discussion of our lossreserve development experienced during those periods.

 

**Acquired Loss Reserves - MUSIC**

 

Prior to the MUSIC Acquisition, MUSIC wrote general liability,commercial auto liability, specialty and umbrella lines of business. From 2003to 2007 MUSIC did not write any new business and entered into run-off.  As of November 1, 2007, the date of theMUSIC Acquisition, MUSIC had gross loss and LAE reserves of $20.2 million andhad both third-party and GAINSCO reinsurance recoverables totaling $20.2million.  The gross loss and LAE reserveswe acquired are subject to various protective arrangements that we entered intoin connection with the MUSIC Acquisition. These protective arrangements wereestablished specifically for the purpose of minimizing our exposure to the pastbusiness underwritten by MUSIC and any adverse developments to MUSIC’s lossreserves as they existed at the time of the acquisition.

 

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As of December 31, 2009, MUSIC had remaining gross loss and LAEreserves relating to business underwritten prior to the MUSIC Acquisition of$6.1 million (the “Acquired Reserves”). In support of the Acquired Reserves, at December  31, 2009, MUSICheld a trust deposit maintained by GAINSCO and reinsurance recoverable fromthird-party reinsurers rated “A-” (Excellent) or better by A.M. Best in acombined amount exceeding $6.1 million. In addition, we have the benefit of afull indemnity from GAINSCO covering any adverse development from its pastbusiness.  If the Acquired Reserves wereto develop unfavorably during future periods and the various protectivearrangements, including GAINSCO’s indemnity, ultimately proved to beinsufficient, these liabilities would become our responsibility.

 

**INVESTMENTS, CASH AND CASH EQUIVALENTS**

 

**Investments**

 

Our investment portfolio is structured to support our need for: (i) maximizingour risk-adjusted total return; (ii) adequate liquidity, (iii) financialstrength and stability and (iv) regulatory and legal compliance.  Whereas we oversee all of our investmentactivities, the portfolio is actively managed by a number of registered investmentadvisors.  The Finance Committee of ourBoard of Directors (the “Finance Committee”) establishes our investmentguidelines, which specify minimum criteria regarding the credit quality andliquidity characteristics of the portfolio. These guidelines also setlimitations on the size of certain holdings, as well as the types of securitiesand industries in which the portfolio can be invested.

 

The Finance Committee also oversees our investment activities andreviews compliance with our investment objectives and guidelines. Theseobjectives and guidelines stress diversification of risk, capital preservation,market liquidity, and stability of portfolio income. Our investment advisorshave the discretion to invest our assets as they see fit provided that theycomply with their individual objectives and guidelines.

 

The current components of our investment portfolio are as follows:

 

*Fixed Maturity Investments*.  As a provider of insurance and reinsurancefor natural and man-made catastrophes, we could become liable for significantlosses on short notice.  As a result, ourasset allocation is predominantly oriented toward high-quality, fixed maturitysecurities with a short average duration. Our asset allocation is designed toreduce our sensitivity to interest rate fluctuations and provide adequateliquidity for the settlement of our expected liabilities. As of December 31,2009, our fixed maturities had an average credit quality of “AA+” (Very Strong)by Standard & Poor’s and an average duration of 2.5 years.  As of December 31, 2009, our fixedmaturities, which totaled $2,207.5 million, comprised 89% of our totalinvestment portfolio.

 

In August 2008, we terminated our securities lending program.  Prior to the termination, we lent certain ofour fixed maturity investments to other institutions for short periods of timethrough a lending agent and received a fee from the borrower for the temporaryuse of our securities.

 

*Equity Securities*.  Over longer time horizons, we believe thatmodest investments in equity securities can enhance our investmentreturns.  Our equity investment strategyis expected to maximize our risk-adjusted total return through investments in avariety of equity and equity-related instruments with a focus on valueinvesting.  As of December 31, 2009,our equity securities, which totaled $167.2 million, comprised 7% of our totalinvestment portfolio.

 

*Other Investments*.  Our other investments consist of investmentsin limited partnership interests and private investment funds, event-linked securities(“CAT Bonds”), private placements and certain derivative instruments.  As of December 31, 2009, our otherinvestments, which totaled $94.1 million, comprised 4% of our total investmentportfolio.  As of December 31, 2009,we had unfunded commitments to limited partnerships and private investmentfunds totaling $23.5 million.

 

**Cash and Cash Equivalents**

 

Our cash and cash equivalents consist of cash and fixed incomesecurities with maturities of less than three months from the date ofpurchase.  Our cash and cash equivalentbalances consist of: (i) amounts held to pay our operating expenses andcertain losses that become due for payment on short notice; (ii) undeployedcash and cash equivalents held by our investment advisors; and (iii) fundsheld to meet any other commitments and contingencies, including our unfundedobligations.  As of December 31,2009, we held $202.1 million in cash and cash equivalents of which $120.0million represented undeployed cash and cash equivalents held by our investmentadvisors.

 

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See *“Management’s Discussion andAnalysis of Financial Condition and Results of Operations”* containedin Item 7 herein for further information concerning our investment portfolio,our investment results and our liquidity and capital resources.

 

**RATINGS**

 

Reinsurance contracts do not discharge ceding companies from theirobligations to policyholders.  Therefore,ceding companies often require their reinsurers to have, and to maintain,strong financial strength ratings as assurance that their claims will bepaid.  Montpelier Re, Syndicate 5151 andMUSIC each maintain financial strength ratings, as discussed below, from one ormore rating agencies, including A.M. Best, Standard & Poor’s andFitch Ratings Ltd.

 

The financial strength ratings stated below are not evaluationsdirected to the investment community with regard to Common Shares or debtsecurities or a recommendation to buy, sell or hold such securities. Ourfinancial strength ratings may be revised or revoked at the sole discretion ofthe independent rating agencies.

 

*Montpelier Re*

 

Montpelier Re is currently rated “A-” by A.M. Best (Excellent, witha stable outlook), “A-” by Standard & Poor’s (Strong, with a stableoutlook) and “A-” by Fitch Ratings Ltd. (Strong, with a stable outlook).  “A-” is the fourth highest of fifteen A.M.Best financial strength ratings, “A-” is the seventh highest of twenty-oneStandard & Poor’s financial strength ratings and “A-” is the seventhhighest of twenty-four Fitch Ratings Ltd. financial strength ratings.

 

Montpelier Re’s ability to underwrite business is dependent upon thequality of its claims paying and financial strength ratings as evaluated bythese independent rating agencies. In the event that Montpelier Re isdowngraded below “A-” by A.M. Best or Standard & Poor’s, webelieve our ability to write business through Montpelier Re would be adverselyaffected. In the normal course of business, we evaluate Montpelier Re’s capitalneeds to support the amount of business it writes in order to maintain itsclaims paying and financial strength ratings.

 

A downgrade of Montpelier Re’s A.M. Best financial strength ratingbelow “B++” would constitute an event of default under our secured operationalletter of credit facilities. A downgrade of Montpelier Re’s A.M. Best orStandard & Poor’s rating could also trigger provisions allowing someceding companies to opt to cancel their reinsurance contracts with us. For themajority of contracts that incorporate ratings provision, a downgrade of below “A-”by A.M. Best, or “A-” by Standard and Poor’s constitutes grounds forcancellation. Either of these events could adversely affect our ability toconduct business.

 

At our request, on June 12, 2009, Moody’s Investors Services (“Moody’s”)withdrew its insurance financial strength rating of Montpelier Re.  Immediately prior to this withdrawal, Moody’sreaffirmed Montpelier Re’s Baa1 rating (Adequate, with a positive outlook).

 

*Syndicate 5151*

 

Syndicate 5151, as is the case with all Lloyd’s syndicates, benefitsfrom Lloyd’s central resources, including the Lloyd’s brand, its network ofglobal licences and the Lloyd’s Central Fund. The Lloyd’s Central Fund isavailable at the discretion of the Council of Lloyd’s to meet any valid claimthat cannot be met by the resources of any member. As all Lloyd’s policies areultimately backed by this common security, the Lloyd’s single market rating isapplied to all syndicates, including Syndicate 5151, equally.  Lloyd’s is currently rated “A” by A.M.Best (Excellent, with a stable outlook), “A+” by Standard & Poor’s(Strong, with a stable outlook) and “A+” by Fitch Ratings Ltd. (Strong, with astable outlook).  “A” is the thirdhighest of fifteen A.M. Best financial strength ratings, “A+” is the fifthhighest of twenty-one Standard & Poor’s financial strength ratings and“A+” is the fifth highest of twenty-four Fitch Ratings Ltd. financial strengthratings.

 

Standard & Poor’s has also assigned Syndicate 5151 aninteractive Lloyd’s Syndicate Assessment (“LSA”) of “3-” (Average Dependency,with a stable outlook).  A rating of 3 isthe third highest of five Standard & Poor’s LSA ratings.  A syndicate assigned an LSA of “5” isconsidered to have a very low dependency on Lloyds’ single market rating and isviewed as possessing strong business continuity characteristics.  A syndicate assigned an LSA of “1” indicatesa very high dependency on Lloyds’ single market rating and is viewed aspossessing weak business continuity characteristics.

 

*MUSIC*

 

MUSIC is currently rated “A-” by A.M. Best (Excellent, with astable outlook).  In the event thatMontpelier Re is downgraded below “A-” by A.M. Best, our ability to writebusiness through MUSIC could be adversely affected.

 

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**COMPETITION**

 

We compete with major U.S., Bermuda and other international insurersand reinsurers and certain underwriting syndicates and insurers, many of whichhave greater financial, marketing and management resources than we do. Weconsider our primary competitors to include: Ariel Holdings Ltd., FlagstoneReinsurance Holdings Limited, Lancashire Holdings Limited, various Lloyd’ssyndicates, RenaissanceRe Holdings Ltd. and Validus Holdings, Ltd.  Competition varies depending on the type ofbusiness being insured or reinsured and whether we are in a leading position oracting on a following basis. We also compete with various capital marketparticipants who offer or access insurance and reinsurance business insecuritized form or through special purpose entities or derivativetransactions. We also compete with government-sponsored insurers andreinsurers.

 

Competition in the types of business that we underwrite is based onmany factors including: (i) premiums charged and other terms andconditions offered; (ii) quality of services provided; (iii) financialratings assigned by independent rating agencies; (iv) speed of claimspayment; (v) reputation; (vi) perceived financial strength; and (vii) theexperience of the underwriter in the line of insurance or reinsurance to bewritten.

 

Increased competition could result in fewer submissions, lower premiumrates and less favorable policy terms, which could adversely impact our growthand profitability. In addition, capital market participants have createdalternative products such as catastrophe bonds that are intended to competewith traditional reinsurance products. We are unable to predict the extent towhich these factors may affect the future demand for our insurance andreinsurance products.

 

**REGULATION**

 

Insurance and reinsurance entities are highly regulated in mostcountries, although the degree and type of regulation varies significantly fromone jurisdiction to another with reinsurers generally subject to lessregulation than primary insurers. Montpelier Re is regulated by the BermudaMonetary Authority (the “BMA”), Syndicate 5151, MUAL, PUAL and MMSL areregulated by the U.K. Financial Services Authority (the “FSA”) and, in regardto Syndicate 5151, MUAL and MCL, the Council of Lloyd’s, MUI, MEAG and PUAL areapproved by Lloyd’s as Coverholders for Syndicate 5151, MUSIC is regulated byindividual U.S. state insurance commissioners and MEAG is regulated by theSwiss Financial Market Supervisory Authority (“FINMA”).

 

**Bermuda Regulation**

 

The Insurance Act 1978 of Bermuda and related regulations, as amended (the“Insurance Act”), regulates the insurance business of Montpelier Re andprovides that no person may carry on any insurance business in or from withinBermuda unless registered as an insurer by the BMA.  Montpelier Re is registered as a Class 4insurer by the BMA, which is responsible for the day-to-day supervision ofinsurers; however, as a holding company, the Company is not subject to Bermudainsurance regulations.  Insurance, aswell as reinsurance, is regulated under the Insurance Act.

 

The Insurance Act imposes solvency and liquidity standards and auditingand reporting requirements on Bermuda insurance companies and grants the BMApowers to supervise, investigate, require information and the production ofdocuments and to intervene in the affairs of insurance companies.

 

The Insurance Amendment Act 2008 (the “Amendment Act”), which waspromulgated in July 2008, created a new supervisory framework for Bermudainsurers by establishing new risk-based regulatory capital adequacy andsolvency margin requirements, including the calculation of a Class 4insurer’s Enhanced Capital Requirement (“ECR”) as further detailed below.

 

In December 2008 the Bermuda House of Assembly approved amendmentsto Bermuda’s existing insurance regulations (the “Regulations”) whichcompliment, and in certain respects are consequential to, the changesinstituted under the Amendment Act.

 

Certain significant aspects of Bermuda’s insurance regulatory frameworkare set forth as follows:

 

The BMA utilizes a risk-based approach when it comes to licensing andsupervising insurance companies.  As partof the BMA’s risk-based system, an assessment of the inherent risks within eachparticular class of insurer is utilized in the first instance to determine thelimitations and specific requirements which may be imposed.  Thereafter the BMA keeps its analysis ofrelative risk within individual institutions under review on an ongoing basis,including through the scrutiny of regular audited statutory financialstatements, and, as appropriate, meeting with senior management during onsitevisits.

 

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*Classification of Insurers*

 

The Insurance Act distinguishes between insurers carrying on long-termbusiness and insurers carrying on general business.  There are six classifications of insurerscarrying on general business, with Class 4 insurers subject to thestrictest regulation.  Montpelier Re,which is incorporated to carry on general insurance and reinsurance business,is registered as a Class 4 insurer in Bermuda and is regulated as suchunder the Insurance Act.

 

*Cancellation of Insurer’s Registration*

 

An insurer’s registration may be cancelled by the Supervisor ofInsurance of the BMA on certain grounds specified in the Insurance Act,including failure of the insurer to comply with its obligations under theInsurance Act or if, in the opinion of the BMA after consultation with theInsurance Advisory Committee, the insurer has not been carrying on business inaccordance with sound insurance principles.

 

*Principal Representative*

 

An insurer is required to maintain a principal office in Bermuda and toappoint and maintain a principal representative in Bermuda.  For the purpose of the Insurance Act,Montpelier Re’s principal office is located at Montpelier House, 94 Pitts BayRoad, Pembroke, HM 08, Bermuda. Christopher L. Harris, Montpelier Re’sPresident and Chief Executive Officer, has been appointed by the Board ofDirectors as Montpelier Re’s principal representative and has been approved bythe BMA.

 

*Independent Approved Auditor*

 

Every registered insurer must appoint an independent auditor who willaudit and report annually on the statutory financial statements and thestatutory financial return of the insurer, both of which, in the case ofMontpelier Re, are required to be filed annually with the BMA.  Montpelier Re’s independent auditor must beapproved by the BMA.

 

*Loss Reserve Specialist*

 

As a registered Class 4 insurer, Montpelier Re is required tosubmit an opinion of its approved loss reserve specialist with its statutoryfinancial return in respect of its losses and loss expenses provisions.  The loss reserve specialist, who willnormally be a qualified property and casualty actuary, must be approved by theBMA.

 

*Financial Statements*

 

An insurer must prepare annual statutory financial statements.  The Insurance Act prescribes rules forthe preparation and substance of such statements (which include, in statutoryform, a balance sheet, an income statement, a statement of capital and surplusand notes thereto).  The insurer isrequired to give detailed information and analyses regarding premiums, claims,reinsurance and investments.  TheAmendment Act and amended Regulations have introduced a new accounts regimeapplicable to Class 4 insurers, the most significant aspect of whichinvolves the obligation to detail, on a line-by-line basis, specific asset andliability classes in the insurer’s statutory balance sheet as well as therequirement to identify and distinguish between what is or is not attributableto affiliates of the insurer.  Class 4insurers are also required to prepare and file with the BMA audited annualfinancial statements prepared in accordance with GAAP or InternationalFinancial Reporting Standards.

 

*Annual Statutory Financial Return*

 

Montpelier Re is required to file with the BMA a statutory financialreturn no later than four months after its financial year end (unlessspecifically extended by the BMA).  Thestatutory financial return for a Class 4 insurer includes, among othermatters, a report of the approved independent auditor on the insurer’sstatutory financial statements, solvency certificates, the statutory financialstatements themselves, the opinion of the loss reserve specialist in respect ofthe loss and loss expense provisions and a schedule of reinsurance ceded.  The solvency certificates must be signed bythe principal representative and at least two directors of the insurer certifyingthat the minimum solvency margin and, in the case of the solvency certificate,the minimum liquidity ratio, have been met and whether the insurer compliedwith the conditions attached to its certificate of registration.  The independent auditor is required to statewhether, in its opinion, it was reasonable for the directors to make thesecertifications and whether the declaration of the statutory ratios complieswith the requirements of the Insurance Act. If an insurer’s accounts have been audited for any purpose other thancompliance with the Insurance Act, a statement to that effect must be filedwith the statutory financial return.

 

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*Enhanced Capital Requirement (“ECR”), MinimumSolvency Margin and Restrictions on Dividends and Distributions*

 

The new risk-based regulatory capital adequacy and solvency marginregime introduced under the Amendment Act (termed the Bermuda Solvency CapitalRequirement (“BSCR”), provides a risk-based capital model as a tool to assistthe BMA both in measuring risk and in determining appropriate levels ofcapitalization. BSCR employs a standard mathematical model that correlates therisk underwritten by Bermuda insurers to the capital that is dedicated to theirbusiness. The framework that has been developed applies a standard measurementformat to the risk associated with an insurer’s assets, liabilities andpremiums, including a formula to take account of the catastrophe risk exposure.

 

Where an insurer believes that its own internal model for measuringrisk and determining appropriate levels of capital better reflects the inherentrisk of its business, it may apply to the BMA for approval to use its internalcapital model in substitution for the BSCR model. The BMA may approve aninsurer’s internal model, provided certain conditions have been established,and may revoke approval of an internal model in the event that the conditionsare no longer met or where it feels that the revocation is appropriate. The BMAwill review the internal model regularly to confirm that the model continues tomeet the conditions.

 

In order to minimize the risk of a shortfall in capital arising from anunexpected adverse deviation, the BMA seeks that insurers operate at or above athreshold capital level (termed the Target Capital Level (“TCL”)), whichexceeds the BSCR or approved internal model minimum amounts.  The Amendment Act also introduced prudentialstandards in relation to the ECR and Capital and Solvency Return (“CSR”). TheECR is determined using the BSCR or an approved internal model, provided thatat all times the ECR must be an amount equal to, or exceeding the minimummargin of solvency.  The CSR is thereturn setting out the insurer’s risk management practices and otherinformation used by the insurer to calculate its approved internal modelECR.  The new capital requirementsrequire Class 4 insurers to hold available statutory capital and surplusequal to, or exceeding ECR and set TCL at 120% of ECR.  In circumstances where an insurer has failedto comply with an ECR given by the BMA, such insurer is prohibited fromdeclaring or paying any dividends until the failure is rectified.

 

The new risk-based solvency capital framework described aboverepresents a modification of the minimum solvency margin test set out in theInsurance Returns and Solvency Amendment Regulations 1980 (as amended).  While it must calculate its ECR annually byreference to either the BSCR or an approved internal model, a Class 4insurer such as Montpelier Re must also ensure at all times that its ECR is atleast equal to the minimum solvency margin for a Class 4 insurer inrespect of its general business, which is the greater of: (i) $100.0million; (ii) 50% of net premiums written; and (iii) 15% of net lossand loss expense provisions and other general business insurance reserves.

 

In addition, under the Insurance Act, a Class 4 insurer isprohibited from declaring or paying any dividends of more than 25% of its totalstatutory capital and surplus, as shown on its previous financial yearstatutory balance sheet. Montpelier Re, as a Class 4 insurer, must obtainthe BMA’s prior approval before reducing its total statutory capital, as shownon its previous financial year statutory balance sheet, by 15% or more.

 

Furthermore, under the Companies Act, the Company and Montpelier Re mayonly declare or pay a dividend if the Company or Montpelier Re, as the case maybe, has no reasonable grounds for believing that it is, or would after thepayment be, unable to pay its liabilities as they become due, or if therealizable value of its assets would not be less than the aggregate of itsliabilities and its issued share capital and share premium accounts.

 

*Minimum Liquidity Ratio*

 

The Insurance Act provides a minimum liquidity ratio for generalbusiness insurers.  An insurer engaged ingeneral business is required to maintain the value of its relevant assets atnot less than 75% of the amount of its relevant liabilities.  Relevant assets include, but are not limitedto, cash and time deposits, quoted investments, unquoted bonds and debentures,first liens on real estate, investment income due and accrued, accounts andpremiums receivable, reinsurance balances receivable and funds held by cedingreinsurers.  There are certain categoriesof assets which, unless specifically permitted by the BMA, do not automaticallyqualify as relevant assets, such as unquoted equity securities, investments inand advances to affiliates and real estate and collateral loans.  The relevant liabilities are total generalbusiness insurance reserves and total other liabilities less deferred incometax and sundry liabilities (by interpretation, those not specifically defined),letters of credit and guarantees.

 

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*Supervision, Investigation and Intervention*

 

The BMA may appoint an inspector with extensive powers to investigatethe affairs of Montpelier Re if it believes that such an investigation is inthe best interests of Montpelier Re’s policyholders or persons who may becomepolicyholders.  In order to verify orsupplement information otherwise provided to the BMA, the BMA may directMontpelier Re to produce documents or information relating to matters connectedwith its business.  Further, the BMA hasthe power to appoint a professional person to prepare a report on any aspect ofany matter about which the BMA has required or could require information.  If it appears to the BMA that there is a riskof Montpelier Re becoming insolvent, or that Montpelier Re is in breach of theInsurance Act or any conditions imposed upon its registration, the BMA may,among other things, direct Montpelier Re not to take on any new insurancebusiness; not to vary any insurance contract if the effect would be to increasethe insurer’s liabilities; not to make certain investments; to realize or notto realize certain investments; to maintain in, or transfer to the custody of,a specified bank, certain assets; not to declare or pay any dividends or otherdistributions or to restrict the making of such payments and/or to limit itspremium income and to remove a controller or officer.

 

*Certain Other Bermuda Law Considerations*

 

Although Montpelier Re is incorporated in Bermuda, it is classified asa non-resident of Bermuda for exchange control purposes by the BMA.  Pursuant to its non-resident status,Montpelier Re may engage in transactions in currencies other than Bermudadollars and there are no restrictions on its ability to transfer funds (otherthan funds denominated in Bermuda dollars) in and out of Bermuda or to paydividends to U.S. residents who are holders of its ordinary shares.

 

**U.K. Regulation**

 

We participate in the Lloyd’s market through Syndicate 5151. Syndicate5151’s operations are subject to regulation by the FSA and the Council of Lloyd’s.The FSA is responsible under the Financial Services and Markets Act 2000 forregulating U.K. insurers. It regulates the Society of Lloyd’s as well asindividual Lloyd’s managing agents. The Council of Lloyd’s regulates Lloyd’smembers and Lloyd’s managing agents.

 

MCL, Syndicate 5151’s sole corporate member, provides 100% of the stampcapacity of Syndicate 5151. Stamp capacity is a measure of the amount ofpremium a syndicate is authorized to write by Lloyd’s. Stamp capacity for 2009,2008 and 2007 was £143 million, £143 million and £47 million, respectively, andstamp capacity for 2010 has been increased to £180 million.

 

As a corporate member of Lloyd’s, MCL is bound by the rules of theSociety of Lloyd’s, which are prescribed by Byelaws and requirements made bythe Council of Lloyd’s under powers conferred by the Lloyd’s Act 1982. Thesegovern MCL’s participation in Syndicate 5151 and (among other matters)prescribe its membership subscription, the level of its contribution to theLloyd’s Central Fund and the assets it provides to Lloyd’s in support of itsunderwriting.

 

The Council of Lloyd’s has broad powers to sanction breaches of itsrules, including the power to restrict or prohibit a member’s participation onLloyd’s syndicates. In addition, the FSA monitors Lloyd’s rules to ensurethese are adequate to allow the Society of Lloyd’s to meet its own regulatoryobligations to the FSA.

 

Syndicate 5151 is currently managed by MUAL but, through December 31,2008, Syndicate 5151 was managed by Spectrum. Under the FSA’s regulatory regime, managing agents are required, amongother matters, to adopt internal systems and controls appropriate to the risksof their business, obtain regulatory approval for those members of staffresponsible for performing certain controlled functions and calculate the levelof capital required to support the underwriting of the syndicates that theymanage. They are also required to conduct their business according to elevencore regulatory principles, to which all firms regulated by the FSA aresubject. The FSA and the Council of Lloyd’s have entered into an agreement bywhich the Council of Lloyd’s undertakes primary supervision of managing agentsin relation to certain aspects of the FSA’s regulatory regime. This arrangementis intended to minimize duplication of supervision.

 

Lloyd’s supervises Coverholders such as MEAG, MUI and PUAL as part ofits statutory role in managing and supervising the Lloyd’s market. Thissupervision is carried out through the approval process and then through Lloyd’songoing supervision of all approved Coverholders.  Local regulators may require Lloyd’s todemonstrate that it has control over, and responsibility for, the businesscarried out by Coverholders under the terms of Lloyd’s authorization in thatjurisdiction.  Nonetheless, the primary responsibilityto supervise Coverholders and binding authorities on a day-to-day basis restswith Lloyd’s managing agents, which in our case is currently MUAL or, through December 31,2008, was Spectrum.

 

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Each member of Lloyd’s is required to deposit cash, securities orletters of credit (or a combination of these assets) with Lloyd’s to supportits participation on Lloyd’s syndicates. These assets are known as a members’ “Fundsat Lloyd’s.” Funds at Lloyd’s requirements are calculated according to aminimum capital resources requirement, which is assessed at the syndicate levelby Lloyd’s and at the level of the Lloyd’s market as a whole by the FSA. Thisrequirement is similar in effect to a required solvency margin.

 

At the syndicate level, managing agents are required to calculate thecapital resource requirements of the members of each syndicate they manage.They do this by carrying out a syndicate Individual Capital Assessment (“ICA”)according to detailed rules prescribed by the FSA. The ICA processevaluates the risks faced by the syndicate, including insurance risk,operational risk, market risk, credit risk, liquidity risk and group risk, andassesses the amount of capital that syndicate members should hold against thoserisks. Lloyd’s reviews each syndicate’s ICA annually and may challenge it.  In order to ensure that Lloyd’s aggregatecapital is maintained at a high enough level to support its overall securityrating, Lloyd’s adds an uplift (historically 35% on average) to the capitalrequirement figure produced by the ICA across the Lloyd’s market.  This uplifted figure is known as a syndicate’sEconomic Capital Assessment (“ECA”), which is used by Lloyd’s to calculate eachsyndicate’s Funds at Lloyd’s requirement.

 

At a Lloyd’s market level, Lloyd’s is required to demonstrate to theFSA that each member’s capital resources requirement is met by that member’savailable capital resources, which for this purpose comprises its Funds atLloyd’s, its share of member capital held at syndicate level and the funds heldwithin the Lloyd’s Central Fund. In this way the FSA monitors the solvency ofthe Lloyd’s market as a whole.  TheCouncil of Lloyd’s has wide discretionary powers to regulate members’underwriting at Lloyd’s. It may, for instance, vary the amount of a member’sFunds at Lloyd’s requirement (or alter the ways in which those funds may beinvested). The exercise of any of these powers may reduce the amount of premiumwhich a member is allowed to accept for its account in an underwriting yearand/or increase a member’s costs of doing business at Lloyd’s. As aconsequence, the member’s ability to achieve an anticipated return on capitalduring that year may be compromised.

 

Each syndicate is required to submit a business plan to Lloyd’s on anannual basis, which is subject to the review and approval of the Lloyd’sFranchise Board. The Lloyd’s Franchise Board is the managing agents’ principalinterface with the Council of Lloyd’s. The main goal of the Franchise Board isto seek to create and maintain a commercial environment at Lloyd’s in whichunderwriting risk is prudently managed while providing maximum long termreturns to capital providers.

 

Lloyd’s syndicates are treated as “annual ventures” and members’participation on syndicates may change from underwriting year to underwritingyear. Ordinarily, a syndicate will accept business over the course of one calendaryear (an underwriting year of account), which will remain open for a furthertwo calendar years before being closed by means of “reinsurance to close”. Anunderwriting year may be reinsured to close by the next underwriting year ofthe same syndicate or by an underwriting year of a different syndicate. Lloyd’smoved to annual accounting on January 1, 2005. Previously, the marketoperated according to a three-year accounting cycle, so that members were notable to take profits made in an underwriting year until it had been reinsuredto close, usually at the end of three years. Now, provided that certainsolvency requirements are met, underwriting profits may effectively be taken inpart before the year has been reinsured to close. Once an underwriting year hasbeen reinsured to close, Lloyd’s will release the Funds at Lloyd’s providedthat these are not required to support the members’ other underwriting years orto meet a loss made on the closed underwriting year. If reinsurance to closecannot be obtained at the end of an underwriting year’s third open year (eitherat all, or on terms that the managing agent considers to be acceptable onbehalf of the members participating on that underwriting year), then themanaging agent of the syndicate must determine that the underwriting year willremain open. If the managing agent determines to keep the underwriting yearopen, then the underwriting year of account will be considered to be inrun-off, and the Funds at Lloyd’s of the participating members will continue tobe held by Lloyd’s to support their continuing liabilities unless the memberscan show that their Funds at Lloyd’s are in excess of the amount required to beheld in respect of their liabilities in relation to that year.

 

The reinsurance to close of an underwriting year does not dischargeparticipating members from the insurance liabilities they incurred during thatyear. Rather, it provides them with a full indemnity from the membersparticipating in the reinsuring underwriting year in respect of thoseliabilities. Therefore, even after all the underwriting years in which a memberhas participated have been reinsured to close, the member is required to stayin existence and to remain a non-underwriting member of Lloyd’s. Accordingly,although Lloyd’s will release members’ Funds at Lloyd’s, there neverthelesscontinues to be an administrative and financial burden for corporate membersbetween the time of the reinsurance to close of the underwriting years on whichthey participated and the time that their insurance obligations are entirelyextinguished. This includes the completion of financial accounts in accordancewith the Companies Act 2006 and the submission of an annual compliancedeclaration to Lloyd’s.

 

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Underwriting losses incurred by a syndicate during an underwriting yearmust be paid according to the links in the Lloyd’s chain of security. Claimsmust be funded first from the members’ premiums trust fund (which is held underthe control of the syndicate’s managing agent), second from a cash call made tothe corporate name and third from members’ Funds at Lloyd’s. In the event thatany member is unable to pay its debts owed to policyholders from these assets,such debts may, at the discretion of the Council of Lloyd’s, be paid by theLloyd’s Central Fund.

 

The Lloyd’s Central Fund levy, which is funded annually by members, wasdetermined by Lloyd’s to be 0.5% of Syndicate 5151’s written premiums withrespect to 2010,  2% of Syndicate 5151’swritten premiums with respect to 2009 and 2008 and 2% of Syndicate 5151’sunderwriting capacity with respect to 2007. In addition, the Council of Lloyd’s has power to call on members to makean additional contribution to the Central Fund of up to 3% of theirunderwriting capacity each year should it decide that such additionalcontributions are necessary.

 

Lloyd’s also makes other charges to its members and the syndicates onwhich they participate, including an annual subscription charge (0.5% ofwritten premiums with respect to 2010, 2009 and 2008, and 0.5% of underwritingcapacity with respect to 2007) and an overseas business charge, levied as apercentage of gross international premiums (that is premiums on businessoutside the U.K. and the Channel Islands), with the percentage depending on thetype of business written. Lloyd’s also has power to impose additional chargesunder Lloyd’s Powers of Charging Byelaw.

 

**Emerging European Regulation - Solvency II**

 

Solvency II is a fundamental review of the capital adequacy regime forthe European Union (“EU”) insurance industry. It aims to establish a revisedset of EU-wide capital requirements and risk management standards that areexpected to replace the current Solvency I requirements in 2012.

 

We expect that both Montpelier Re and Syndicate 5151 will be affectedby Solvency II. Montpelier Re may be affected by virtue of the BMA’s statedintention to achieve Solvency II equivalence for Bermuda insurance andreinsurance regulation, and Syndicate 5151 may be affected as a result of itsauthorization by the FSA within the EU.

 

The final requirements of Solvency II have not yet been published, andkey aspects remain subject to the political process as well as to thefinalization of consequential amendments to their regulatory regimes by the BMAand the FSA. Accordingly, the Company is not in a position to assess the finalimpact of the new regime on the capital and operational requirements ofMontpelier Re and Syndicate 5151.

 

The Company has established a taskforce of specialists to address theissues arising from Solvency II within the scope of a planning andrisk-management initiative covering all of its underwriting operations.

 

**U.S. Regulation**

 

MUSIC is domiciled in Oklahoma and is authorized to write surplus linesprimary insurance in 47 additional states and the District of Columbia. MUSICis subject to the laws of Oklahoma and the surplus lines regulation andreporting requirements of the jurisdictions in which it is eligible to writesurplus lines insurance. In accordance with certain provisions of the NationalAssociation of Insurance Commissioners (“NAIC”) Non-Admitted Insurance ModelAct, which provisions have been adopted by a number of states, MUSIC hasestablished, and is required to maintain, specified amounts on deposit as acondition of its status as an eligible, non-admitted insurer in the U.S.

 

The regulation of surplus lines insurance differs significantly fromthe licensed or “admitted” market. The regulations governing the surplus linesmarket have been designed to facilitate the procurement of coverage, throughspecially licensed surplus lines brokers, for hard-to-place risks that do notfit standard underwriting criteria and are otherwise eligible to be written ona surplus lines basis. Particularly, surplus lines regulation generallyprovides for more flexible rules relating to insurance rates and forms.However, strict regulations apply to surplus lines placements under the laws ofevery state, and certain state insurance regulations require that a risk mustbe declined by up to three admitted carriers before it may be placed in thesurplus lines market. Initial eligibility requirements and annualrequalification standards apply to insurance carriers writing on a surplusbasis and filing obligations must also be met. In most states, surplus linesbrokers are responsible for collecting and remitting the surplus lines taxpayable to the state where the risk is located. Companies such as MUSIC, whichconducts business on a surplus lines basis in a particular state, are generallyexempt from that state’s guaranty fund laws.

 

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*Non-Admitted Reinsurers.*  Ceding insurers generally receive full creditfor outwards reinsurance protections in their U.S. statutory financialstatements with respect to liabilities ceded to admitted U.S. domesticreinsurers.  However, most states in theU.S. do not confer full credit for outwards reinsurance protections forliabilities ceded to non-admitted or unlicensed reinsurers, such as MontpelierRe, unless such reinsurers collateralize all ceded liabilities. Underapplicable statutory provisions, permissible security arrangements includeletters of credit, reinsurance trusts maintained by third-party trustees andfunds withheld arrangements.

 

*Holding Company Regulation.*  The Company and MUSIC are subject toregulation under the insurance holding company laws of various jurisdictions.The insurance holding company laws and regulations vary from jurisdiction tojurisdiction, but generally require an insurance holding company, and insurersthat are subsidiaries of insurance holding companies, to register with stateregulatory authorities and to file with those authorities certain reports,including information concerning their capital structure, ownership, financialcondition, certain intercompany transactions and general business operations.

 

Further, in order to protect insurance company solvency, stateinsurance statutes typically place limitations on the amount of dividends orother distributions payable by insurance companies. Oklahoma, MUSIC’s state of domicile,currently requires that dividends be paid only out of earned statutory surplusand also limits the annual amount of dividends payable without the priorapproval of the Oklahoma Insurance Department to the greater of 10% ofstatutory capital and surplus at the end of the previous calendar year or 100%of statutory net income from operations for the previous calendar year.  These insurance holding company laws alsoimpose prior approval requirements for certain transactions with affiliates. Inaddition, as a result of our ownership of MUSIC under the terms of applicablestate statutes, any person or entity desiring to purchase more than 10% of ouroutstanding voting securities is required to obtain prior regulatory approvalfor the purchase.

 

*NAIC Ratios.* The NAIC has established 13financial ratios to assist state insurance departments in their oversight ofthe financial condition of licensed U.S. insurance companies operating in theirrespective states. The NAIC’s Insurance Regulatory Information System (“IRIS”)calculates these ratios based on information submitted by insurers on an annualbasis and shares the information with the applicable state insurancedepartments. Each ratio has an established “usual range” of results and assistsstate insurance departments in executing their statutory mandate to oversee thefinancial condition of insurance companies. A ratio result falling outside theusual range of IRIS ratios is not considered a failing result; rather unusualvalues are viewed as part of the regulatory early monitoring system.Furthermore, in some years, it may not be unusual for financially soundcompanies to have several ratios with results outside the usual ranges. Aninsurance company may fall out of the usual range for one or more ratiosbecause of specific transactions that are in themselves immaterial. Generally,an insurance company will be subject to regulatory scrutiny if it falls outsidethe usual ranges with respect to four or more of the ratios.

 

*Risk-Based Capital.*  The NAIC has implemented a risk-based capital(“RBC”) formula and model law applicable to all licensed U.S. property/casualtyinsurance companies. The RBC formula is designed to measure the adequacy of aninsurer’s statutory surplus in relation to the risks inherent in its business.Such analysis permits regulators to identify inadequately capitalized insurers.The RBC formula develops a risk-adjusted target level of statutory capital byapplying certain factors to insurers’ business risks such as asset risk,underwriting risk, credit risk and off-balance sheet risk. The target level ofstatutory surplus varies not only as a result of the insurer’s size, but alsoon the risk profile of the insurer’s operations. Insurers that have lessstatutory capital than the RBC calculation requires are considered to haveinadequate capital and are subject to varying degrees of regulatory actiondepending upon the level of capital inadequacy. The RBC formulas have not beendesigned to differentiate among adequately capitalized companies that operatewith higher levels of capital. Therefore, it is inappropriate and ineffectiveto use the formulas to rate or to rank such companies. MUSIC currentlysatisfies the RBC formula and exceeds all recognized industry solvencystandards.

 

*Legislative and Regulatory Proposals.*  Government intervention in the insurance andreinsurance markets, both in the U.S. and worldwide, continues to evolve. Forexample, Florida has enacted recent insurance reforms that have caused adecline in our property catastrophe gross premiums written in recent years. See*“Risk Factors”* contained in Item1A herein.  Federal and state legislatorshave also considered numerous government initiatives. While we cannot predictthe exact nature, timing, or scope of other such proposals, if adopted theycould adversely affect our business by: (i) providing government supportedinsurance and reinsurance capacity in markets and to consumers that we target,such as the legislation enacted in Florida in early 2007; (ii) regulatingthe terms of insurance and reinsurance policies; (iii) impacting producercompensation; or (iv) disproportionately benefitting the companies of onecountry over those of another.

 

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For example, new federal legislation, the Non-Admitted and ReinsuranceReform Act of 2007 (the “NRRA”), was passed by the U.S. House ofRepresentatives in 2007 and has been introduced in the U.S. Senate. If enactedin its current form, the NRRA would, among other things, (i) grant soleregulatory authority with respect to the placement of non-admitted insurance tothe policyholder’s home state, (ii) limit states to uniform standards forsurplus lines eligibility in conformity with the NAIC Non-Admitted InsuranceModel Act, (iii) establish a streamlined insurance procurement process forexempt commercial purchasers by eliminating the requirement that brokersconduct a due diligence search to determine whether the insurance is availablefrom admitted insurers, (iv) establish the domicile state of the cedinginsurer as the sole regulatory authority with respect to credit for reinsuranceand solvency determinations if such state is an NAIC-accredited state or hasfinancial solvency requirements substantially similar to those required forsuch accreditation and (v) require that premium taxes related tonon-admitted insurance only be paid to the policyholder’s home state, althoughthe states may enter into a compact or establish procedures to allocate suchpremium taxes among the states.

 

In addition, the Insurance Industry Competition Act of 2007 (the “IICA”)has been introduced in the U.S. Senate and the U.S. House of Representatives.The IICA, if enacted in its current form, would remove the insurance industry’santitrust exemption created by the McCarran-Ferguson Act, which provides thatinsurance companies are exempted from federal antitrust law so long as they areregulated by state law, absent boycott, coercion or intimidation. If enacted inits current form, the IICA would, among other things, (i) effect adifferent judicial standard providing that joint conduct by insurancecompanies, such as price sharing, would be subject to scrutiny by the U.S.Department of Justice unless the conduct was undertaken pursuant to a clearlyarticulated state policy that is actively supervised by the state and (ii) delegateauthority to the Federal Trade Commission to identify insurance industrypractices that are not anti-competitive.

 

We are unable to predict whether any of the foregoing proposedlegislation or any other proposed laws and regulations will be adopted, theform in which any such laws and regulations would be adopted, or the effect, ifany, these developments would have on our operations and financial condition.

 

**Swiss Regulation**

 

MEAG is subject to registration and supervision by FINMA as aninsurance intermediary. Unlike supervision of insurance undertakings, Swissintermediary supervision does not involve a solvency review.  There is, however, ongoing supervision aimedat protecting insurance customers and ensuring compliance with Swissobligations.

 

**EMPLOYEES**

 

As of December 31, 2009, we had 209 full-time employees worldwide.None of our employees are subject to collective bargaining agreements, and weknow of no current efforts to implement such agreements.

 

Many of our employees, including several executive officers, areemployed in Bermuda pursuant to work permits granted by the Bermuda government,which has a policy that limits the duration of work permits to six years,subject to certain exemptions for key employees. These permits expire atvarious times over the next several years and we have no assurance that thesepermits will be extended upon expiration.

 

**AVAILABLE INFORMATION**

 

We are subject to the informational reporting requirements of theSecurities Exchange Act of 1934 (the “Exchange Act”).  In accordance therewith, we file reports,proxy statements and other information with the Securities and ExchangeCommission (the “SEC”).  These documentsare electronically available at *www.montpelierre.bm*and *www.sec.gov* at the same timethey are filed with or furnished to the SEC. They are also available to copy orview at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC20549. For further information call 1-800-SEC-0330.  In addition, our Code of Conduct and Ethicsas well as the various charters governing the actions of certain of ourCommittees of the Board of Directors, including our Audit Committee and ourCompensation and Nominating Committee (the “CN Committee”) charters, areavailable at *www.montpelierre.bm*.  Updates to, as well as waivers of, our Codeof Conduct and Ethics will also be made available on our website. Our websiteis not part of this report and nothing from our website shall be deemed to beincorporated into this report.

 

We will provide to any shareholder, upon request and without charge,copies of these documents (excluding any applicable exhibits unless specificallyrequested).  Requests should be directedto Investor Relations, Montpelier Re Holdings Ltd., P.O. Box HM 2079,Hamilton, Bermuda HM HX, telephone (441) 299-7570 or info@montpelierre.bm.  All such documents are also physicallyavailable at our principal office at 94 Pitts Bay Road, Pembroke, Bermuda HM08.

 

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**Item 1A**.  ***Risk Factors***

 

Factors that could cause our actual results to differ materially fromthose in the forward looking statements contained in this Form 10-K andother documents we file with the SEC are outlined below. Additional risks notpresently known to us or that we currently deem immaterial may also impair ourbusiness or results of operations. Any of the risks described below couldresult in a significant or material adverse effect on our results of operationsor financial condition.

 

***Risks Related to Our Company***

 

**Unpredictable disasters and other catastrophic eventscould adversely affect our financial condition or results of operations.**

 

We have substantial exposure to losses resulting from natural andman-made disasters and other catastrophic events. Many of our insurance andreinsurance policies cover unpredictable natural and other disasters, such ashurricanes, windstorms, earthquakes, floods, fires,  explosions and terrorism.  In recent years, the frequency of majorweather-related catastrophes is believed to have increased.

 

The extent of losses from a catastrophe is a function of the frequencyof loss events, the total amount of insured exposure in the area affected byeach event and the severity of the events. Increases in the value of insured property, the effects of inflation andchanges in cyclical weather patterns may increase the severity of claims fromcatastrophic events in the future. Claims from catastrophic events could reduceour earnings and cause substantial volatility in our results of operations forany fiscal period and adversely affect our financial condition.  Our ability to write new insurance andreinsurance policies could also be impacted as a result of correspondingreductions in our capital.

 

We manage certain key quantifiable risks using a combination of CATM,various third-party vendor models and underwriting judgment.  We focus on tracking exposed contract limits,estimating the potential impact of a single natural catastrophe event, andsimulating our yearly net operating result to reflect aggregate underwritingand investment risk.  Accordingly, if ourassumptions are materially incorrect, the losses we might incur from an actualcatastrophe could be significantly higher than our expectation of lossesgenerated from modeled catastrophe scenarios and, as a result, our financialcondition and results of operations could be materially and adversely affected.

 

**We may not maintain favorable financial strengthratings which could adversely affect our ability to conduct business.**

 

Third-party rating agencies assess and rate the financial strength,including claims-paying ability, of insurers and reinsurers. These ratings arebased upon criteria established by the rating agencies and are subject torevision at any time at the sole discretion of the rating agencies. Some of thecriteria relate to general economic conditions and other circumstances that areoutside of our control. Financial strength ratings are used by policyholders,agents and brokers as an important means of assessing the suitability ofinsurers and reinsurers as business counterparties and have become anincreasingly important factor in establishing the competitive position ofinsurance and reinsurance companies. These financial strength ratings do notrefer to our ability to meet non-insurance obligations and are not arecommendation to purchase or discontinue any policy or contract issued by usor to buy, hold or sell our securities.

 

Rating agencies periodically evaluate us to determine whether wecontinue to meet the criteria of the ratings previously assigned to us.  A downgrade or withdrawal of our financialstrength ratings could limit or prevent us from writing new insurance orreinsurance contracts or renewing existing contracts, which could have amaterial adverse effect on our financial condition and results of operations.

 

In addition, a ratings downgrade by A.M. Best or Standard &Poor’s could trigger provisions allowing some cedants to opt to cancel theirreinsurance contracts with us and a downgrade of Montpelier Re’s A.M. Bestfinancial strength rating to below “B++” would constitute an event of defaultunder certain of our letter of credit and revolving credit facilities. Eitherof these events could adversely affect our ability to conduct business.

 

**We are highly dependent on a small number of insuranceand reinsurance brokers for a large portion of our revenues.  Additionally, we are subject to credit riskwith respect to brokers.**

 

We market our reinsurance worldwide primarily through insurance andreinsurance brokers. The majority of our gross premiums written are sourcedthrough a limited number of brokers with Aon Corporation, Marsh &McLennan Companies, Inc. and Willis Group Holdings Limited providing atotal of 74% of our gross premiums written for the year ended December 31,2009.

 

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The nature of our dependency on these brokers relates to the highvolume of business they consistently refer to us. Our relationship with suchbrokers is based on the quality of the underwriting and claims services weprovide to our cedants and on our financial strength ratings.  Any deterioration in these factors couldresult in these brokers advising cedants to place their risks with otherreinsurers rather than with us.  Inaddition, affiliates of some of these brokers have co-sponsored the formationof reinsurance companies that directly compete with us, and these brokers mayfavor those reinsurers over us. A loss of all or a substantial portion of thebusiness provided by one or more of these brokers could have a material adverseeffect on our financial condition and results of operations.

 

We are frequently required to pay amounts owed on claims under ourpolicies to brokers, and these brokers, in turn, pay these amounts to theceding companies that have reinsured a portion of their liabilities with us. Insome jurisdictions, if a broker fails to make such a payment, we might remainliable to the ceding company for the deficiency. In addition, in certainjurisdictions, when the ceding company pays premiums for these policies tobrokers, these premiums are considered to have been paid and the ceding insureris no longer liable to us for those amounts, whether or not we have actuallyreceived the premiums.

 

**We may be unable to purchase reinsurance protection tothe extent we desire on acceptable terms. Additionally,  we may be unable tocollect all amounts due from our reinsurers under our existing reinsurancearrangements.**

 

In the normal course of business, we purchase reinsurance from thirdparties in order to manage our exposures. The availability and cost ofreinsurance protection is subject to market conditions, which are outside ofour control.  As a result, we may not beable to successfully alleviate risk through these arrangements, which couldhave a material adverse effect on our financial condition and results ofoperations.

 

We are not relieved of our obligation to our policyholders or cedingcompanies by purchasing reinsurance. Accordingly, we are subject to credit risk with respect to ourreinsurance protections in the event that a reinsurer is unable to pay amountsowed to us as a result of a significant weakening in its financialcondition.  A number of reinsurers in theindustry were significantly weakened in the aftermath of the active 2005hurricane season and the deterioration of world-wide credit and financialmarkets experienced during 2008.

 

It is possible that one or more of our reinsurers will be significantlyweakened by future significant events, causing them to be unable to honoramounts owed to us.  We also may beunable to recover amounts due under our reinsurance arrangements if ourreinsurers choose to withhold payment due to disputes or other factors beyondour control.  Our inability to collectamounts due from our reinsurers could have a material adverse effect on ourfinancial condition and results of operations.

 

**Our ability to provide reinsurance to many cedingcompanies is dependant upon the availability and cost of permissible securityarrangements.**

 

Ceding insurers generally receive full credit for outwards reinsuranceprotections in their U.S. statutory financial statements with respect toliabilities ceded to admitted U.S. domestic reinsurers.  However, cedants in the U.S. do not receivefull credit for outwards reinsurance protections for liabilities ceded tonon-admitted or unlicensed reinsurers, such as Montpelier Re, unless suchreinsurers collateralize all ceded liabilities. Under applicable statutoryprovisions, permissible security arrangements include letters of credit,reinsurance trusts maintained by third-party trustees and funds withheldarrangements.

 

The cost and availability of these security arrangements vary, andadverse changes in cost or availability could negatively impact Montpelier Re’sability to provide reinsurance to U.S. ceding insurers.

 

**Emerging claims and coverage issues could adverselyaffect our business.**

 

As industry practices and legal, judicial, social and otherenvironmental conditions change, unexpected and unintended issues related toclaims and coverages may emerge. These issues may adversely affect our businessby either extending coverages beyond our underwriting intent or by increasingthe number or size of claims. In some instances, these changes may not becomeapparent until some time after we have issued reinsurance contracts that areaffected by the changes. In addition, we are unable to predict the extent towhich the courts may expand the theory of liability under a casualty insurancecontract, such as the range of occupational hazards causing losses underemployers’ liability insurance, thereby increasing our reinsurance exposure.

 

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In addition, coverage disputes are also common within the insurance andreinsurance industries. For example, a reinsurance contract might limit theamount that can be recovered as a result of flooding. However, if the flooddamage was caused by an event that also caused extensive wind damage, thedetermination and quantification of the two types of damage is often a matterof judgment. Similarly, one geographic zone could be affected by more than onecatastrophic event. In this case, the amount recoverable from a reinsurer may,in part, be determined by the judgmental allocation of damage between thestorms. Given the magnitude of the amounts at stake involved with acatastrophic event, these types of judgment occasionally necessitatethird-party resolution. As a result, the full extent of liability under ourreinsurance contracts may not be known for many years after a contract isissued.

 

**Our loss reserves may be inadequate to cover ourultimate liability for losses and LAE and, as a result, our financial resultscould be adversely affected.**

 

We maintain loss and LAE reserves to cover our estimated ultimateliabilities.  Loss and LAE reserves aretypically comprised of case reserves for losses reported and IBNR reserves forlosses that have occurred but for which claims have not yet been reported whichinclude a provision for expected future development on case reserves. Thesereserves are estimates based on what we believe the settlement andadministration of claims will cost based on facts and circumstances then knownto us, including but not limited to potential changes in the legal environmentand other factors such as inflation and demand surge.  Because of the uncertainties that surroundestimating loss and LAE reserves, we cannot be certain that our reserves areadequate.  If we determine in the futurethat our reserves are insufficient to cover our actual loss and LAE, we wouldhave to strengthen our reserves, which could have a material adverse effect onour financial condition and results of operations.

 

**Lines of business that we are developing through MUIand MUSIC will change the composition of our overall book of business in wayswhich could adversely impact our financial results.**

 

One of the lines of business being pursued by MUI and MUSIC is excessand surplus lines insurance, which covers risks that are typically more complexand unusual than standard risks and requires a high degree of specializedunderwriting.  As such, excess andsurplus lines risks do not often fit the underwriting criteria of standardinsurance carriers.  The business that weintend to underwrite in this market fills the insurance needs of businesseswith unique characteristics and is generally considered higher risk than thatin the standard market. If our underwriting staff inadequately judges and pricesthe business underwritten in the excess and surplus lines market, our financialresults could be adversely impacted.

 

Further, the excess and surplus lines market is significantly affectedby the conditions of the property and casualty insurance market in general andits cyclical nature can be more pronounced than the standard insurancemarket.  During times of hard marketconditions (i.e., those favorable to insurers), as rates increase and coverageterms become more restrictive, business tends to move from the admitted marketback to the excess and surplus lines market and growth in the excess andsurplus market can be significantly more rapid than growth in the standardinsurance market. In softer market conditions (i.e. those less favorable to insurers),standard insurance carriers tend to loosen underwriting standards and seek toexpand market share by moving into business lines traditionally characterizedas excess and surplus lines, exacerbating the effect of rates decreases.  If we fail to manage the cyclical nature andvolatility of the revenues and profit we generate in the excess and surpluslines market, our financial condition and results of operations could beadversely impacted.

 

**Our stated catastrophe and enterprise-wide riskmanagement exposures are based on estimates and judgments which are subject tosignificant uncertainties.**

 

Our approach to risk management relies on subjective variables whichentail significant uncertainties.  Forexample, in our treaty reinsurance business, the effectiveness of grossreinsurance contract zonal limits in managing risk depends largely on thedegree to which an actual event is confined to the zone in question and ourability to determine the actual location of the risks insured.  Moreover, in the treaties we write, thedefinition of a single occurrence may differ from policy to policy and thelegal interpretation of a policy’s various terms and conditions following acatastrophic event may be different than we envisioned at its inception.  For these and other reasons, there can be noassurance that our aggregate gross reinsurance treaty exposure in a singlezone, from a single event, will not exceed our reported measure of that zone’sstated maximum gross treaty contract limit.

 

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Our Natural Catastrophe Risk Management disclosure provided in Item 7herein involves a substantial number of subjective variables, factors anduncertainties.  Small changes inassumptions, which are heavily reliant upon our judgment, can have asignificant impact on the modeled output resulting from our internalsimulations.  Further, these disclosuresdo not take into account numerous real, but non-quantifiable, inputs and riskssuch as the implications of a loss of our financial strength ratings on ourbusiness.  Although we believe that theseprobabilistic measures provide a meaningful indicator of the relative riskinessof certain events and changes to our business over time, these measures do notpredict our actual exposure to, nor guarantee our successful management of,future losses that could have a material adverse effect on our financialcondition and results of operations.

 

**Global financial markets and economic conditions,which may change suddenly and dramatically, could adversely affect the value ofour investment portfolio.**

 

Our investment portfolio consists of fixed maturity investments, equitysecurities and other investments including private placements, limitedpartnership interests and derivative instruments. Our primary investment focusis to maximize risk-adjusted total returns while maintaining adequateliquidity.  Since investing entailssubstantial risks, we cannot assure you that we will achieve our investmentobjectives and our investment performance may vary substantially year-to-year.

 

The value of our investment portfolio can be significantly affected byfluctuations in interest rates, issuer credit concerns and volatility infinancial markets. Our investments are sensitive to many factors, includinggovernmental monetary policies, domestic and international economic andpolitical conditions, the financial position of issuers and financialguarantors of investment securities and other factors beyond our control.

 

For example, during 2008, difficult conditions worldwide in the debtand equity markets, and in worldwide economies generally, adversely affectedour business and results of operations. These unfavorable and uncertain conditions originated, in large part,from difficulties encountered in the mortgage and broader credit markets in theU.S. and elsewhere and resulted in a sudden decrease in the availability ofcredit, a corresponding increase in borrowing costs and an increase inresidential mortgage delinquencies and foreclosures. As a result, many issuersof such securities as well as the financial guarantors of such securities,experienced a sudden deterioration in credit quality which caused both adecline in liquidity and prices for these types of securities.  These factors resulted in broad andsignificant declines in the fair value of fixed income and equity securitiesworldwide, including investment securities held in our investment portfolio.

 

While markets began to recover in 2009, concerns about the availabilityand cost of credit, inflation, mortgage markets, risks associated with globalsovereign entities, the stability of banks and other financial institutions,and declining real estate markets remain, continue and may contribute tofurther market volatility. Further, the potential for government policyinitiatives to alter rules for financial institutions in terms of how theyconduct business may impact our investment portfolio.  These factors, combined with decliningconsumer confidence, adverse unemployment trends, volatile oil and othercommodity prices and the sustainability of governmental initiatives may hinderrecovery or contribute to further economic difficulties.

 

We cannot predict how long these difficult conditions may persist andhow we might be further affected.

 

**We could be adversely affected by the loss of one ormore principal employees or by our inability to attract and retain staff.**

 

Our success will depend substantially on our ability to attract andretain our principal employees. As of December 31, 2009, we had 209full-time employees worldwide whom we depend upon for the generation andservicing of our business. Our future success depends on our ability to hireand retain personnel.  Difficulty inhiring or retaining personnel could adversely affect our results of operationsand financial condition.

 

In addition, many of our employees, including several executiveofficers, are employed in Bermuda. Although to date we have generally been successful in recruitingemployees in Bermuda, its location may be an impediment to attracting andretaining experienced personnel, particularly if we are unable to secure workpermits. In addition, Bermuda is currently a highly-competitive location forqualified staff making it harder to retain employees.  Many of our Bermuda employees are required tohave work permits granted by the Bermuda government, which has a policy thatlimits the duration of work permits to six years, subject to certain exemptionsfor key employees. These permits expire at various times over the next severalyears and we have no assurance that these permits will be extended uponexpiration.

 

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**Operational risks, including potential human andsystem failures, are inherent in our business.**

 

Operational risks that are inherent to our business can result inlosses, including those resulting from fraud or errors by our employees or afailure of our information technology systems.

 

In particular, we believe that the performance of our informationtechnology systems is critical to our business and our ability to properlyservice our business.  Such systems are,and will continue to be, a crucial part of our underwriting process.  Any defect or error in our informationtechnology systems could result in, among other things, a loss or delay ofrevenues, higher than expected losses or harm to our reputation.

 

We believe we have established appropriate controls and mitigationprocedures to prevent significant errors or irregularities, but such proceduresprovide only reasonable, not absolute, assurance as to the absence of errors orirregularities.

 

**As a holding company, we are dependent upon dividendsor distributions from our operating subsidiaries.**

 

We are a holding company and, as such, we have no substantialoperations of our own. We rely primarily on cash dividends or distributionsfrom our operating subsidiaries to pay our operating expenses, interest on ourdebt and dividends or distributions to our shareholders. Our insurance andreinsurance operations are highly regulated by authoritative bodies in Bermuda,the U.K., the U.S. and Switzerland.  Thevarious laws and regulations that we are subject to within these jurisdictionslimit the declaration and payment of dividends or distributions from ourinsurance and reinsurance operating subsidiaries and affiliates.  In addition, under the Companies Act, theCompany and Montpelier Re may only declare or pay a dividend or distributionif, among other matters, there are reasonable grounds to believe that each ofthem is, or would after the payment be, able to pay its respective liabilitiesas they become due and the realizable value of its assets would be more thanthe aggregate of its liabilities, its issued share capital and its additionalpaid-in capital.

 

Accordingly, we cannot assure you that we will declare or pay dividendsor distributions in the future. Any determination to pay future dividends ordistributions will be at the discretion of our Board of Directors and will bedependent upon our results of operations and cash flows, our financial positionand capital requirements, general business conditions, legal, tax, regulatoryand any contractual restrictions on the payment of dividends or distributions,and any other factors our Board of Directors deems relevant. The inability ofour insurance and reinsurance operating subsidiaries and affiliates to paydividends or distributions in an amount sufficient to enable us to meet any ofour holding company cash requirements could have a material adverse effect onthe Company.

 

**We may require additional capital in the future, whichmay not be available or may be available only on unfavorable terms.**

 

We may need to raise additional capital in the future, through theissuance of debt, equity or hybrid securities, in order to, among other things,write new business, pay significant losses, respond to, or comply with, anychanges in the capital requirements that rating agencies use to evaluate us,acquire new businesses, invest in existing businesses or to refinance ourexisting obligations.

 

The issuance of any new debt, equity or hybrid financial instrumentsmight contain terms and conditions that are unfavorable to us and ourshareholders.  More specifically, any newissuances of equity or hybrid securities could result in the issuance ofsecurities with rights, preferences and privileges that are senior or otherwisesuperior to those of Common Shares and could prove to be dilutive to ourexisting Common Shares.  Further, if wecannot obtain adequate capital on favorable terms or otherwise, our business,financial condition and operating results could be adversely affected.

 

**Our operating results may be adversely affected byforeign currency fluctuations.**

 

The U.S. dollar is the Company’s reporting currency.  The British pound is the functional currencyfor the operations of Syndicate 5151, MUAL, PUAL, MCL, MUSL and MMSL and theSwiss franc is the functional currency for the operations of MEAG. In addition,we write a portion of our business, receive premiums and pay losses in foreigncurrencies and may maintain a portion of our investment portfolio in investmentsdenominated in currencies other than U.S. dollars. We may experience foreignexchange losses to the extent our foreign currency exposure is not successfullymanaged or otherwise hedged, which in turn could adversely affect our financialcondition and results of operations.

 

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**Competition may reduce our operating margins.**

 

Competition in the insurance and reinsurance industry has increased asindustry participants seek to enhance their product and geographic reach,client base, operating efficiency and general market share through organicgrowth, mergers and acquisitions, and reorganization activities. As the industryevolves, competition for customers may become more intense and the importanceof acquiring and properly servicing each customer will grow. We could incurgreater expenses relating to customer acquisition and retention, which couldreduce our operating margins.

 

We currently compete, and will continue to compete, with major U.S. andnon-U.S. insurers and reinsurers, many of which have greater financial,marketing and management resources. We also compete with several otherBermuda-based reinsurers that write reinsurance and that target the same marketas we do and utilize similar business strategies, and many of these companiescurrently have more capital. We also compete with capital markets participantssuch as investment banks and investment funds that access business insecuritized form or through special purpose vehicles or derivativetransactions. As new insurance and reinsurance companies are formed andestablished competitors raise additional capital, any resulting increase incompetition could affect our ability to attract or retain business or to writebusiness at premium rates sufficient to cover losses. If competition limits ourability to write new business and renew existing business at adequate rates,our return on capital may be adversely affected.

 

**Regulation may restrict our ability to operate.**

 

Our insurance and reinsurance operations are subject to extensiveregulation under Bermuda, U.S., U.K. and Swiss laws.  Governmental agencies have broadadministrative power to regulate many aspects of our business, which mayinclude premium rates, marketing practices, advertising, policy forms andcapital adequacy. These governmental agencies are concerned primarily with theprotection of policyholders rather than shareholders. Insurance laws and regulationsimpose restrictions on the amount and type of investments, prescribe solvencystandards that must be met and maintained and require the maintenance ofreserves.

 

Changes in laws and regulations may restrict our ability to operateand/or have an adverse effect upon the profitability of our business within agiven jurisdiction.  For example, since2007 there have been a number of government initiatives in Florida designed todecrease insurance rates in the state. Of most significance to reinsurers wasthe large increase in the capacity of the Florida Hurricane Catastrophe Fund (“FHCF”),a state-run reinsurer. We believe any increase in capacity of privatereinsurers and the FHCF will cause downward pressure on windstorm catastropherates for the foreseeable future, particularly for Florida residentialexposures. In addition, state and Federal legislation has been proposed toestablish catastrophe funds and to discourage development in coastal areaswhich could adversely impact our business.

 

A further example is Solvency II, which is a fundamental review of thecapital adequacy regime for the EU insurance industry. Solvency II aims toestablish a revised set of EU-wide capital requirements and risk managementstandards that are expected to replace the current Solvency I requirements in2012.

 

The final requirements of Solvency II have not yet been published, andkey aspects remain subject to the political process. However, from the Level 1(framework principles), Level 2 (implementing measures) and Level 3 (guidance)materials published to date we expect that Solvency II will ultimately impactthe operational requirements of Montpelier Re and Syndicate 5151 as aconsequence of regulatory actions that will be taken in due course by the BMAand the FSA, respectively. Since the Solvency II requirements have not yet beenfinalized, their impact on our operations cannot be quantified at this time.

 

**Political, regulatory and industry initiatives couldadversely affect our business.**

 

The supply of property catastrophe reinsurance coverage decreased dueto the withdrawal of capacity and substantial reductions in capital resultingfrom, among other things, the September 11th terrorist attacks. Thistightening of supply resulted in government intervention significantlyincreasing the government’s role in insurance and reinsurance markets at theexpense of private markets. TRIA was enacted to ensure the availability ofinsurance coverage for certain types of terrorist acts in the U.S. This lawestablishes a federal assistance program to help commercial insurers andreinsurers in the property and casualty insurance industry cover claims relatedto future terrorism related losses and regulates the terms of insurancerelating to terrorism coverage. The enactment of the TRIPRA in December 2007extended the program’s expiration from December 31, 2007 to December 31,2014.

 

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Similarly, following the 2005 hurricane season, rates significantlyincreased which prompted legislative and administrative regulatory actions bythe State of Florida. This government intervention and the possibility offuture interventions have created uncertainty in the insurance and reinsurancemarkets.  Government regulators aregenerally concerned with the protection of policyholders to the exclusion ofother constituencies, including shareholders of insurers and reinsurers. Whilewe cannot predict the exact nature, timing or scope of possible governmentalinitiatives, such proposals could adversely affect our business by:

 

·            Providinginsurance and reinsurance capacity, in some cases at government-subsidizedrates, in markets and to consumers that we target;

 

·            Requiring ourparticipation in industry pools and guaranty associations;

 

·            Expanding thescope of coverage under existing policies;

 

·            Regulating theterms of insurance and reinsurance policies; or

 

·            Disproportionatelybenefitting the companies of one country over those of another.

 

The insurance and reinsurance industry is also affected by political,judicial and legal developments that may create new and expanded theories ofliability. Such changes may result in delays or cancellations of products andservices by insurers and reinsurers, which could adversely affect our business.

 

Some direct writers are currently facing lawsuits and other actionsdesigned to expand coverage related to hurricane Katrina losses beyond thatwhich those insurers believed they would be held liable for prior to thatevent. It is impossible to predict what impact similar actions may have on usin the future.

 

We may also be subject to political, regulatory and industryinitiatives in other jurisdictions in which we do business.

 

***Risks Related to Common Shares***

 

**The market price and trading volume of Common Sharesmay be subject to significant volatility.**

 

The market price and trading volume of Common Shares may be subject tosignificant volatility in response to a variety of events and factors,including but not limited to:

 

·            catastrophesthat may specifically impact us or are perceived by investors as impacting theinsurance and reinsurance industries in general;

 

·            exposure tocapital market risks related to changes in interest rates, realized investmentlosses, credit spreads, equity prices and foreign exchange rates;

 

·            variations inour operating results;

 

·            changes inexpectations about our future operating results;

 

·            changes infinancial estimates and recommendations by securities analysts concerning us orthe insurance and reinsurance industries in general;

 

·            the overallperformance of other companies that investors may deem to be our peers;

 

·            news reportsrelating to our business and trends in the markets in which we operate; and,

 

·            acquisitions,strategic initiatives and financing activities undertaken by us or our peers.

 

In addition, markets around the worldhave recently experienced extreme price and volume fluctuations.  This volatility has had a significant effecton the market prices of securities of issuers for reasons unrelated to theiroperating performance. These broad market fluctuations may materially adverselyaffect the price of Common Shares, regardless of our operating performance.

 

**Provisions in our charter documents restrict thevoting rights of Common Shares.**

 

Our bye-laws generally provide that, if any person beneficially owns oris deemed to beneficially own directly, indirectly or constructively (withinthe meaning of Section 958 of the U.S. Internal Revenue Code), more than9.5% of Common Shares, the voting rights attached to such Common Shares will bereduced so that such person may not exercise and is not attributed more than9.5% of the total voting rights.

 

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**Bermuda law differs from the laws in effect in theU.S. and may afford less protection to our shareholders.**

 

We are organized under the laws of Bermuda.  As a result, it may not be possible for ourshareholders to enforce court judgments obtained in the U.S. against us basedon the civil liability provisions of the Federal or state securities laws ofthe U.S., either in Bermuda or in countries other than the U.S. where we haveassets. In addition, there is some doubt as to whether the courts of Bermudaand other countries would recognize or enforce judgments of U.S. courtsobtained against us or our directors or officers based on the civil liabilitiesprovisions of the Federal or state securities laws of the U.S. or would hearactions against us or those persons based on those laws.

 

Our corporate affairs are governed by the Companies Act which differsin some material respects from laws generally applicable to U.S. corporationsand shareholders, including the provisions relating to interested directors,amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits andindemnification of directors. Generally, the duties of directors and officersof a Bermuda company are owed to the company only. Shareholders of Bermudacompanies generally do not have rights to take action against directors orofficers of the company and may only do so in limited circumstances. Class actionsand derivative actions are generally not available to shareholders underBermuda law. The Bermuda courts, however, would ordinarily be expected topermit a shareholder to commence an action in the name of a company to remedy awrong to the company where the act complained of is alleged to be beyond thecorporate power of the company or illegal, or would result in the violation ofthe company’s memorandum of association or bye-laws. Furthermore, considerationwould be given by a Bermuda court to acts that are alleged to constitute afraud against the minority shareholders or, for instance, where an act requiresthe approval of a greater percentage of the company’s shareholders than thatwhich actually approved it.

 

When the affairs of a company are being conducted in a manner that isoppressive or prejudicial to the interests of some shareholders, one or moreshareholders may apply to the Supreme Court of Bermuda, which may make suchorder as it sees fit, including an order regulating the conduct of the company’saffairs in the future or ordering the purchase of the shares of anyshareholders by other shareholders or by the company. Additionally, under ourbye-laws and as permitted by Bermuda law, each shareholder has waived any claimor right of action against our directors or officers for any action taken bydirectors or officers in the performance of their duties, except for actionsinvolving fraud or dishonesty. In addition, the rights of our shareholders andthe fiduciary responsibilities of our directors under Bermuda law are not asclearly established as under statutes or judicial precedent in existence injurisdictions in the U.S., particularly the State of Delaware. Therefore, ourshareholders may have more difficulty protecting their interests than wouldshareholders of a corporation incorporated in a jurisdiction within the U.S.

 

**Holders of Common Shares may have difficulty effectingservice of process on us or enforcing judgments against us in the U.S.**

 

We are incorporated pursuant to the laws of Bermuda and are headquarteredin Bermuda. In addition, certain of our directors and officers reside outsidethe U.S. and a substantial portion of our assets, and the assets of suchpersons, are located in jurisdictions outside the U.S.  As such, we have been advised that there isdoubt as to whether:

 

·          a holder ofCommon Shares would be able to enforce, in the courts of Bermuda, judgments ofU.S. courts based upon the civil liability provisions of the U.S. federalsecurities laws;

 

·          a holder ofCommon Shares would be able to bring an original action in the Bermuda courtsto enforce liabilities against us or our directors and officers, as well as theexperts named in this Form 10-K, who reside outside the U.S. based solelyupon U.S. federal securities laws.

 

Further,there is no treaty in effect between the U.S. and Bermuda providing for theenforcement of judgments of U.S. courts, and there are grounds upon whichBermuda courts may not enforce judgments of U.S. courts. Because judgments ofU.S. courts are not automatically enforceable in Bermuda, it may be difficultfor a holder of Common Shares to recover against us based upon such judgments.

 

**We may require our shareholders to sell us their CommonShares.**

 

Underour bye-laws and subject to Bermuda law, we have the option, but not theobligation, to require a shareholder to sell some or all of their Common Sharesto us at fair market value (which would be based upon the average closing priceof Common Shares as defined under our bye-laws) if the Board of Directorsreasonably determines, in good faith based on an opinion of counsel, that shareownership, directly, indirectly or constructively by any shareholder is likelyto result in adverse tax, regulatory or legal consequences to us, certain ofour other shareholders or our subsidiaries.

 

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***Risks Related to Taxation***

 

**Our Bermuda companies may be subject to U.S. tax.**

 

TheCompany and Montpelier Re currently intend to conduct substantially all oftheir operations in Bermuda in a manner such that they will not be engaged in atrade or business in the U.S. However, because there is no definitive authorityregarding activities that constitute being engaged in a trade or business inthe U.S. for U.S. federal income tax purposes, there can be no assurance thatthe Internal Revenue Service will not contend, perhaps successfully, that theCompany or Montpelier Re is engaged in a trade or business in the U.S.  A foreign corporation deemed to be so engagedwould be subject to U.S. income tax, as well as the branch profits tax, on itsincome that is treated as effectively connected with the conduct of that tradeor business unless the corporation is entitled to relief under a tax treaty.

 

Inaddition, Congress has discussed legislation from time-to-time intended toeliminate certain perceived tax advantages of Bermuda reinsurers and U.S.companies with Bermuda affiliates, and is currently considering proposalswhich, if adopted, are expected to adversely impact such operations. Whilethese legislative proposals would not have a material impact on our currentresults, such proposals and/or additional legislative proposals could have anmaterial future impact on us or our shareholders.

 

**Proposed U.S. tax legislation may adversely affect U.S.shareholders.**

 

Undercurrent U.S. law, non-corporate U.S. holders of Common Shares generally aretaxed on dividends at a capital gains tax rate rather than ordinary income taxrates. Both Houses of Congress have considered legislation that would excludeshareholders of foreign corporations from this advantageous income taxtreatment unless either (i) the corporation is organized or created underthe laws of a country that has entered into a “comprehensive income tax treaty”with the U.S. or (ii) the stock of such corporation is readily tradable onan established securities market in the U.S. and the corporation is organizedor created under the laws of a country that has a “comprehensive income taxsystem” that the U.S. Secretary of the Treasury determines is satisfactory forthis purpose. We would likely not satisfy either of these tests and,accordingly, if this legislation became law, individual U.S. shareholders wouldno longer qualify for the capital gains tax rate on dividends paid by us.

 

**We may become subject to taxes in Bermuda after 2016, whichmay have a material adverse effect on our financial condition.**

 

The Bermuda Minister of Finance, under the Exempted Undertaking TaxProtection Act 1966, as amended, of Bermuda, has given us an assurance that ifany legislation is enacted in Bermuda that would impose tax on profits orincome, or computed on any capital asset, gain or appreciation, or any tax inthe nature of estate duty or inheritance tax, then the imposition of any suchtax will not be applicable to us or any of our operations or our shares,debentures or other obligations until March 28, 2016. We cannot assure youthat we will not be subject to any Bermuda tax after that date.

 

**Item 1B.   *Unresolved Staff Comments***

 

As of the date of this report, we had no unresolved comments from theSEC regarding our periodic or current reports under the Exchange Act.

 

**Item 2.   *Properties***

 

We currently lease office space in Pembroke, Bermuda, where the Companyand Montpelier Re are located.  We alsolease office space in London, U.K. where MUAL, PUAL, MCL, MMSL and MUSL arelocated; in Zug, Switzerland, where MEAG is located; in Boston, MA, Chicago,IL, Hartford, CT and Overland Park, KS where MUI is located; in Scottsdale, AZwhere MUSIC is located; and in Woburn, MA and Hanover, NH where MTR is located.

 

We believe our facilities are adequate for our current needs.

 

**Item 3.   *Legal Proceedings***

 

We are subject to litigation and arbitration proceedings in the normalcourse of our business.  Such proceedingsgenerally involve insurance or reinsurance contract disputes which are typicalfor the property and casualty insurance and reinsurance industry in general andare considered in connection with our net loss and LAE reserves.

 

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On October 17, 2007, following the failure of contractually-mandatedmediation, Montpelier Re received a notice of arbitration from ManufacturersProperty and Casualty Limited (“MPCL”), a subsidiary of Manulife FinancialCorporation of Toronto, Canada (“Manulife”). The notice involves two contracts pursuant to which Montpelier Repurchased reinsurance protection from MPCL (the “Disputed Contracts”).  MPCL seeks in the arbitration to rescind, inwhole or in part, the Disputed Contracts, and seeks further relief, includingbut not limited to attorney fees and interest.

 

The hearings in the arbitration were concluded in February of 2010and we are currently awaiting the decision of the arbitrators.

 

We continue to believe that MPCL’s case is without merit and that theDisputed Contracts are fully enforceable. In addition, we have sought relief from MPCL for our attorney fees andinterest costs.

 

In the event that MPCL is awarded full rescission of the DisputedContracts, in addition to any relief that we could be ordered to provide MPCL,we would be required to: (i) assume the unpaid ceded losses expected to beincurred under the Disputed Contracts which, net of reinsurance premiums earnedand accrued, total $47.5 million; and (ii) assume (and repay to MPCL) thepaid ceded losses incurred under the Disputed Contracts which, net of deposit,reinstatement and additional premiums, total $26.3 million.

 

Other than the contract dispute with MPCL described above, we had noother potentially material litigation or arbitration proceedings at December 31,2009.

 

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

 

There were no matters submitted to a vote of our shareholders duringthe fourth quarter of 2009.

 

**PART II**

 

**Item 5.  *Marketfor the Company’s Common Equity, Related Shareholder Matters and IssuerPurchases of Equity Securities***

 

**Market Information, Registered Holders and Dividendsand Distributions on Common Shares**

 

Common Shares are listed on the New York Stock Exchange (symbol MRH)and the Bermuda Stock Exchange (symbol MRH BH). The quarterly range of the high and low sales price for Common Sharesduring 2009 and 2008 is presented below:

 

| ** **        | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------|------------|------------|------------|------------|------------|
| ** **        | ** ** | **High**   | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| Quarter ended:    | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| December 31  | ** ** | **$**      | **17.95**  | ** ** | **$**      | **15.45** |   | $ | 17.00 |   | $ | 10.13 |   |
| September 30 | ** ** | **16.72**  | ** ** | **12.63**  |       | 17.94 |   | 14.00 |   |
| June 30      | ** ** | **14.47**  | ** ** | **12.06**  |       | 17.20 |   | 14.75 |   |
| March 31     | ** ** | **17.31**  | ** ** | **10.55**  |       | 17.64 |   | 15.17 |   |
|                   |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

As of February 24, 2009, we had 102 registered holders of CommonShares.

 

During 2009 we declared regular quarterly cash dividends totalling$0.315 per common share.  During 2008 wedeclared regular quarterly cash dividends totalling $0.30 per common share.

 

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**Issuer Purchases of Common Shares**

 

The following table provides information with respect to the Company’srepurchases of Common Shares during the three months ended December 31,2009:

 
| **Period**                               | ** ** | **Total  Number********of Shares********Purchased** | ** ** | **Average********Price  Paid********per Share** | ** ** | **Total Number********of Shares  Purchased********as Part of  Publicly  Announced********Plans or  Programs** | ** ** | **Approximate********Dollar Value of********Shares that********May Yet Be********Purchased Under  the Plans or********Programs (a)** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 1 - October 31, 2009   |       | 1,460,904                                           |       | $                                               | 17.11      |                                                                                                               | 1,460,904  |                                                                                                                                      | $          | 66,417,216 |   |
| November 1 - November 30, 2009 |       | 1,131,827                                           |       | $                                               | 16.97      |                                                                                                               | 1,131,827  |                                                                                                                                      | $          | 197,205,137 |   |
| December 1 - December 31, 2009 |       | 2,828,210                                           |       | $                                               | 17.42      |                                                                                                               | 2,828,210  |                                                                                                                                      | $          | 147,946,555 |   |
| Total                                    |       | 5,420,941                                           |       | $                                               | 17.24      |                                                                                                               | 5,420,941  |                                                                                                                                      |       |   |

 

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(a)          On November 20,2009, the Board of Directors increased the Company’s existing share repurchaseauthorization by $150.0 million to a total of $203.5 million.  As of December 31,2009, $148.0 million of such authorization remained. The authorization wascanceled on February 24, 2010.

 

In connection with thetermination of our second forward sale agreement and our share issuanceagreement (the “Share Issuance Agreement”), on March 4, 2009, the forwardcounterparty to those agreements delivered to the Company, in exchange for acash payment of $0.01, 5,920,000 of the 7,920,000 Common Shares previouslyissued to them under the Share Issuance Agreement. See Note 7 of the Notes toConsolidated Financial Statements.

 

During the period from January 1,2010 to February 23, 2010, the Company repurchased an additional 2,297,598Common Shares at an average purchase price of $17.61 per share.

 

On February 24, 2010,the Board of Directors authorized the private purchase of the entirety of the6,897,802 Common Shares previously owned by Wilbur L. Ross, Jr., adirector of the Company, and investment funds managed by WL Ross & CoLLC at a price of $19.00 per share, subject to the execution of a SharePurchase Agreement.  The Share PurchaseAgreement was executed on February 26, 2010, and the transaction closed onthat date.  In connection with thistransaction, the Board of Directors cancelled the Company’s remaining sharerepurchase authorization.

 

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**Securities Authorized for Issuance Under Equity CompensationPlans**

 

The following table providesinformation, as of December 31, 2009, with respect to our equitycompensation plans.

 

| ** **                                                                    | ** ** | **Number of Securities  to be Issued Upon  Exercise of  Outstanding  Options, Warrants  and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding  Options, Warrants  and Rights** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column (a))** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                                        | ** ** | **(a)**                                                                                              | ** ** | **(b)**                                                                             | ** ** | **(c)**                                                                                                                                               | ** ** |
|                                                                          |       |                                                                                                 |       |                                                                                |       |                                                                                                                                                  |       |
| Equity compensation plansapproved by shareholders - *LTIP*                    |       | 1,940,769                                                                                            | (1)        | —                                                                              |       | 3,259,160                                                                                                                                             | (3)        |
|                                                                          |       |                                                                                                 |       |                                                                                |       |                                                                                                                                                  |       |
| Equity compensation plans notapproved by shareholders -*Directors Share Plan* |       | —                                                                                               | (2)        | —                                                                              |       | 58,917                                                                                                                                                |       |
|                                                                          |       |                                                                                                 |       |                                                                                |       |                                                                                                                                                  |       |
| Total                                                                         |       | 1,940,769                                                                                            |       | —                                                                              |       | 3,318,077                                                                                                                                             |       |

 

----

| (1)    | The Montpelier  Re Holdings Ltd. Long-Term Incentive Plan (the “LTIP”) is the Company’s  primary long-term incentive plan and was last approved by shareholders in  May 2007. Incentive awards that may be granted under the LTIP consist of  share appreciation rights, restricted share units (“RSUs”) and performance  shares.                                                                                                                                                                                                                                            |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | At target  payout, each performance share represents the fair value of a common share.  At the end of a performance period, which is generally the three-year period  following the date of grant, participants may receive a harvest of between  zero and 200% of the performance shares granted depending on the achievement  of specific performance criteria relating to our operating and financial  performance over the period. At the discretion of the CN Committee, any final  payment in respect of such performance shares may take the form of cash,  Common Shares or a combination of both. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Each RSU  represents a phantom restricted share which vests ratably in equal tranches,  typically over three-to-five year periods, subject to the employee remaining  employed at the applicable vesting date. RSUs are payable only in Common  Shares or in Common Shares net of applicable tax withholdings.                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Neither  performance shares nor RSUs require the payment of an exercise price.  Accordingly, there is no weighted average exercise price for either of these  awards.                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (2)    | All  non-management directors are eligible to participate voluntarily in the  Directors Share Plan. Participants receive, in lieu of a portion of their  annual cash retainer, a number of Director Share Units (“DSUs”) of the same  dollar value based on the value of Common Shares at that date. DSUs comprise  a contractual right to receive Common Shares, or an equivalent amount of  cash, upon termination of service as a director. While the DSUs are  outstanding, they are credited with common share dividend equivalents.                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | In 2008, in  light of new U.S. tax legislation, the Company resolved to permit directors  who participated in the Directors Share Plan to elect to receive the Common  Shares underlying their DSUs prior to December 31, 2017.  All participating directors elected to  receive payment for their outstanding DSUs in January 2009, which  resulted in the issuance of 26,703 Common Shares. See Note 9 of the Notes to  Consolidated Financial Statements.                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3)    | On May 23,  2007, the Company’s shareholders authorized an inventory of up to 6,200,000  Common Shares for issuance under the LTIP. LTIP awards outstanding at December 31,  2009 consisted of 172,000 performance shares at “target” and 1,768,769  RSUs.Since May 23, 2007, the Company has paid 1,000,071 RSUs under the  LTIP in the form of Common Shares.                                                                                                                                                                                                              |

 

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**Performance Graph**

 

The following graph shows the five-year cumulative total return for ashareholder who invested $100 in Common Shares as of January 1, 2005,assuming reinvestment of dividends and distributions.  Cumulative returns for the five-year periodended December 31, 2009 are also shown for the Standard & Poor’s500 Index (“S&P 500”) and the Standard & Poor’s 500 Property &Casualty Insurance Index (“S&P P&C”) for comparison.

 

 
| ** **                               | ** ** | **Year  Ended December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| **Company/Index**                        | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Montpelier Re Holdings Ltd. (symbol MRH) |       | $                                 | 100.00     |   | $ | 59.02 |   | $ | 59.10 |   | $ | 54.94 |   | $ | 55.26 |   | $ | 58.22 |   |
| S&P 500 P&C                      |       | 100.00                            |       | 115.11 |   | 129.93 |   | 111.79 |   | 78.91 |   | 88.65 |   |
| S&P 500                              |       | 100.00                            |       | 104.91 |   | 121.48 |   | 128.16 |   | 80.74 |   | 102.11 |   |
|                                          |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 6.****                *****Selected Financial Data***

 

Selected consolidatedstatement of operations data, ending balance sheet data and share data for eachof the five years ended December 31, 2009, follows:

 
| ** **                                                | ** ** | **Year Ended December 31,** | ** **  |
|-----------------------------------------------------------|------------|----------------------------------|-------------|
| **(Millions, except share and per share amounts)**        | ** ** | **2009**                         | ** **  | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005 (a)** | ** ** |
| **Statement  of Operations Data:**                        |       |                             |        |   |   |   |   |   |   |   |   |
| Revenues (b)                                              | ** ** | **$**                            | **847.2**   |   | $ | 364.3 | (c) | $ | 724.0 |   | $ | 722.0 |   | $ | 967.9 |   |
| Expenses                                                  | ** ** | **(382.6**                       | **)**       | (507.8 | )(d) | (376.2 | ) | (379.7 | ) | (1,720.8 | )(d) |
| Income (loss) before income  taxes and extraordinary item | ** ** | **464.6**                        |        | (143.5 | ) | 347.8 |   | 342.3 |   | (752.9 | ) |
| Income tax provision                                      | ** ** | **(1.1**                         | **)**       | (1.1 | ) | (0.1 | ) | (0.1 | ) | — |   |
| Excess of fair value of  acquired net assets over cost    | ** ** | **—**                       |        | 1.0 |   | — |   | — |   | — |   |
| Net income (loss)                                         | ** ** | **463.5**                        |        | (143.6 | ) | 347.7 |   | 342.2 |   | (752.9 | ) |
| Net income attributable to  noncontrolling interest (a)   | ** ** | **—**                       |        | (1.9 | ) | (31.9 | ) | (39.3 | ) | — |   |
| Net income (loss)  attributable to the Company            | ** ** | **$**                            | **463.5**   |   | $ | (145.5 | ) | $ | 315.8 |   | $ | 302.9 |   | $ | (752.9 | ) |
| **Balance  Sheet Data:**                                  |       |                             |        |   |   |   |   |   |   |   |   |
| Total assets                                              | ** ** | **$**                            | **3,102.3** |   | $ | 2,797.6 |   | $ | 3,525.2 |   | $ | 3,898.8 |   | $ | 4,059.7 |   |
| Loss and LAE reserves                                     | ** ** | **680.8**                        |        | 808.9 |   | 860.7 |   | 1,089.2 |   | 1,781.9 |   |
| Debt                                                      | ** ** | **331.7**                        | (e)         | 352.5 | (e) | 427.4 |   | 427.3 | (e) | 249.1 |   |
| Common shareholders’ equity                          | ** ** | **1,728.5**                      | (f)         | 1,357.6 | (g) | 1,741.8 | (h) | 1,731.3 | (i) | 1,221.6 | (j) |
| **Per Share  and Warrant Data:**                          |       |                             |        |   |   |   |   |   |   |   |   |
| Fully converted book value  (k)                           | ** ** | **$**                            | **21.14**   |   | $ | 15.94 |   | $ | 17.88 |   | $ | 15.46 |   | $ | 11.86 |   |
| Fully converted tangible  book value (k)                  | ** ** | **21.08**                        |        | 15.88 |   | 17.82 |   | 15.46 |   | 11.86 |   |
| Net income (loss)  attributable to common shareholders    | ** ** | **5.36**                         |        | (1.69 | ) | 3.29 |   | 3.21 |   | (11.16 | ) |
| Cash dividends declared per  Common Share                 | ** ** | **0.315**                        |        | 0.30 |   | 0.30 |   | 0.30 |   | 6.655 | (l) |
| Cash dividends declared per  warrant                      | ** ** | **—**                       |        | — |   | 0.075 |   | 0.30 |   | 6.655 | (l) |

 

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| (a)    |   | From December 2005 to  June 2008, the period prior to Blue Ocean becoming a wholly-owned  subsidiary, we fully consolidated Blue Ocean in our financial statements. Net  income attributable to noncontrolling interest represents the portion of Blue  Ocean’s net income attributable to all other shareholders (those other than  the Company) during the periods presented.                                                                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (b)    |   | As of January 1, 2007, we adopted a new accounting pronouncement  whereby substantially all of our investments are now carried at fair value  with changes in fair value being reported as net realized and unrealized  investment gains (losses) in our statement of operations. Prior to adoption,  substantially all of our investments were carried at fair value with changes  in fair value being reported as a separate component of our shareholders’  equity, with changes therein reported as a component of other comprehensive  income (loss). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (c)    |   | During 2008, we incurred $244.9 million in net realized and unrealized  investment losses which significantly reduced our total revenues in that  year.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (d)    |   | During 2008, we incurred $177.1 million in net catastrophe losses  associated with Hurricanes Ike and Gustav. During 2005, we incurred  catastrophe losses associated with Hurricanes Katrina, Wilma and Rita. These  events significantly increased our expenses in those years.                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (e)    |   | During 2009, we repurchased and retired $21.0 million of our senior  unsecured debt. During 2008, Blue Ocean fully repaid $75.0 million of its  debt that was issued in 2006. During 2006, we issued $103.1 million of our  junior subordinated debt.                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (f)    |   | During 2009, we repurchased 6,599,038 Common Shares for $112.6  million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (g)    |   | During 2008, we repurchased 7,799,019 Common Shares for $125.7  million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (h)    |   | During 2007, we repurchased 939,039 Common Shares and 7,172,375.5  warrants to acquire Common Shares from White Mountains Insurance Group, Ltd.  (“White Mountains”), a former affiliate, for $65.0 million. We also  repurchased 3,780,305 Common Shares for $63.7 million from shareholders other  than White Mountains.                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (i)    |   | During 2006, we privately sold 6,896,552 Common Shares for $100.0  million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (j)    |   | During 2005, we publicly sold 25,850,926 Common Shares for $600.0  million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (k)    |   | See *“Management’s Discussion and  Analysis of Financial Condition and Results of Operations”* contained  in Item 7 herein for a description and computation of our fully converted  book value per share and fully converted tangible book value per share.                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (l)    |   | During 2005, we declared and paid a one-time special dividend of $5.50  per Common Share and warrant, in addition to regular quarterly dividends.                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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**Item 7.****          *****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

 

**General**

 

The following is adiscussion and analysis of our results of operations for the years ended December 31,2009, 2008 and 2007 and our financial condition as of December 31, 2009and 2008.  This discussion and analysisshould be read in conjunction with the audited consolidated financialstatements and related notes thereto included within this filing.

 

This discussion containsforward-looking statements that are not historical facts, including statementsabout our beliefs and expectations. These statements are based upon currentplans, estimates and projections. Our actual results may differ materially fromthose projected in these forward-looking statements as a result of variousfactors. See *“Forward Looking Statements”*appearing at the beginning of this report and *“RiskFactors”* contained in Item 1A herein.

 

**Overview**

 

*Summary Financial Results*

 

YearEnded December 31, 2009

 

We ended 2009 with a fullyconverted tangible book value per share of $21.08, an increase of 34.7% for theyear inclusive of dividends declared. The increase in our fully convertedtangible book value per share during 2009 resulted from both strongunderwriting and investment results. Our comprehensive income for 2009 was$463.8 million and our GAAP combined ratio was 62.2%.

 

Our underwriting results for2009 were devoid of any individually significant catastrophe losses andincluded $75.7 million of prior year favorable loss reserve development. Ourinvestment results for 2009 included $181.8 million of net realized andunrealized investment gains which were comprised of $104.2 million in net gainsfrom fixed maturities, $74.6 million in net gains from equity securities and$3.0 million in net gains from other investments.

 

YearEnded December 31, 2008

 

We ended 2008 with a fullyconverted tangible book value per share of $15.88, a decrease of 9.2% for theyear inclusive of dividends declared. The decrease in our fully convertedtangible book value per share during 2008 was largely the result of catastrophelosses from Hurricanes Gustav and Ike and realized and unrealized lossesassociated with our investment portfolio. Our comprehensive loss for 2008 was$150.9 million and our GAAP combined ratio was 91.0%.

 

Our underwriting results for2008 included $177.1 million of net catastrophe losses from Hurricanes Gustavand Ike, partially offset by $104.1 million of prior year favorable lossreserve development.  The Company’sfinancial impact from Hurricanes Gustav and Ike, net of reinsurance, reinstatementsand reductions in incentive accruals, was approximately $140.0 million. Ourinvestment results for 2008 included $244.9 million of net realized andunrealized investment losses which were comprised of $82.4 million in netlosses from fixed maturities, $103.5 million in net losses from equitysecurities and $59.0 million in net losses from other investments.

 

YearEnded December 31, 2007

 

We ended 2007 with a fullyconverted tangible book value per share of $17.82, an increase of 17.2% for theyear inclusive of dividends declared. The increase in our fully convertedtangible book value per share during 2007 resulted from both strongunderwriting and investment results. Our comprehensive income for 2007 was$314.0 million and our GAAP combined ratio was 61.3%.

 

Our underwriting results for2007 included $88.6 million of net catastrophe losses from windstorms Kyrilland Gonu, floods in Australia and the U.K. and wildfires in California,partially offset by $36.4 million of prior year favorable loss reservedevelopment.  Our investment results for2007 included $26.5 million of net realized and unrealized investment gainswhich were comprised of $19.9 million in net gains from fixed maturities, $7.5million in net gains from equity securities and $0.9 million in net losses fromother investments.

 

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*Book Value Per Share*

 

The following table presentsour computation of book value per share, fully converted book value per shareand fully converted tangible book value per share:

 
| ** **                                                                 | ** ** | **December 31,** | ** **  |
|----------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                 | ** ** | **2009**              | ** **  | **2008** | ** ** | **2007** | ** ** |
|                                                                       |       |                  |        |   |   |   |   |
| **Book value per share numerators  (Millions)**:                           |       |                  |        |   |   |   |   |
|                                                                       |       |                  |        |   |   |   |   |
| **[A]** Book value per share numerator (common  shareholders’ equity) | ** ** | **$**                 | **1,728.5** |   | $ | 1,357.6 |   | $ | 1,653.1 |   |
| Intangible asset (1)                                                       | ** ** | **(4.7**              | **)**       | (4.7 | ) | (4.7 | ) |
| **[B]** Fully converted tangible book value per share  numerator           | ** ** | **$**                 | **1,723.8** |   | $ | 1,352.9 |   | $ | 1,648.4 |   |
|                                                                       |       |                  |        |   |   |   |   |
| **Book value per share denominators  (Thousands of shares):**              |       |                  |        |   |   |   |   |
|                                                                       |       |                  |        |   |   |   |   |
| Common Shares outstanding                                                  | ** ** | **79,999**            |        | 91,827 |   | 99,290 |   |
| Common Shares subject to the Share Issuance  Agreement (2)                 | ** ** | **—**            |        | (7,920 | ) | (7,920 | ) |
| **[C]** Book value per share denominator                                   | ** ** | **79,999**            |        | 83,907 |   | 91,370 |   |
| Common share obligations under benefit plans                               | ** ** | **1,769**             |        | 1,281 |   | 1,109 |   |
| **[D]** Fully converted book value per share denominator                   | ** ** | **81,768**            |        | 85,188 |   | 92,479 |   |
|                                                                       |       |                  |        |   |   |   |   |
| **Book value per share [A] / [C]**                                         | ** ** | **$**                 | **21.61**   |   | $ | 16.18 |   | $ | 18.09 |   |
| **Fully converted book value per  share [A] / [D]**                        | ** ** | **21.14**             |        | 15.94 |   | 17.88 |   |
| **Fully converted tangible book value  per share [B] / [D]**               | ** ** | **21.08**             |        | 15.88 |   | 17.82 |   |
| ** **                                                                 | ** ** | ** **            |        |   |   |   |   |
| Change in fully converted tangible book value per  share: (3)              | ** ** | ** **            |        |   |   |   |   |
|                                                                       |       |                  |        |   |   |   |   |
| From December 31, 2008                                                | ** ** | **34.7**              | **%**       |   |   |   |   |
| From December 31, 2007                                                | ** ** | **21.7**              | **%**       |   |   |   |   |
| From December 31, 2006                                                | ** ** | **42.3**              | **%**       |   |   |   |   |

 

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| (1)    | Represents the value of MUSIC’s excess and surplus lines licenses and  authorizations acquired in 2007.                                                                                                                                                                                                                                                                                                                                   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    | The Share Issuance Agreement was terminated on February 27, 2009.  Prior to its termination, the Share Issuance Agreement had the effect of  substantially eliminating the economic dilution that would otherwise have  resulted from the issuance of Common Shares. Therefore, we did not consider  these Common Shares outstanding for the purposes of this computation. See  Note 7 of the Notes to Consolidated Financial Statements. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    | Computed as the change in fully converted tangible book value per  share, inclusive of dividends declared.                                                                                                                                                                                                                                                                                                                                     |

 

We believe that our computations of our fully converted tangible bookvalue per share and our change in fully converted tangible book value pershare, as adjusted for dividends, are non-GAAP measures which are important toour investors, analysts and other interested parties who benefit from having anobjective and consistent basis for comparison with other companies within our industry.

 

*Outlook and Trends*

 

Pricing in most insurance and reinsurance markets is cyclical innature. During 2009 we observed adequate to strong pricing levels in themajority of our business lines, ending broad price reductions experienced overthe previous two years. Pricing strength has also affected the cost of cededreinsurance protection, with the overall impact being a reduction in both ourgross exposure and our reinsurance purchases.

 

During 2009 we, and many of our peers, experienced strong underwritingand investment returns due to a low level of catastrophes and a widespreadrebound in the financial markets. Consequently, the amount of available capital in the reinsurance marketfor the January 2010 renewal season expanded significantly as compared to2009.  We have also observed slightlyreduced demand for reinsurance as weak economic conditions are dampening growthprospects for ceding companies who, at the same time, have a greater capacityto retain risk.  In summary, we expect2010 will prove to be a more difficult operating environment than 2009, whichwill place a high emphasis on risk selection and capacity management.

 

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At the same time, reinsurers appear to have maintained pricingdiscipline and have generally exhibited a selective approach to capacityexpansion, which has set the stage for fairly orderly pricing concessions.  With some exceptions, pricing reductions aremostly coming off of healthy levels, leading to a low level of renewalattrition on our book.  Additionally, wehave found opportunities to write new business and expand our participations onexisting accounts, which has offset some of the pricing pressure.

 

Syndicate 5151’s newly acquired team of experienced marine underwriterscommenced underwriting a diverse portfolio of short-tail marine hull, cargo andspecie business during the third quarter of 2009. This portfolio is underwrittenthrough more than twenty brokers, does not incorporate energy business and islargely uncorrelated with Syndicate 5151’s peak exposures. Terms, rates andconditions in the marine market have improved modestly in recent months and ouroutlook for this line of business remains positive. During 2009, Syndicate 5151produced $8.4 million in net premiums associated with the new marine portfolio.

 

Syndicate 5151’s newly formed Coverholder, PUAL, recently commencedunderwriting business on behalf of both Syndicate 5151 and third parties with afocus on specialist contractors, recycling and crime classes of business. Thisbusiness is also is largely uncorrelated with Syndicate 5151’s peak exposures.Due to the timing of its formation, PUAL wrote no business that incepted during2009.

 

In January 2010, MUSIC received its authorization as an excess andsurplus line insurer in California, a substantial market for thatbusiness.  During 2009, MUSIC wrote $24.3million in net premiums, $8.3 million of which was written during the fourthquarter, and our outlook for this business remains positive.

 

For 2010 we plan to continue to optimize the use of our catastrophecapacity and to look for selective growth opportunities across our broaderunderwriting platform in order to improve our operating and capitalefficiency.  We believe our business mix,which is overweight short-tail lines, matches well with the current pricingcycle as pricing for these lines of business continues to be relatively strong.Looking forward, absent a major market event, we see no catalyst for a generalmarket upturn in the near future, though we remain satisfied with the expectedprofit potential in the markets we target.

 

It is difficult to predict the amount of annual premiums we will writein 2010 and how attractive overall pricing, terms and conditions will be.  To the extent that the pricing environmentdoes not merit the deployment of any excess capital we might have towards newunderwriting opportunities, we will continue to consider the use of capitalmanagement tools such as share repurchases.

 

*Natural Catastrophe Risk Management*

 

As a predominantly short-tail property reinsurer, we have exposure tovarious natural catastrophes around the world. We manage our exposure to catastrophes using a combination of CATM (ourproprietary modeling tool), third-party vendor models, underwriting judgment,and our own reinsurance purchases.

 

Our three-tiered risk management approach focuses on managing exposedoverall contract limits, estimating the potential impact of a single naturalcatastrophe event, and simulating our yearly net operating result to reflectcertain modellable underwriting and investment risks we face on an aggregatebasis.  We seek to refine and improve ourrisk management process over time. Our catastrophe and enterprise-wide riskmanagement metrics entail significant estimates, judgments anduncertainties.  The following discussionshould be read in conjunction with our *“RiskFactors”* contained in Item 1A herein, in particular the specificrisk factor entitled *“Our stated catastropheand enterprise-wide risk management exposures are based on estimates andjudgments which are subject to significant uncertainties.”*

 

Exposure Management

 

We track gross reinsurance treaty contract limits that we believe areexposed to a single natural perils occurrence within certain broadly definedmajor catastrophe zones.  The resultingmeasure represents the sum of all contract limits assumed through propertyreinsurance treaties, other specialty reinsurance treaties and event-linkedinsurance derivatives, but excludes limits relating to individual riskinsurance business and the benefit of any reinsurance protections we havepurchased.  As of December 31, 2009,our largest single zonal concentration was Northern European windstorm (thezone consisting of the U.K., Ireland, Germany, France, the Benelux countries,Switzerland, Denmark, Norway and Sweden). For individual risk business, including both direct insurance andfacultative reinsurance accounts, we supplement our treaty approach by trackingcontract limits to a finer geographic resolution.

 

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Single Event Losses

 

For certain defined natural catastrophe region and peril combinations,we assess the probability and likely magnitude of losses using a combination ofindustry third-party vendor models, CATM and underwriting judgment.  We attempt to model the projected net impactfrom a single event, taking into account contributions from our inwardportfolio of property, aviation, workers’ compensation, marine, casualty, andpersonal accident insurance policies, reinsurance policies, and event-linkedderivative securities offset by the net benefit of any reinsurance orderivative protections we purchase and the net benefit of reinstatementpremiums. The table below details our estimated average net impact market sharefor selected natural catastrophe events of various industry loss magnitudes:

 

| **Event / Resulting Market Loss** | ** ** | **Our  Average Market Share** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
|                              |       |                          |       |
| U.S. Hurricane / $50  billion     |       | 0.8                           | %          |
|                              |       |                          |       |
| U.S. Earthquake / $50  billion    |       | 1.0                           | %          |
|                              |       |                          |       |
| Europe Windstorm / $20  billion   |       | 1.6                           | %          |

 

The market share estimatesabove represent an estimate of our average market share across multiple eventscenarios corresponding to industry losses of a given size.  However, it is important to note that ouraverage market share may vary considerably within a particular territorydepending on the specific characteristics of the event.  This is particularly true for the directinsurance and facultative reinsurance portfolio we underwrite. Other factorscontributing to such variation may include our decision to be overweight orunderweight in certain regions within a territory.  For example, our market share for a largeEuropean wind event may differ depending on whether the majority of loss comesfrom the U.K. or from Continental Europe. Additionally, our net market share may be impacted by the number andorder of occurrence of catastrophic events during a year which could exhaustindividual policy limits or trigger additional losses from certain policiesoffering second-event or aggregate protection. Further, certain reinsurance we purchase may have geographicrestrictions or provide coverage for only a single occurrence within the policyperiod.  Lastly, these estimatesrepresent snapshots at a point in time. The composition of our in-force portfolio will fluctuate due to theacceptance of new policies, the expiration of existing policies, and changes inour reinsurance program.

 

Each industry-recognizedcatastrophe model contains its own assumptions as to the frequency and severityof large events, and results may vary significantly from model to model.  Given the relatively limited historicalrecord, there is a great deal of uncertainty with regard to the accuracy of anycatastrophe model, especially at relatively remote return periods.

 

There is no single standardmethodology or set of assumptions utilized industry-wide in estimating propertycatastrophe losses.  As a consequence, itmay be difficult to compare estimates of risk exposure among differentinsurance and reinsurance companies, due to differences in modeling, portfoliocomposition and concentrations, modeling assumptions, and selected eventscenarios.

 

AnnualOperating Result

 

In addition to monitoringexposed contract limits and single event accumulation potential, we attempt tomeasure enterprise-wide risk using a simulated annual aggregate operatingresult approach. This approach estimates a net operating result over simulatedannual return periods, including contributions from certain variables such asaggregate premiums, losses, expenses, and investment results.  We view this approach as a supplement to oursingle event stress test as it allows for multiple losses from naturalcatastrophe and other sources and attempts to take into account certain risksfrom non-underwriting sources. Through our modeling we endeavor to take intoaccount many risks that we face as an enterprise.  By the very nature of the insurance andreinsurance business, and the limitations of models generally, our modelingdoes not cover every potential risk. Examples include emerging risks, changes in liability awards, pandemicillnesses, asteroid strikes, climate change, bioterrorism, scientificaccidents, and various political and financial market catastrophes.

 

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**I.   Results ofOperations**

 

Our consolidated financialresults for the years ended December 31, 2009, 2008 and 2007 follow:

 

| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross premiums written                                              |       | $                                | **634.9**  |   | $ | 620.1 |   | $ | 653.8 |   |
| Reinsurance premiums ceded                                          | ** ** | **(32.7**                        | **)**      | (78.9 | ) | (104.8 | ) |
| Net premiums written                                                | ** ** | **602.2**                        |       | 541.2 |   | 549.0 |   |
| Change in net unearned premiums                                     | ** ** | **(29.0**                        | **)**      | (12.7 | ) | 8.2 |   |
| Net premiums earned                                                 | ** ** | **573.2**                        |       | 528.5 |   | 557.2 |   |
|                                                                |       |                             |       |   |   |   |   |
| Net investment income                                               | ** ** | **81.0**                         |       | 86.4 |   | 132.5 |   |
| Net realized and unrealized gains (losses)                          | ** ** | **181.8**                        |       | (244.9 | ) | 26.5 |   |
| Net foreign exchange gains (losses)                                 | ** ** | **(2.5**                         | **)**      | 7.6 |   | 6.1 |   |
| Net income (expense) from derivative instruments                    | ** ** | **7.3**                          |       | (14.3 | ) | (0.3 | ) |
| Gain on early extinguishment of debt                                | ** ** | **5.9**                          |       | — |   | — |   |
| Other revenue                                                       | ** ** | **0.5**                          |       | 1.0 |   | 2.0 |   |
| **Total revenues**                                                  | ** ** | **847.2**                        |       | 364.3 |   | 724.0 |   |
|                                                                |       |                             |       |   |   |   |   |
| Underwriting expenses:                                              |       |                             |       |   |   |   |   |
| Loss and LAE – current year losses                             | ** ** | **(214.4**                       | **)**      | (399.2 | ) | (213.9 | ) |
| Loss and LAE – prior year losses                               | ** ** | **75.7**                         |       | 104.1 |   | 36.4 |   |
| Acquisition costs                                                   | ** ** | **(80.5**                        | **)**      | (83.9 | ) | (78.3 | ) |
| General and administrative expenses                                 | ** ** | **(137.1**                       | **)**      | (102.0 | ) | (85.9 | ) |
| Non-underwriting expenses:                                          |       |                             |       |   |   |   |   |
| Interest and other financing expenses                               | ** ** | **(26.3**                        | **)**      | (26.8 | ) | (34.5 | ) |
| **Total expenses**                                                  | ** ** | **(382.6**                       | **)**      | (507.8 | ) | (376.2 | ) |
|                                                                |       |                             |       |   |   |   |   |
| **Income (loss) before income taxes  and extraordinary item**       | ** ** | **464.6**                        |       | (143.5 | ) | 347.8 |   |
| Income tax provision                                                | ** ** | **(1.1**                         | **)**      | (1.1 | ) | (0.1 | ) |
| Excess of fair value of acquired net assets over  cost - Blue Ocean |       | —                           |       | 1.0 |   | — |   |
|                                                                |       |                             |       |   |   |   |   |
| **Net income (loss)**                                               | ** ** | **463.5**                        |       | (143.6 | ) | 347.7 |   |
| Net income attributable to noncontrolling interest  in Blue Ocean   | ** ** | **—**                       |       | (1.9 | ) | (31.9 | ) |
|                                                                |       |                             |       |   |   |   |   |
| **Net income (loss) attributable to  the Company**                  | ** ** | **463.5**                        |       | (145.5 | ) | 315.8 |   |
| Other comprehensive income (loss)                                   | ** ** | **0.3**                          |       | (5.4 | ) | (1.8 | ) |
|                                                                |       |                             |       |   |   |   |   |
| **Comprehensive income (loss)**                                     | ** ** | **$**                            | **463.8**  |   | $ | (150.9 | ) | $ | 314.0 |   |
|                                                                |       |                             |       |   |   |   |   |
| Loss and LAE ratio                                                  | ** ** | **24.2**                         | **%**      | 55.8 | % | 31.8 | % |
| Acquisition cost ratio                                              | ** ** | **14.1**                         | **%**      | 15.9 | % | 14.1 | % |
| General and administrative expense ratio                            | ** ** | **23.9**                         | **%**      | 19.3 | % | 15.4 | % |
|                                                                |       |                             |       |   |   |   |   |
| **GAAP combined ratio**                                             | ** ** | **62.2**                         | **%**      | 91.0 | % | 61.3 | % |

 

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**I. Review of Underwriting Results - by Segment**

 

We currently operate through three reportable segments: Montpelier Bermuda,Montpelier Syndicate 5151 and MUSIC. Prior to its liquidation and dissolution in 2009, Blue Ocean constituteda fourth reportable segment.  Eachreportable segment represents a separate underwriting platform through which wewrite insurance and reinsurance business. The activities of the Company,certain of its intermediate holding and service companies and intercompanyeliminations relating to inter-segment reinsurance and support services,collectively referred to as “Corporate and Other”, are also presented below.

 

**MONTPELIER BERMUDA**

 

Underwriting results for Montpelier Bermuda, our largest reportablesegment, for the years ended December 31, 2009, 2008 and 2007 were asfollows:

 

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                             |       |   |   |   |   |
| Gross premiums written                   | ** ** | **$**                            | **452.4**  |   | $ | 503.5 |   | $ | 595.7 |   |
| Reinsurance premiums ceded               | ** ** | **(24.8**                        | **)**      | (76.7 | ) | (104.7 | ) |
| Net premiums written                     | ** ** | **427.6**                        |       | 426.8 |   | 491.0 |   |
| Change in net unearned premiums          | ** ** | **(1.6**                         | **)**      | 32.9 |   | 0.3 |   |
| Net premiums earned                      | ** ** | **426.0**                        |       | 459.7 |   | 491.3 |   |
|                                     |       |                             |       |   |   |   |   |
| Loss and LAE                             | ** ** | **(64.4**                        | **)**      | (245.9 | ) | (173.3 | ) |
| Acquisition costs                        | ** ** | **(54.2**                        | **)**      | (72.8 | ) | (72.9 | ) |
| General and administrative expenses      | ** ** | **(62.2**                        | **)**      | (43.3 | ) | (53.6 | ) |
| **Underwriting income**                  | ** ** | **$**                            | **245.2**  |   | $ | 97.7 |   | $ | 191.5 |   |
|                                     |       |                             |       |   |   |   |   |
| Loss and LAE ratio                       | ** ** | **15.1**                         | **%**      | 53.5 | % | 35.3 | % |
| Acquisition costs ratio                  | ** ** | **12.7**                         | **%**      | 15.8 | % | 14.8 | % |
| General and administrative expense ratio | ** ** | **14.6**                         | **%**      | 9.4 | % | 10.9 | % |
|                                     |       |                             |       |   |   |   |   |
| **GAAP combined ratio**                  | ** ** | **42.4**                         | **%**      | 78.7 | % | 61.0 | % |

 

***Gross and Net Premiums Written***

 

The following table summarizes Montpelier Bermuda’s gross premiums, byline of business, for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Property Catastrophe - Treaty          | ** ** | **$**                            | **262.5**  | ** ** | **58** | **%** | $ | 305.9 |   | 61 | % | $ | 329.7 |   | 55 | % |
| Property Specialty - Treaty            | ** ** | **68.9**                         | ** ** | **15** |   | 86.4 |   | 17 |   | 101.9 |   | 17 |   |
| Other Specialty - Treaty               | ** ** | **71.2**                         | ** ** | **16** |   | 66.1 |   | 13 |   | 98.9 |   | 17 |   |
| Property and Specialty Individual Risk | ** ** | **41.2**                         | ** ** | **9** |   | 39.8 |   | 8 |   | 65.2 |   | 11 |   |
| Inter-segment reinsurance (1)          | ** ** | **8.6**                          | ** ** | **2** |   | 5.3 |   | 1 |   | — |   | — |   |
|                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross premiums written                 | ** ** | **452.4**                        | ** ** | **100** | **%** | 503.5 |   | 100 | % | 595.7 |   | 100 | % |
| Reinsurance premiums ceded             | ** ** | **(24.8**                        | **)**      |   |   | (76.7 | ) |   |   | (104.7 | ) |   |   |
| Net premiums written                   | ** ** | **$**                            | **427.6**  |   |   |   | $ | 426.8 |   |   |   | $ | 491.0 |   |   |   |

 

----

| (1) | Represents an  inter-segment reinsurance cover with Montpelier Syndicate 5151. This  intercompany arrangement is eliminated in consolidation. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|

 

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Gross premiums writtenwithin our Montpelier Bermuda segment decreased by approximately 10%, in 2009,as compared to 2008, as a result of the following:

 

·                  Due to the lowlevel of catastrophe loss events that occurred during 2009, as well as thefavorable prior period development recognized during the year, MontpelierBermuda’s gross premiums written during 2009 included a $0.7 million netreversal of reinstatement premiums whereas gross premiums written during 2008included $21.2 million of reinstatement premiums, primarily related toHurricane Ike.  Excluding the effects ofthese reinstatements, gross premiums written within our Montpelier Bermudasegment decreased by approximately 6% from 2008.

 

·                  The decrease,as adjusted for reinstatements, relates mainly to our Property Catastrophe -Treaty line of business and reflects our decision to reduce gross exposures inconnection with the lapsing of certain outward reinsurance protections. Thisreduction was partially offset by price increases on 2009 renewal business.

 

Grosspremiums written within our Montpelier Bermuda segment decreased byapproximately 16% in 2008, as compared to 2007, as a result of the following:

 

·                  Pricing levelsdecreased, particularly in our Property Catastrophe - Treaty and PropertySpecialty Individual Risk lines of business. This deterioration in pricing hadthe dual effect of: (i) reducing the premium written on many contractrenewals, and (ii) causing Montpelier Bermuda not to renew othercontracts.

 

·                  Certaincontracts that would have been written by this segment during 2007 were writteninstead by our Montpelier Syndicate 5151 segment during 2008.

 

·                  Loss-sensitivepremium adjustments were made during the year within some retrospectively ratedcasualty contracts written in our Other Specialty - Treaty line of business.Montpelier Bermuda reduced its estimate of casualty losses incurred on thesecontracts, and consequently reduced the associated premium written.

 

In the normal course of its business, Montpelier Bermuda purchasesreinsurance in order to manage its exposures. The amount and type of reinsurance that it purchases is dependent on avariety of factors, including the cost of a particular reinsurance cover andthe nature of its gross premiums written during a particular period. Pricingstrength has  affected Montpelier Bermuda’sutilization of ceded reinsurance protection with the overall impact being asteady reduction in both its gross exposure and the level of its reinsurancepurchases since 2007.

 

All of Montpelier Bermuda’s reinsurance purchases to date haverepresented prospective cover; that is, ceded reinsurance purchased to protectit against the risk of future losses as opposed to covering losses that havealready occurred but have not been paid. The majority of these contracts areexcess-of-loss contracts covering one or more lines of business. To a lesserextent we have also purchased quota share reinsurance with respect to specificlines of business. Montpelier Bermuda also purchases industry loss warrantypolicies which provide coverage for certain losses provided they are triggeredby events exceeding a specified industry loss size.

 

During  2009, net premiumswritten within our Montpelier Bermuda segment were consistent with those writtenin 2008. Net premiums written in 2008 decreased by approximately 13% ascompared to  2007.  Various factors will continue to affectMontpelier Bermuda’s appetite and capacity to write and retain risk. Theseinclude, but are not limited to the impact of changes in frequency and severityassumptions used in our models and the corresponding pricing required to meetour return targets, evolving industry-wide capital requirements and increasedcompetition.  The level of reinstatementpremiums received in future periods is also dependent upon the occurrence ofcatastrophic losses.

 

***Net Premiums Earned***

 

Net premiumsearned during 2009, 2008 and 2007 were $426.0 million, $459.7 million and$491.3 million, respectively, representing decreases of 7% and 6% during 2009and 2008, respectively.  Net premiumsearned are a function of the amount and timing of net premiums written.

 

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*** ***

***Loss and LAE***

 

The following tables summarize Montpelier Bermuda’s loss and LAEreserve activities for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                 |       |                             |       |   |   |   |   |
| Gross unpaid loss and LAE reserves - beginning       | ** ** | **$**                            | **750.0**  |   | $ | 839.8 |   | $ | 1,089.2 |   |
| Reinsurance recoverable on unpaid losses - beginning | ** ** | **(114.1**                       | **)**      | (135.8 | ) | (197.3 | ) |
| Net unpaid loss and LAE reserves - beginning         | ** ** | **635.9**                        |       | 704.0 |   | 891.9 |   |
|                                                 |       |                             |       |   |   |   |   |
| Losses and LAE incurred:                             |       |                             |       |   |   |   |   |
| Current year losses                                  | ** ** | **133.0**                        |       | 350.7 |   | 209.7 |   |
| Prior year losses                                    | ** ** | **(68.6**                        | **)**      | (104.8 | ) | (36.4 | ) |
| Total losses and LAE incurred                        | ** ** | **64.4**                         |       | 245.9 |   | 173.3 |   |
|                                                 |       |                             |       |   |   |   |   |
| Losses and LAE paid                                  | ** ** | **(194.0**                       | **)**      | (314.0 | ) | (361.2 | ) |
|                                                 |       |                             |       |   |   |   |   |
| Net unpaid loss and LAE reserves - ending            | ** ** | **506.3**                        |       | 635.9 |   | 704.0 |   |
| Reinsurance recoverable on unpaid losses - ending    | ** ** | **63.1**                         |       | 114.1 |   | 138.8 |   |
|                                                 |       |                             |       |   |   |   |   |
| Gross unpaid loss and LAE reserves - ending          | ** ** | **$**                            | **569.4**  |   | $ | 750.0 |   | $ | 839.8 |   |

 

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| **(Millions)**           | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                     |       |                  |       |   |   |
| Gross IBNR               | ** ** | **$**                 | **364.5**  |   | $ | 385.8 |   |
| Gross Case Reserves      | ** ** | **204.9**             |       | 364.2 |   |
| **Total Gross Reserves** | ** ** | **$**                 | **569.4**  |   | $ | 750.0 |   |

 

As of December 31, 2009 and 2008, Montpelier Bermuda’s IBNRreserves represented 64% and 51% of its total gross loss and LAE reserves,respectively.  With the exception ofperiods immediately following a natural catastrophe or other large loss event,the portion of loss reserves represented by IBNR tends to be lower for largeloss events than it does for other business we write. During 2009, a year witha low level of large losses and sizable payments of existing reserves, our casereserves associated with such events decreased relative to total reserves.

 

Our best estimate for Montpelier Bermuda’s ending gross loss and LAEreserves at December 31, 2009 and 2008 was $569.4 million and $750.0 million, respectively.

 

We estimated Montpelier Bermuda’s gross and net loss and LAE reservesusing the methodology outlined in our *“Summaryof Critical Accounting Estimates”* contained in Item 7 herein.  We did not make any significant changes inthe assumptions or methodology used in our reserving process during the yearended December 31, 2009.

 

The following tables present Montpelier Bermuda’s net loss and LAE andnet loss and LAE ratios for the years ended December 31, 2009, 2008 and2007:

 

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |   |   |   |   |
| Loss and LAE ratio - current year | ** ** | **31.2**                         | **%**      | 76.3 | % | 42.7 | % |
| Loss and LAE ratio - prior year   | ** ** | **(16.1**                        | **)%**     | (22.8 | )% | (7.4 | )% |
|                              |       |                             |       |   |   |   |   |
| **Loss and LAE ratio**            | ** ** | **15.1**                         | **%**      | 53.5 | % | 35.3 | % |

 

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* *

 

*Current Year Loss and LAE*

 

During 2009, Montpelier Bermuda incurred $47.7 million of net loss andLAE from catastrophe losses, including European windstorm Klaus and hail stormsin Europe and Canada.

 

During 2008, Montpelier Bermuda incurred catastrophic losses fromEuropean Windstorm Emma and Hurricanes Ike and Gustav, representing a combinednet loss of $181.2 million. Additionally, Montpelier Bermuda incurred $49.2 million of net losses asa result of four individual risk losses within our Other Specialty line ofbusiness.

 

During 2007, Montpelier Bermuda incurred losses from Europeanwindstorms Kyrill and Gonu, California wildfires and floods in the U.K. andAustralia. These events generated combined net losses of $88.6 million.

 

Estimated ultimate loss and LAE recoverable from reinsurers increased(decreased) by $(27.4) million, $35.4 million and $6.9 million during 2009,2008 and 2007, respectively.

 

The nature of our business is such that losses, and the resulting lossratios, can vary widely from period to period depending on the occurrence andseverity of natural and man-made catastrophes.

 

*Prior Year Loss and LAE development experienced in2009*

 

Net favorable loss and LAE development occurring in 2009 that relatedto prior year losses was $68.6 million. The primary reasons for this decreasewere the following:

 

·      Net estimatedultimate losses and LAE associated with prior year catastrophe and individualrisk events decreased by $35.2 million, which is broken down as follows:

 

| **(Millions)**                          | ** ** | **Favorable**   | ** ** |
|-----------------------------------------|------------|-----------------|------------|
| **Event**                               | ** ** | **Development** | ** ** |
| 2005 hurricanes                         |       | $               | 10.9       |   |
| 2008 Hurricane Ike                      |       | 3.8             |       |
| Subrogation from 2005 explosion         |       | 4.5             |       |
| 2007 California wildfires               |       | 4.0             |       |
| Settlement of 2007 mining event         |       | 3.8             |       |
| 2007 windstorm Kyrill                   |       | 2.4             |       |
| 2007 U.K. floods                        |       | 2.4             |       |
| Partial refund on 2006 furnace collapse |       | 2.2             |       |
| 2004 hurricanes                         |       | 1.2             |       |
| Total catastrophe events                |       | $               | 35.2       |   |

 

Our loss and LAE developmentassociated with natural catastrophes such as hurricanes, wildfires, floods andwindstorms is the result of new information received from multiple cedants and,for the most recent events, information regarding the impact of such losses onthe entire reinsurance market.

 

Loss and LAE developmentregarding the 2005 explosion and 2007 mining event was driven by the resolutionof legal proceedings in 2009. The development associated with the 2006 furnacecollapse was the result of new information provided to us by the ceding companyin 2009.

 

·      A reassessment of loss andLAE reserves in our casualty class of business, primarily relating to medicalmalpractice policies, resulted in a decrease in estimated prior year losses andLAE of $6.6 million during 2009.

 

·      The remaining developmentrelated to smaller adjustments across several classes of business.

 

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* *

 

*Prior Year Loss and LAE development experienced in2008*

 

Net favorable loss and LAE development occurring in 2008 that relatedto prior year losses was $104.8 million. The most significant drivers of thisdecrease were the following:

 

·      Net estimated ultimatelosses and LAE associated with for prior year catastrophe events decreased by$54.9 million, which is broken down as follows:

 

| **(Millions)**            | ** ** | **Favorable**   | ** ** |
|---------------------------|------------|-----------------|------------|
| **Event**                 | ** ** | **Development** | ** ** |
| 2005 hurricanes           |       | $               | 16.8       |   |
| 2007 U.K. floods          |       | 14.2            |       |
| 2007 windstorm Kyrill     |       | 6.2             |       |
| 2005 train crash          |       | 5.0             |       |
| 2007 Australia floods     |       | 2.4             |       |
| 2007 California wildfires |       | 2.2             |       |
| 2004 hurricanes           |       | 1.6             |       |
| 2007 Cyclone Gonu         |       | 1.4             |       |
| Other                     |       | 5.1             |       |
| Total catastrophe events  |       | $               | 54.9       |   |

·      A reduction in lossesreported to us during 2008 in connection with several individual risk claims,resulted in a decrease in estimated losses and LAE of $11.0 million.

 

·      A reassessment of loss andLAE reserves in our casualty class of business, primarily relating to medicalmalpractice policies, resulted in a decrease in estimated losses and LAE of$13.0 million.

 

·      The remaining developmentrelated to smaller adjustments across several classes of business.

 

*Prior Year Loss and LAE development experienced in 2007*

 

During the year ended December 31,2007, Montpelier Bermuda experienced $36.4 million in favorable development onnet loss and LAE reserves relating to prior year losses. This decrease in lossand LAE was the result of relatively small adjustments across several classesof business. None of these adjustments was individually significant.

 

***Underwriting Expenses***

 

The following table presentsMontpelier Bermuda’s underwriting expenses for the years ended December 31,2009, 2008 and 2007:

 

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Acquisition costs                        | ** ** | **$**                            | **54.2**   |   | $ | 72.8 |   | $ | 72.9 |   |
| Acquisition costs ratio                  | ** ** | **12.7**                         | **%**      | 15.8 | % | 14.8 | % |
|                                     | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| General and administrative expenses      | ** ** | **$**                            | **62.2**   |   | $ | 43.3 |   | $ | 53.6 |   |
| General and administrative expense ratio | ** ** | **14.6**                         | **%**      | 9.4 | % | 10.9 | % |

 

Acquisition costs includeprofit commissions, brokerage costs, commissions and excise taxes, whenapplicable.

 

Profit commissions, whichare paid by assuming companies to ceding companies in the event of a favorableloss experience, change as our estimates of loss and LAE fluctuate. Relativelyfew of our assumed reinsurance contracts contain profit commission clauses. Theterms of these profit commissions are specific to the individual contracts andvary as a percentage of the contract results. Profit commissions (reversals),which are accrued based on the estimated results of the subject contract,totaled $(3.8) million, $5.9 million and $6.8 million for 2009, 2008 and 2007,respectively.  The 2009 reversal reflectsprofit commission adjustments on a few large contracts.

 

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All other acquisition costsare generally driven by contract terms and are normally a set percentage ofgross premiums written. Such acquisition costs consist of the net of commissionexpenses incurred on assumed business and commission revenue earned onpurchased reinsurance covers. Commission revenue on purchased reinsurancecovers is earned over the same period over which the corresponding premiums areexpensed.

 

The following tablesummarizes Montpelier Bermuda’s general and administrative expenses during theyears ended December 31, 2009, 2008 and 2007:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **(Millions)**                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                         | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Fixed expenses                               | ** ** | **$**                            | **50.7**   |   | $ | 39.2 |   | $ | 42.5 |   |
| Share-based and other incentive compensation | ** ** | **11.5**                         | ** ** | 4.1 |   | 11.1 |   |
| General and administrative expenses          | ** ** | **$**                            | **62.2**   |   | $ | 43.3 |   | $ | 53.6 |   |

 

The increase in MontpelierBermuda’s fixed expenses incurred during 2009, as compared to 2008, wasprimarily attributable to two items.  Thefirst was the implementation of a new reinsurance accounting system. Fixedexpenses recognized during 2009 associated with this new system include theperiodic amortization of capitalized costs, as well as maintenance andenhancement costs incurred subsequent to its implementation. The second was a$2.9 million increase in legal fees incurred during 2009, primarily inconnection with our unresolved contract dispute with MPCL.

 

The decrease in fixedexpenses incurred in 2008, as compared to 2007, is primarily the result of areduction in the marketing efforts of MMSL and lower intercompany allocationsof information technology and risk modeling expenses to the Montpelier Bermudasegment, as our newer operations gained significance and began to bear agreater proportion of such costs. In addition, during 2008 Montpelier Bermudareceived a $1.2 million U.K. Value Added Tax refund.

 

The significant increase inMontpelier Bermuda’s share-based and other incentive compensation recognizedduring 2009 versus 2008 is the result of an increase in accrued incentivecompensation to above-target levels in response to stronger operating resultsachieved by the Company during 2009. Expenses incurred in 2008 reflectedbelow-target incentive compensation costs, mainly as a result of thesignificant storm losses we incurred during the third quarter of that year. The2008 losses were also the primary driver of the decrease in share-based andother incentive compensation from 2007, a year with significantly strongeroperating results and few significant loss events.

 

**MONTPELIER SYNDICATE 5151**

 

Underwriting results forMontpelier Syndicate 5151, which commenced operations on July 1, 2007,were as follows for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross premiums written                   | ** ** | **$**                            | **167.3**  |   | $ | 116.2 |   | $ | 15.3 |   |
| Reinsurance premiums ceded               | ** ** | **(16.4**                        | **)**      | (7.5 | ) | (0.1 | ) |
| Net premiums written                     | ** ** | **150.9**                        |       | 108.7 |   | 15.2 |   |
| Change in net unearned premiums          | ** ** | **(17.8**                        | **)**      | (45.1 | ) | (11.0 | ) |
| Net premiums earned                      | ** ** | **133.1**                        |       | 63.6 |   | 4.2 |   |
|                                     |       |                             |       |   |   |   |   |
| Loss and LAE                             | ** ** | **(64.6**                        | **)**      | (47.4 | ) | (4.2 | ) |
| Acquisition costs                        | ** ** | **(22.9**                        | **)**      | (10.4 | ) | (1.6 | ) |
| General and administrative expenses      | ** ** | **(38.5**                        | **)**      | (32.7 | ) | (10.8 | ) |
| **Underwriting income (loss)**           | ** ** | **$**                            | **7.1**    |   | $ | (26.9 | ) | $ | (12.4 | ) |
|                                     |       |                             |       |   |   |   |   |
| Loss and LAE ratio                       | ** ** | **48.5**                         | **%**      | 74.5 | % | 100.0 | % |
| Acquisition costs ratio                  | ** ** | **17.2**                         | **%**      | 16.4 | % | 38.1 | % |
| General and administrative expense ratio | ** ** | **28.9**                         | **%**      | 51.4 | % | n/m |   |
|                                     |       |                             |       |   |   |   |   |
| **GAAP combined ratio**                  | ** ** | **94.6**                         | **%**      | 142.3 | % | n/m |   |

 

n/m - notmeaningful due to the start-up nature of these operations.

 

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*** ***

 

***Gross and Net Premiums Written***

 

The following table summarizes Montpelier Syndicate 5151’s grosspremiums, by line of business, for the years ended December 31, 2009, 2008 and2007:

 
|                                   | ** ** | **Year Ended December 31,** |       |
|----------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**               | ** ** | **2009**                         | ** ** | **2008** |   | **2007** |   |
| Property Catastrophe - Treaty          | ** ** | **$**                            | **32.9**   | ** ** | **20** | **%** | $ | 30.6 |   | 26 | % | $ | 1.0 |   | 6 | % |
| Property Specialty - Treaty            | ** ** | **27.7**                         | ** ** | **16** |   | 15.8 |   | 14 |   | 3.5 |   | 23 |   |
| Other Specialty - Treaty               | ** ** | **49.7**                         | ** ** | **30** |   | 30.3 |   | 26 |   | 0.3 |   | 2 |   |
| Property and Specialty Individual Risk | ** ** | **56.5**                         | ** ** | **34** |   | 39.5 |   | 34 |   | 10.5 |   | 69 |   |
| Inter-segment reinsurance (1)          | ** ** | **0.5**                          | ** ** | **—** |   | — |   | — |   | — |   | — |   |
|                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross premiums written                 | ** ** | **167.3**                        | ** ** | **100** | **%** | 116.2 |   | 100 | % | 15.3 |   | 100 | % |
| Reinsurance premiums ceded             | ** ** | **(16.4**                        | **)**      |   |   | (7.5 | ) |   |   | (0.1 | ) |   |   |
| Net premiums written                   | ** ** | **$**                            | **150.9**  |   |   |   | $ | 108.7 |   |   |   | $ | 15.2 |   |   |   |

 

----

(1)Represents an inter-segment reinsurance cover withMontpelier Bermuda.  This intercompanyarrangement is eliminated in consolidation.

 

Montpelier Syndicate 5151wrote $167.3 million of gross premiums during 2009, which represents a 44%increase over the $116.2 million in total gross premiums written during 2008.The majority of the increase was generated by our U.K.-based underwriters whowrote $119.1 million of gross premiums during 2009, as compared to $79.9million during 2008. The largest drivers of this increase related to marinebusiness (within our Property and Specialty Individual Risk line of business)and to excess-of-loss and proportional contracts written within our OtherSpecialty - Treaty line of business. Our U.S.-based underwriters, who wrote$48.2 million of gross premiums during 2009, wrote $36.3 million during 2008.The biggest portion of this increase was written within our Property Specialty- Treaty line of business.

 

Montpelier Syndicate 5151also experienced significant growth from 2007, the year in which the segmentwas established, compared to 2008. The largest drivers of the increase were newbusiness production in engineering, individual and treaty property coverage andU.S. casualty lines, written on both a proportional and non-proportional basis.

 

Syndicate 5151’s currentfocus is primarily on short-tail business that does not contain catastropheexposure. The majority of Syndicate 5151’s Property Catastrophe - Treatywritings during each of the years presented represent business transferred fromthe Montpelier Bermuda and Blue Ocean segments.

 

To date, most of MontpelierSyndicate 5151’s outward reinsurance has been purchased by the MontpelierBermuda segment, which in turn provides inter-segment reinsurance to MontpelierSyndicate 5151. This inter-segment reinsurance purchased by MontpelierSyndicate 5151 totaled $8.6 million, $5.3 million and zero in 2009, 2008 and2007, respectively. Additionally, from time to time, Montpelier Syndicate 5151purchases a limited amount of third-party reinsurance cover for its own account.

 

All of Montpelier Syndicate5151’s own-account reinsurance purchases to date have represented prospectivecover; that is, ceded reinsurance purchased to protect it against the risk offuture losses as opposed to covering losses that have already occurred but havenot been paid.

 

Various factors will continue to affect this segment’s appetite andcapacity to write and retain risk. These include, but are not limited to theimpact of changes in frequency and severity assumptions used in our models andthe corresponding pricing required to meet our return targets, evolvingindustry-wide capital requirements and increased competition.

 

***Net Premiums Earned***

 

Net premiumsearned at Montpelier Syndicate 5151 during years ended December 31, 2009,2008 and 2007 were $133.1 million, $63.6 million and $4.2 million,respectively.  Net premiums earned are afunction of the timing of net premiums written.

 

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*** ***

 

***Loss and LAE***

 

The following tables summarize Montpelier Syndicate 5151’s loss and LAEreserve activities for the years ended December 31, 2009, 2008 and 2007:

 

| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross unpaid loss and LAE reserves - beginning       | ** ** | **$**                            | **48.8**   |   | $ | 4.2 |   | $ | — |   |
| Reinsurance recoverable on unpaid losses - beginning | ** ** | **—**                       |       | — |   | — |   |
| Net unpaid loss and LAE reserves - beginning         | ** ** | **48.8**                         |       | 4.2 |   | — |   |
|                                                 |       |                             |       |   |   |   |   |
| Losses and LAE incurred:                             |       |                             |       |   |   |   |   |
| Current year losses                                  | ** ** | **72.1**                         |       | 46.7 |   | 4.2 |   |
| Prior year losses                                    | ** ** | **(7.5**                         | **)**      | 0.7 |   | — |   |
| Total losses and LAE incurred                        | ** ** | **64.6**                         |       | 47.4 |   | 4.2 |   |
|                                                 |       |                             |       |   |   |   |   |
| Net impact of foreign currency movements             | ** ** | **(0.5**                         | **)**      | 0.6 |   | — |   |
|                                                 |       |                             |       |   |   |   |   |
| Losses and LAE paid                                  | ** ** | **(17.4**                        | **)**      | (3.4 | ) | — |   |
|                                                 |       |                             |       |   |   |   |   |
| Net unpaid loss and LAE reserves - ending            | ** ** | **95.5**                         |       | 48.8 |   | 4.2 |   |
| Reinsurance recoverable on unpaid losses - ending    | ** ** | **0.5**                          |       | — |   | — |   |
| Gross unpaid loss and LAE reserves - ending          | ** ** | **$**                            | **96.0**   |   | $ | 48.8 |   | $ | 4.2 |   |

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Loss and LAE ratio - current year | ** ** | **54.2**                         | **%**      | 73.4 | % | 100.0 | % |
| Loss and LAE ratio - prior year   | ** ** | **(5.6**                         | **)%**     | 1.1 | % | — | % |
| **Loss and LAE ratio**            | ** ** | **48.5**                         | **%**      | 74.5 | % | 100.0 | % |

 

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| **(Millions)**           | ** ** | **2009**              |       | **2008** |   |
| Gross IBNR               | ** ** | **$**                 | **74.6**   |   | $ | 36.4 |   |
| Gross Case Reserves      | ** ** | **21.4**              |       | 12.4 |   |
| **Total Gross Reserves** | ** ** | **$**                 | **96.0**   |   | $ | 48.8 |   |

 

Our best estimate for Montpelier Syndicate 5151’s ending gross loss andLAE reserves at December 31, 2009 and 2008 was $96.0 million and $48.8million, respectively.

 

We estimated Montpelier Syndicate 5151’s loss and LAE reserves usingthe methodology outlined in our *“Summary ofCritical Accounting Estimates”* contained in Item 7 herein.  We did not make any significant changes inthe assumptions or methodology used in our reserving process during the yearended December 31, 2009.

 

*Current Year Loss and LAE*

 

During 2009, Montpelier Syndicate 5151 incurred $72.1 million of netloss and LAE from current year losses, $50.1 million of which represents IBNRlosses across all lines of business. Similarly, the $22.0 million of reportedcase losses related to small claims affecting multiple classes of businesswritten.

 

During 2008, Montpelier Syndicate 5151 incurred $46.7 million ofnet loss and LAE from current year losses which related to several individualrisk losses, as well as $6.8 million of losses relating to Hurricanes Gustavand Ike.

 

During 2007, Montpelier Syndicate 5151 incurred $4.2 million ofnet loss and LAE from current year loss, the majority of which represented IBNRlosses.

 

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* *

 

*Prior Year Loss and LAE development experienced in2009*

 

During 2009, Montpelier Syndicate 5151 experienced $7.5 million offavorable development on its loss and LAE reserves relating to prior yearlosses. The primary drivers of the decreases were:

 

·      The settlementof two individual risk losses below the amounts previously reserved, whichrepresented $5.4 million of favorable development.

 

·      A $2.6 millionreduction in the estimated ultimate losses and LAE associated with HurricaneIke.

 

Thisfavorable development was partially offset by net adverse development affectingseveral classes of business.

 

*Prior Year Loss and LAE development experienced in 2008*

 

During2008, Montpelier Syndicate 5151 experienced $0.7 million in adverse developmenton its loss and LAE reserves relating to prior year losses.

 

***Underwriting Expenses***

 

Thefollowing table presents Montpelier Syndicate 5151’s underwriting expenses forthe years ended December 31, 2009, 2008 and 2007:

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Acquisition costs                        | ** ** | **$**                            | **22.9**   |   | $ | 10.4 |   | $ | 1.6 |   |
| Acquisition costs ratio                  | ** ** | **17.2**                         | **%**      | 16.4 | % | 38.1 | % |
|                                     | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| General and administrative expenses      | ** ** | **$**                            | **38.5**   |   | $ | 32.7 |   | $ | 10.8 |   |
| General and administrative expense ratio | ** ** | **28.9**                         | **%**      | 51.4 |   | n/m |   |

 

Acquisitioncosts include profit commissions, brokerage costs, commissions and excisetaxes, when applicable.  Profitcommissions and brokerage costs can vary based on the nature of businessproduced.

 

During2009 and 2008, Montpelier Syndicate 5151’s acquisition costs included $1.0million and $0.3 million of profit commissions, respectively, and premiumdeficiency charges (reversals) of $(0.7) million and $0.1 million,respectively. Absent these adjustments, Montpelier Syndicate 5151’s acquisitioncost ratio increased slightly during 2009, due to a change in the mix ofbusiness compared to 2008. During 2007, acquisition costs included premiumdeficiency charges of $0.9 million, representing 21 points to that year’sacquisition costs ratio.

 

Thefollowing table summarizes Montpelier Syndicate 5151’s general andadministrative expenses during the years ended December 31, 2009, 2008 and2007:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **(Millions)**                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                         | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Fixed expenses                               | ** ** | **$**                            | **27.4**   |   | $ | 28.4 |   | $ | 8.4 |   |
| Share based and other incentive compensation | ** ** | **11.1**                         | ** ** | 4.3 |   | 2.4 |   |
| General and administrative expenses          | ** ** | **$**                            | **38.5**   |   | $ | 32.7 |   | $ | 10.8 |   |

 

MontpelierSyndicate 5151’s fixed expenses are driven mainly by salaries and premisescosts associated with its underwriting and Coverholder operations located inthe U.S., U.K. and Switzerland and intercompany allocations of informationtechnology and risk modeling expenses. Increases in these expenses for 2009, ascompared to 2008, were offset by a reduction in annual Lloyd’s fees, as well asa $2.1 million credit received in respect of Lloyd’s fees relating to the 2007and 2008 years of account. These fees had been largely tied to MontpelierSyndicate 5151’s underwriting capacity, which increased from £47 million in2007 to £143 million in 2008. For 2009 and beyond, Lloyd’s fees are based onMontpelier Syndicate 5151’s actual premium writings.

 

Fixedexpenses incurred during 2008 and 2007 included Lloyd’s fees of $7.6 millionand $2.3 million, respectively, and management fees paid to Spectrum of $4.6million and $2.5 million, respectively.

 

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Thesignificant increase in Montpelier Syndicate 5151’s share-based and otherincentive compensation recognized during 2009 versus 2008 is the result of anincrease in accrued incentive compensation to above-target levels in responseto stronger operating results achieved by the Company during 2009. The increasein incentive compensation costs from 2007 to 2008 was mainly due to increasesin the number of staff within the U.S. and U.K. operations, and was partiallyoffset by a decrease in incentive accruals made during the third quarter of2008 resulting from the significant storm losses we incurred during thatperiod.

 

**MUSIC**

 

Underwritingresults for MUSIC, which we acquired on November 1, 2007, were as followsfor the years ended December 31, 2009, 2008 and 2007:

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross premiums written                   | ** ** | **$**                            | **24.3**   |   | $ | 5.6 |   | $ | — |   |
| Reinsurance premiums ceded (1)           | ** ** | **(0.6**                         | **)**      | — |   | — |   |
| Net premiums written                     | ** ** | **23.7**                         |       | 5.6 |   | — |   |
| Change in net unearned premiums          | ** ** | **(9.6**                         | **)**      | (3.5 | ) | — |   |
| Net premiums earned                      | ** ** | **14.1**                         |       | 2.1 |   | — |   |
|                                     |       |                             |       |   |   |   |   |
| Loss and LAE                             | ** ** | **(9.7**                         | **)**      | (1.8 | ) | — |   |
| Acquisition costs                        | ** ** | **(3.4**                         | **)**      | (0.5 | ) | — |   |
| General and administrative expenses      | ** ** | **(9.0**                         | **)**      | (5.0 | ) | (1.2 | ) |
| **Underwriting loss**                    | ** ** | **$**                            | **(8.0**   | **)** | $ | (5.2 | ) | $ | (1.2 | ) |
|                                     |       |                             |       |   |   |   |   |
| Loss and LAE ratio                       | ** ** | **68.8**                         | **%**      | 85.7 | % | — | % |
| Acquisition costs ratio                  | ** ** | **24.1**                         | **%**      | 23.8 | % | — | % |
| General and administrative expense ratio | ** ** | **63.8**                         | **%**      | n/m | % | — | % |
|                                     |       |                             |       |   |   |   |   |
| **GAAP combined ratio**                  | ** ** | **156.7**                        | **%**      | n/m | % | — | % |

 

----

(1) 2009includes $0.5 million of inter-segment reinsurance cover with MontpelierSyndicate 5151. This intercompany arrangement is eliminated in consolidation.

 

***Premium written and earned***

 

All premiums written to date by MUSIC relate to our Property andSpecialty Individual Risk line of business. MUSIC has retained almost all of this gross premium, ceding $0.6 millionduring 2009 and zero in 2008. MUSIC wrote a de minimis amount of premium during2007.

 

Net premiums earned are a function of the timing of net premiumswritten.

 

***Loss and LAE***

 

The following tables summarize MUSIC’s net loss and LAE for the yearsended December 31, 2009, and 2008:

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                             | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|                                                 |       |                             |       |   |   |
| Gross unpaid loss and LAE reserves - beginning       | ** ** | **$**                            | **10.1**   |   | $ | 16.7 |   |
| Reinsurance recoverable on unpaid losses - beginning | ** ** | **(8.8**                         | **)**      | (16.7 | ) |
| Net unpaid loss and LAE reserves - beginning         | ** ** | **1.3**                          |       | — |   |
|                                                 | ** ** |                             |       |   |   |
| Losses and LAE incurred:                             | ** ** |                             |       |   |   |
| Current year losses                                  | ** ** | **9.3**                          |       | 1.8 |   |
| Prior year losses                                    | ** ** | **0.4**                          |       | — |   |
| Total losses and LAE incurred                        | ** ** | **9.7**                          |       | 1.8 |   |
|                                                 | ** ** |                             |       |   |   |
| Losses and LAE paid                                  | ** ** | **(1.6**                         | **)**      | (0.5 | ) |
|                                                 | ** ** |                             |       |   |   |
| Net unpaid loss and LAE reserves - ending            | ** ** | **9.4**                          |       | 1.3 |   |
| Reinsurance recoverable on unpaid losses - ending    | ** ** | **6.0**                          |       | 8.8 |   |
|                                                 | ** ** | ** **                       |       |   |   |
| Gross unpaid loss and LAE reserves - ending          | ** ** | **$**                            | **15.4**   |   | $ | 10.1 |   |

 

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MUSIC’s gross unpaid loss and LAE reserves and reinsurancerecoverable on unpaid losses include the Acquired Reserves associated with theMUSIC Acquisition.

 

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| ** **                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loss and LAE ratio - current year | ** ** | **66.0**                         | **%**      | 85.7 | % |
| Loss and LAE ratio - prior year   | ** ** | **2.8**                          | **%**      | — | % |
| **Loss and LAE ratio**            |       | **68.8**                         | **%**      | 85.7 | % |

 

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| **(Millions)**           | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                     | ** ** | ** **            |       |   |   |
| Gross IBNR               | ** ** | **$**                 | **11.4**   |   | $ | 7.8 |   |
| Gross Case Reserves      | ** ** | **4.0**               |       | 2.3 |   |
| **Total Gross Reserves** | ** ** | **$**                 | **15.4**   |   | $ | 10.1 |   |

 

Our best estimate for MUSIC’s ending gross loss and LAE reserves at December 31,2009 and 2008 was $15.4 million and $10.1 million, respectively.

 

We estimated MUSIC’s loss and LAE reserves using the methodologyoutlined in our *“Summary of CriticalAccounting Estimates”* contained in Item 7 herein.  We did not make any significant changes inthe assumptions or methodology used in our reserving process during the yearended December 31, 2009.

 

As a result of MUSIC’s limited premium writings and loss experience,MUSIC’s loss and LAE expenses incurred to date primarily represent IBNR.  MUSIC’s unfavorable prior period loss reservedevelopment to date has not been significant, totalling $0.4 million in 2009.

 

***Underwriting Expenses***

 

MUSIC’s acquisition costs of $3.4 million and $0.5 million for 2009 and2008, respectively, reflected the level of its earned premium.

 

The following table summarizes MUSIC’s general and administrativeexpenses during the years ended December 31, 2009, 2008 and 2007:

 

| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **(Millions)**                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                         | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Fixed expenses                               | ** ** | **$**                            | **7.4**    |   | $ | 4.5 |   | $ | 1.1 |   |
| Share based and other incentive compensation | ** ** | **1.6**                          | ** ** | 0.5 |   | 0.1 |   |
| General and administrative expenses          | ** ** | **$**                            | **9.0**    |   | $ | 5.0 |   | $ | 1.2 |   |

 

MUSIC’s fixed expenses of $7.4 million and $4.5 million for 2009 and2008, respectively, represent recurring expenses associated with its growingoperations whereas its fixed expenses of $1.1 million for 2007 primarilyrepresent costs associated with establishing its operating platform.  MUSIC’s variable expenses of $1.6 million,$0.5 million and $0.1 million for 2009, 2008 and 2007, respectively, consistedof annual and long-term incentive accruals tied primarily to the performance ofthe Company.

 

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** **

 

**BLUE OCEAN**

 

Underwriting results for Blue Ocean, which was liquidated and dissolvedin 2009, for the years ended December 31, 2008 and 2007, were as follows.

 

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                 | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Gross premiums written                   |       | $                                | 0.1        |   | $ | 42.8 |   |
| Reinsurance premiums ceded               |       | —                           |       | — |   |
| Net premiums written                     |       | 0.1                              |       | 42.8 |   |
| Change in net unearned premiums          |       | 3.0                              |       | 18.9 |   |
| Net premiums earned                      |       | 3.1                              |       | 61.7 |   |
| Loss and LAE                             |       | —                           |       | — |   |
| Acquisition costs                        |       | (0.2                             | )          | (3.8 | ) |
| General and administrative expenses      |       | (0.9                             | )          | (13.9 | ) |
| **Underwriting income**                  |       | $                                | 2.0        |   | $ | 44.0 |   |
| Loss and LAE ratio                       |       | —                           | %          | — | % |
| Acquisition costs ratio                  |       | 6.5                              | %          | 6.2 | % |
| General and administrative expense ratio |       | 29.0                             | %          | 22.5 | % |
|                                     |       |                             |       |   |   |
| **GAAP combined ratio**                  |       | 35.5                             | %          | 28.7 | % |

 

Blue Ocean was formed in order to capitalize on the attractive marketconditions that existed in the property casualty retrocessional marketfollowing Hurricanes Katrina, Rita and Wilma in 2005. While early pricingconditions for this segment were strong, increased competition and weakerdemand experienced at the end of 2006 and throughout 2007 adversely impactedpricing.

 

During 2007 Blue Ocean Re ceased writing new business.

 

During 2008 Blue Ocean Re was deregistered as a Bermuda insurer and weacquired all the outstanding share capital of Blue Ocean.

 

During 2009 Blue Ocean Re was amalgamated into Blue Ocean and BlueOcean was liquidated and dissolved into the Company.

 

**CORPORATE AND OTHER**

 

Corporate and Other, which collectively represents the Company, certainintermediate holding and service companies and intercompany eliminationsrelating to inter-segment reinsurance and support services, is not consideredto be a reportable segment of our business. The results of Corporate and Otherprincipally reflect general and administrative expenses of the Company insupport of its various operating companies.

 

Our Corporate and Other results for the years ended December 31,2009, 2008 and 2007 were as follows:

 

| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| **(Millions)**                      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross premiums written (1)          | ** ** | **$**                            | **(9.1**   | **)** | $ | (5.3 | ) | $ | — |   |
| Reinsurance premiums ceded (1)      | ** ** | **9.1**                          |       | 5.3 |   | — |   |
| Net premiums written                | ** ** | **—**                       |       | — |   | — |   |
| Change in net unearned premiums     | ** ** | **—**                       |       | — |   | — |   |
| Net premiums earned                 | ** ** | **—**                       |       | — |   | — |   |
| Loss and LAE                        | ** ** | **—**                       |       | — |   | — |   |
| Acquisition costs                   | ** ** | **—**                       |       | — |   | — |   |
| General and administrative expenses | ** ** | **(27.4**                        | **)**      | (20.1 | ) | (6.4 | ) |
| **Income (loss)**                   | ** ** | **$**                            | **(27.4**  | **)** | $ | (20.1 | ) | $ | (6.4 | ) |

 

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(1)   Represents the elimination ofan inter-segment reinsurance cover among Montpelier Bermuda, MontpelierSyndicate 5151 and MUSIC.

 

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The following tablesummarizes the general and administrative expenses of Corporate and Otherduring the years ended December 31, 2009, 2008, and 2007:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **(Millions)**                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Fixed expenses                               | ** ** | **$**                            | **11.5**   | ** ** | **$** | 15.2 |   | $ | 8.5 |   |
| Share based and other incentive compensation | ** ** | **15.9**                         | ** ** | 5.3 | ** ** | 10.5 |   |
| Management services                          | ** ** | **—**                       | ** ** | (0.4 | ) | (12.6 | ) |
| General and administrative expenses          | ** ** | **$**                            | **27.4**   | ** ** | **$** | 20.1 |   | $ | 6.4 |   |

 

The decrease in fixedexpenses for 2009, as compared to 2008, is primarily attributable to: (i) areduction in consulting services for information technology implementations; (ii) reducedlegal expenses regarding corporate matters; (iii) lower audit feeallocations and (iv) reduced insurance allocations. The significantincrease in corporate share-based and other incentive compensation recognizedduring 2009 versus 2008 is the result of an increase in accrued incentivecompensation to above-target levels in response to stronger operating resultsachieved by the Company during 2009. Expenses incurred in 2008 reflectedbelow-target incentive compensation costs, mainly as a result of the stormlosses we incurred during the third quarter of that year.

 

The increase in fixedexpenses during 2008, as compared to 2007, is primarily the result of: (i) anincrease in salaries and benefits associated with the hiring of additionalfinance, risk management and legal personnel in support of our new insuranceand reinsurance initiatives; (ii) the promotion of certain corporateofficers in connection with the Company’s 2008 succession planning actions; (iii) increasedinter-segment allocations from the Company’s service companies; and (iv) upgradesmade to the Company’s information and accounting systems. The decrease inincentive compensation during 2008, as compared to 2007, is due primarily to2008 hurricane losses whereas 2007 was a year with significantly strongeroperating results and few significant loss events.

 

Management services for 2008and 2007 represented underwriting, risk management, claims management, cededretrocession agreement management, actuarial and accounting service feesprovided to Blue Ocean, while it was in existence.

 

**II. Review of Non-Underwriting Results - Consolidated**

 

***Net Investment Income and Total Return onInvestments***

 

The following tablesummarizes our consolidated net investment income and total investment returnfor the years ended December 31, 2009, 2008 and 2007:

 

| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Investment income                                                        | ** ** | **$**                            | **89.0**   |   | $ | 94.2 |   | $ | 139.8 |   |
| Investment expenses                                                      | ** ** | **(8.0**                         | **)**      | (7.8 | ) | (7.3 | ) |
| Net investment income                                                    | ** ** | **81.0**                         |       | 86.4 |   | 132.5 |   |
| Net realized investment gains (losses)                                   | ** ** | **19.9**                         |       | (73.6 | ) | 26.6 |   |
| Net unrealized investment gains (losses)                                 | ** ** | **161.9**                        |       | (171.3 | ) | (0.1 | ) |
| Net foreign exchange transaction gains on cash and  investments          | ** ** | **—**                       |       | 9.6 |   | 7.9 |   |
| Net foreign exchange translation gains (losses) on  cash and investments | ** ** | **0.8**                          |       | (12.9 | ) | — |   |
| Change in fair value of Symetra                                          | ** ** | **(0.5**                         | **)**      | 0.9 |   | (1.6 | ) |
| **Total return on investments ($)**                                      | ** ** | **$**                            | **263.1**  |   | $ | (160.9 | ) | $ | 165.3 |   |
| Weighted average investment portfolio, including  cash                   | ** ** | **$**                            | **2,569**  |   | $ | 2,616 |   | $ | 2,986 |   |
| **Total return on investments (%)**                                      | ** ** | **10.2**                         | **%**      | (6.2 | )% | 5.5 | % |

 

Our total investment returnfor 2009 was significantly higher than that of 2008 and 2007, due to sizablenet realized and unrealized investment gains partially offsetting reductions innet investment income experienced from 2007 to 2009.

 

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Our investment incomedecreased in 2009, as compared to 2008 and 2007, mainly as a result ofcontinued decreases in short-term interest rates and reductions in dividendincome earned on a smaller portfolio of equity securities.  In addition, we discontinued our securitieslending program during the second quarter of 2008.  Fees earned from our securities lendingprogram during 2008 and 2007 were recorded as additional investment income.

 

Our investment expenses werehigher in 2009, as compared to 2008 and 2007, due mainly to higher investmentportfolio balances under management and changes in investment managers madeduring those years.  As of December 31,2009, 2008 and 2007, our ending investment portfolio, excluding cash, totaled$2,469 million, $2,097 million and $2,359 million, respectively.

 

During 2009, we experienced$104.2 million of net realized and unrealized gains from our fixed maturityinvestments, $74.6 million in net realized and unrealized gains from our equityinvestments and $3.0 million in net realized and unrealized gains from ourother investments. The fixed maturity gains we experienced during 2009 werelargely the result of tightening credit spreads between the yield on thosesecurities versus that of U.S. treasuries. Our equity portfolio also experienced gains during 2009, benefittingfrom gains in the U.S. equity market as a whole.

 

During 2008, we experienced$82.4 million of net realized and unrealized losses from our fixed maturityinvestments and securities lending collateral, $103.5 million in net realizedand unrealized losses from our equity investments and $59.0 million in netrealized and unrealized losses from our other investments. The significantfixed maturity losses we experienced during 2008 were largely the result ofcredit concerns for corporate and asset-backed debt securities.  Our equity portfolio also experiencedsignificant losses during 2008, suffering from losses in the U.S. equity marketas a whole.  The net realized investmentlosses recorded during 2008 principally resulted from a $17.5 million losswithin our fixed maturity portfolio resulting from the bankruptcy of LehmanBrothers and $43.6 million in losses within our other investment portfolioattributable to two leveraged limited partnership funds which specialized indistressed loans.

 

During 2007, we experienced$19.9 million in net realized and unrealized investment gains from our fixedmaturities, $7.5 million in net realized and unrealized gains from our equityinvestments and $0.9 million in net realized and unrealized losses from ourother investments.

 

As of December 31,2009, our fixed maturity portfolio contained certain securities with exposureto the subprime mortgage market and the Alternative-A mortgage market which hada fair value of $26.1 million, $19.9 million of which  which were rated “AAA” (Extremely Strong) byStandard & Poor’s at that time. Our subprime and Alt-A securities hadan amortized cost of $28.3 million as of December 31, 2009.

 

During 2009, 2008, and 2007,we experienced net foreign exchange gains (losses) on cash and investments of$0.8 million, $(3.3) million and $7.9 million, respectively. The foreignexchange gains (losses) experienced during these years are due to the weakening(strengthening) of the U.S. dollar against the various foreign currenciesin which we transact, principally the British pound.

 

During 2009, 2008 and 2007,we recorded unrealized gains (losses) from our investment in Symetra FinancialCorporation (“Symetra”) of $(0.5) million, $0.9 million and $(1.6) millionrespectively.  Our investment in Symetrawas acquired in a private placement in 2004. In January 2010, Symetra’s common shares began trading on the NewYork Stock Exchange under the symbol “SYA”. As a result, beginning in the first quarter of 2010, Montpelier’sinvestment in Symetra will be presented as an equity security on the Company’sconsolidated balance sheets and changes in its fair value will be recorded asnet realized and unrealized gains (losses) on the Company’s consolidatedstatements of operations. Symetra provides retirement plans, employee benefits,life insurance and annuities through a national network of independent advisorsand agents.

 

U.S. GAAP establishes ahierarchy that prioritizes the inputs to valuation techniques used to measurefair value into the three broad levels. Level 3 assets are those whose valuations place significant reliance on “unobservable”inputs.

 

As of December 31,2009, $202.6 million or 8.3% of our total invested assets measured at fairvalue were considered to be Level 3 assets. Our investments classified as Level 3 at December 31, 2009consisted primarily of the following: (i) with respect to fixed maturityinvestments, certain corporate bonds, convertible debt and asset-backed securities,many of which are not publicly traded or are not actively traded; (ii) withrespect to equity securities, certain preferred and non-U.S. equity securities;and (iii) with respect to other investments, certain limited partnershipinterests and our investment in Symetra.

 

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As of December 31,2008, $191.3 million, or 9.3%, of our total invested assets measured at fairvalue were considered to be Level 3 assets. Our investments classified as Level3 at December 31, 2008 primarily consisted of the following: (i) withrespect to fixed maturity investments, certain corporate bonds, convertibledebt and asset-backed securities, many of which are not publicly traded or arenot actively traded; (ii) with respect to equity securities, warrants toacquire equity securities and certain non-U.S. securities; and (iii) withrespect to other investments, our investment in Symetra.

 

The decrease in our Level 3securities from December 31, 2008 to December 31, 2009, was theresult of an increase in pricing transparency of certain of the Company’s fixedmaturities historically classified as Level 3. During the first quarter of 2010,our Level 3 investments will further decrease as our investment in Symetra willbe reclassified from Level 3 to Level 1.

 

***Net Foreign Exchange Gains (Losses)***

 

The following table summarizes the components of our consolidated netforeign exchange gains (losses) for years ended December 31, 2009, 2008and 2007:

 

| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Millions)**                                                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net foreign exchange transaction losses on insurance  and reinsurance balances | ** ** | **$**                            | **(2.5**   | **)** | $ | (2.0 | ) | $ | (1.8 | ) |
| Net foreign exchange translation gains on cash and  investments                | ** ** | **—**                       | ** ** | 9.6 |   | 7.9 |   |
| Net foreign exchange gains (losses)                                            | ** ** | **$**                            | **(2.5**   | **)** | $ | 7.6 |   | $ | 6.1 |   |

 

See *“Net Investment Income and TotalReturn on Investments*” above for details of our net foreign exchangetransaction gains on cash and investments.

 

Our net foreign exchange transaction gains (losses) on insurance andreinsurance balances primarily represent realized gains and losses resultingfrom premiums received and losses paid by Montpelier Bermuda in currenciesother than the U.S. dollar.  From time totime we have entered into foreign currency exchange agreements in order tomitigate the financial effects of foreign exchange rate fluctuations.  See *“NetExpense from Derivative Instruments” below.*

 

***Net Income (Expense) from DerivativeInstruments***

 

The following table presents our net income (expense) from  derivative instruments during the years endedDecember 31, 2009, 2008 and 2007:

 

| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Hurricane Option                                 | ** ** | **$**                            | **—** |   | $ | (1.0 | ) | $ | — |   |
| ILW Swap                                         | ** ** | **—**                       |       | (0.7 | ) | — |   |
| CAT Bond Protection                              | ** ** | **(0.2**                         | **)**      | (11.9 | ) | (11.9 | ) |
| Foreign Exchange Contracts                       | ** ** | **(0.6**                         | **)**      | (4.1 | ) | 3.2 |   |
| Investment Options and Futures                   | ** ** | **8.1**                          |       | 1.8 |   | — |   |
| CAT Bond Facility                                | ** ** | **—**                       |       | 1.0 |   | 5.3 |   |
| ILW Contract                                     | ** ** | **—**                       |       | 0.6 |   | 3.1 |   |
| Net income (expense) from derivative instruments | ** ** | **$**                            | **7.3**    |   | $ | (14.3 | ) | $ | (0.3 | ) |

 

A description of each of our derivative instrument activities follows:

 

Hurricane Option

 

In 2008, we purchased an option on hurricane seasonal futures (the “HurricaneOption”) for $1.0 million in order to provide protection against our easternU.S. hurricane exposure during the period from June 1, 2008 to November 30,2008.  The maximum possible recovery toMontpelier under the Hurricane Option was $5.0 million.  The Hurricane Option expired without value.

 

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ILW Swap

 

In 2008, we entered into an Industry Loss Warranty (“ILW”) swapcontract (the “ILW Swap”) with a third-party in order to provide protectionagainst our U.S. hurricane exposure.  Inreturn for a fixed-rate payment of $0.7 million, we are entitled to receive afloating-rate payment triggered on the basis of losses incurred by theinsurance industry as a whole through April 30, 2009. The maximum recoveryto us under the ILW Swap is $5.0 million. The ILW Swap expired without value.

 

CAT Bond Protection

 

In 2005, we purchased fully-collateralized coverage (the “CAT BondProtection”) for losses sustained from qualifying hurricane and earthquake lossevents from a third-party, Champlain, which financed this coverage through theissuance of $90.0 million in catastrophe bonds to investors under twoseparate bond tranches, each of which matured on January 7, 2009. Bothtranches responded to parametric triggers, whereby payment amounts weredetermined on the basis of modeled losses incurred by a notional portfoliorather than by actual losses incurred by us. For that reason, this transaction was accounted for as a derivative,rather than as a reinsurance transaction, and was carried at fair value.

 

Annual contract payments expensed in connection with the CAT BondProtection, calculated at 12.83% per annum on the first tranche and 13.58% perannum on the second tranche, total $0.2 million during 2009 and $11.9 millionduring each of 2008 and 2007.

 

Through the date of maturity of the CAT Bond Protection, no industryloss event occurred which would have triggered a recovery by us.

 

Foreign Exchange Contracts

 

From time to time we have entered into foreign currency exchangeagreements (the “Foreign Exchange Contracts”) which constitute an obligation topurchase or sell a specified currency at a future date at a price set at theinception of the contract. These agreements do not eliminate fluctuations inthe value of our assets and liabilities denominated in foreign currencies;rather, they are designed to protect us against adverse movements in foreignexchange rates. Our open foreign currency agreements at December 31, 2009were denominated in European Union euros and Canadian dollars.

 

At December 31, 2009 and December 31, 2008, we were a partyto outstanding foreign currency exchange agreements having a gross notionalexposure of $30.5 million and $33.0 million, respectively.  We recorded net income  (expense) associated with our ForeignExchange Contracts of $(0.6) million, $(4.1) million and $3.2 million during2009, 2008 and 2007, respectively.

 

Investment Options and Futures

 

During 2009 and 2008, our investment managers executed variousexchange-traded investment options and futures (the “Investment Options andFutures”) as part of their investing strategy. As of December 31, 2009 and 2008, our investment managers held openlong options with a fair value of $1.8 million and $0.1 million, respectively.

 

We recorded net revenues associated with our Investment Options andFutures of $8.1 million and $1.8 million during 2009 and 2008, respectively.

 

CAT Bond Facility

 

In 2006, we entered into a catastrophe bond facility (the “CAT BondFacility”) under which we were entitled to receive contract payments from athird-party in return for assuming mark-to-market risk on a portfolio ofsecuritized catastrophe risks. The difference between the notional capitalamounts of the catastrophe bonds and their market value were marked to marketover the terms of the bonds; the difference was settled on a monthly basis.

 

During 2008, the CAT Bond Facility was terminated and we purchased theunderlying CAT Bonds from the counterparty at their fair value of $71.6million.

 

We recorded net revenues associated with our CAT Bond Facility of $1.0million and $5.3 million during 2008 and 2007, respectively.

 

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ILW Contract

 

In 2007, we sold ILW protection (the “ILW Contract”) to a third-partyfor $3.7 million under which qualifying loss payments were triggeredexclusively by reference to the level of losses incurred by the insuranceindustry as a whole rather than by losses incurred by the insured.  The ILW Contract provided the insured with$15.0 million of second-event protection resulting from industry losses of astated amount and expired in 2008 without payment.

 

We recorded revenues associated with the ILW Contract of $0.6 millionand $3.1 million during 2008 and 2007, respectively.

 

***Gain on Early Extinguishment of Debt***

 

In March 2009 we repurchased and retired $21.0 million in facevalue of our senior unsecured debt  (“SeniorNotes”) due in 2013 and recognized a gain of $5.9 million representing thedifference between the $15.1 million in consideration paid and the carryingvalue of the Senior Notes repurchased.

 

***Other Revenue***

 

Our other revenue is comprised of interest on funds advanced to cedingcompanies to cover losses in accordance with contract terms and fees we earnfrom the Pioneer Diversified High Income Trust (the “Pioneer Fund”). Thefollowing table summarizes our consolidated other revenue for the years ended December 31,2009, 2008 and 2007:

 

| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| **(Millions)**                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest on funds advanced    | ** ** | **$**                            | **0.1**    |   | $ | 0.7 |   | $ | 1.8 |   |
| Pioneer Fund sub-advisor fees | ** ** | **0.4**                          | ** ** | 0.3 |   | 0.2 |   |
|                          | ** ** | ** **                       | ** ** |   |   |   |   |
| Other revenue                 | ** ** | **$**                            | **0.5**    |   | $ | 1.0 |   | $ | 2.0 |   |

 

In 2007, we began serving as a sub-advisor to the Pioneer Fund, apublicly traded closed-end fund offering investors exposure to event-linkedbonds known as catastrophe bonds, as well as other fixed incomeinstruments.  During 2008, we terminatedour sub-advisory relationship and now serve as a consultant to the PioneerFund.  We are not an investor in thePioneer Fund.

 

***Interest and Other FinancingExpenses***

 

The following table summarizes our consolidated interest and otherfinancing expenses for the years ended December 31, 2009, 2008 and 2007:

 

| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| **(Millions)**                                                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest expense and amortization of discount -  Senior Notes | ** ** | **$**                            | **14.5**   |   | $ | 15.3 |   | $ | 15.3 |   |
| Interest expense - Junior Notes                               | ** ** | **8.7**                          | ** ** | 8.7 |   | 8.7 |   |
| Interest expense - Blue Ocean Debt                            | ** ** | **—**                       | ** ** | 0.2 |   | 5.3 |   |
| Letter of credit fees and other financing expenses            | ** ** | **3.1**                          | ** ** | 2.6 |   | 5.2 |   |
|                                                          | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Interest and other financing expenses                         | ** ** | **$**                            | **26.3**   |   | $ | 26.8 |   | $ | 34.5 |   |

 

Our interest and other financing expenses decreased slightly during2009, as compared to 2008, due primarily to the repurchase of $21.0 million ofour Senior Notes in March 2009, partially offset by higher letter ofcredit fees associated with our Lloyd’s Standby Facility.  We increased the Lloyd’s Standby Facilityfrom £110.0 million to $230.0 million in March 2009.

 

Our interest and other financing expenses decreased significantlyduring 2008, as compared to 2007, due primarily to the repayment of the BlueOcean Debt and the cancellation of Blue Ocean Re’s credit facility, each ofwhich occurred in January 2008.

 

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Senior Notes

 

During 2003, we issued $250.0 million of Senior Notes. The Senior Notesbear interest at a rate of 6.125% per annum, payable semi-annually in arrearson February 15 and August 15 of each year. The Senior Notes arescheduled to mature on August 15, 2013. As of December 31, 2009 and 2008, we had $229.0 million and $250.0million of principal amount of Senior Notes outstanding, respectively, with anunamortized carrying value of $228.6 million and $249.4 million, respectively.

 

Junior Subordinated Debt Securities (“Junior Notes”)

 

In January 2006 we, through Montpelier Capital Trust III,participated in a private placement of $103.1 million of floating rate capitalsecurities (the “Trust Preferred Securities”). The Trust Preferred Securitiesmature on March 30, 2036, are redeemable at Montpelier Capital Trust III’soption at par beginning March 30, 2011, and require quarterlydistributions of interest to the holders of the Trust Preferred Securities. TheTrust Preferred Securities bear interest at 8.55% per annum through March 30,2011, and thereafter at a floating rate of 3-month LIBOR plus 380 basis points,reset quarterly. Montpelier Capital Trust III simultaneously issued all of itsshare capital to us for a purchase price of $3.1 million which is carried inother investments.

 

Montpelier Capital Trust III used the proceeds from the sale of theTrust Preferred Securities and the issuance of its share capital to purchasethe Junior Notes, due March 30, 2036, in the principal amount of $100.0million issued by the Company. The Junior Notes bear interest at the same ratesas the Trust Preferred Securities discussed above.

 

Blue Ocean Debt

 

In November 2006 Blue Ocean obtained a secured loan of $75.0million from a syndicate of lenders (the “Blue Ocean Debt”).  The Blue Ocean Debt had an initial maturitydate of February 28, 2008.  The BlueOcean Debt bore interest on the outstanding principal amount at a rate equal toa base rate plus a margin of 200 basis points. The Blue Ocean Debt was repaid in full in January 2008.

 

Letter of Credit Fees and Other Financing Expenses

 

In the normal course of business, the Company, Montpelier Re and MCLmaintain letter of credit facilities and Montpelier Re and MCL provide lettersof credit to third parties. In addition, Blue Ocean Re established trust fundsfor the benefit of ceding companies. See *“Liquidityand Capital Resources”* contained in Item 7.

 

***Income Tax Provision***

 

Our consolidated income tax provision for the years ended December 31,2009, 2008 and 2007 consisted of the following:

 

| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Current tax provision:**       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Federal                     | ** ** | **$**                            | **—** |   | $ | **—** |   | $ | **—** |   |
| U.S. state                       | ** ** | **0.1**                          |       | 0.1 | ** ** | **—** | ** ** |
| Non-U.S.                         | ** ** | **(1.3**                         | **)**      | 1.2 |   | 0.1 |   |
| Current tax provision (benefit)  | ** ** | **$**                            | **(1.2**   | **)** | $ | 1.3 |   | $ | 0.1 |   |
|                             |       |                             |       |   |   |   |   |
| **Deferred tax provision:**      |       |                             |       |   |   |   |   |
| U.S. Federal                     | ** ** | **$**                            | **—** |   | $ | **—** |   | $ | **—** |   |
| U.S. state                       | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** |
| Non-U.S.                         | ** ** | **2.3**                          |       | (0.2 | ) | **—** | ** ** |
| Deferred tax provision (benefit) | ** ** | **2.3**                          |       | (0.2 | ) | **—** | ** ** |
| Income tax provision             | ** ** | **$**                            | **1.1**    |   | $ | 1.1 |   | $ | 0.1 |   |

 

We are domiciled in Bermuda and have subsidiaries that are domiciled inseveral other countries, including the U.S., the U.K. and Switzerland.

 

The Company and its Bermuda-domiciled subsidiaries have received anassurance from the Bermuda Minister of Finance exempting them from allBermuda-imposed income, withholding and capital gains taxes until March 2016.  At the present time, no such taxes are leviedin Bermuda.

 

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Our U.S. subsidiaries have not yet generated any U.S. Federal taxableincome.  Our U.S. subsidiaries incurred$0.1 million in state income taxes during each of 2009 and 2008.

 

Our U.K. and Swiss subsidiaries generated $4.8 million, $2.9 millionand $(3.0) million of non-U.S. taxable income (loss) for the years ended December 31,2009, 2008 and 2007, respectively.  Ournon-U.S. subsidiaries incurred $1.0 million, $1.0 million and $0.1 million innon-U.S. income taxes during the years ended December 31, 2009, 2008 and2007, respectively.

 

***Excess of Fair Value of Acquired NetAssets Over Cost - Blue Ocean***

 

In 2008 we acquired all the remaining outstanding common shares of BlueOcean for $30.5 million in cash.  Thistransaction resulted in an extraordinary gain of $1.0 million representing theexcess of fair value of acquired net assets over our cost.

 

***Net income attributable tononcontrolling interest in Blue Ocean***

 

In 2008 and 2007 we had net income attributable to noncontrollinginterests in Blue Ocean of $1.9 million and $31.9 million, respectively.  As a result of  the Blue Ocean Transaction, none of our netincome for 2009 was attributable to noncontrolling interests.

 

**III.  Liquidityand Capital Resources**

 

***Liquidity***

 

The Company has no operations of its own and relies on dividends anddistributions from its subsidiaries to pay its operating expenses, interest ondebt, dividends to common shareholders and to fund any Common Share repurchaseactivities. There are restrictions on the payment of dividends to the Companyfrom its regulated operating companies as described under “Regulation” herein.We currently have in place a regular dividend of $0.09 per Common Share perquarter. Any future determination to pay dividends or distributions to ourshareholders will be at the discretion of our Board of Directors and will bedependent upon many factors, including our results of operations, cash flows,financial position, capital requirements, general business opportunities,legal, tax, regulatory and contractual restrictions.

 

The primary sources of cash for our regulated operating subsidiariesare premium collections, investment income and sales and maturities ofinvestments.  The primary uses of cashfor our operating subsidiaries are payments of losses and LAE, acquisitioncosts, operating expenses, investment purchases and dividends and distributionspaid to the Company.

 

As a provider of short-tail insurance and reinsurance, mainly fromnatural and man-made catastrophes, we could become liable for significantlosses on short notice. As a result, we have structured our fixed maturityinvestment portfolio with high-quality securities with a short average durationin order to reduce our sensitivity to interest rate fluctuations and to provideadequate liquidity for the settlement of our expected liabilities.  As of December 31, 2009, our fixedmaturities had an average credit quality of “AA+” (Very Strong) by Standard &Poor’s and an average duration of 2.5 years. Nonetheless, if our calculations with respect to the timing of thepayment of our liabilities are incorrect, or if we improperly structure ourinvestments, we could be forced to liquidate investments prior to maturity,potentially at a significant loss.

 

As of December 31, 2009, our sources of immediate liquidityconsisted of: (i) $194 million in unrestricted cash; (ii) $376million in cash equivalents and other highly liquid investments which currentlytrade at a very narrow bid/ask spread and whose proceeds are available upon onedays’ notice; and (iii) $733 million of investment securities whichcurrently trade at a narrow bid-ask spread and whose proceeds are availableupon three days’ notice. Further, we believe that we have significant sourcesof additional liquidity within our investment portfolio beyond these levelsalthough the bid-ask spreads associated with such investment securities wouldbe expected to be broader, perhaps significantly, from sales of those securitiespreviously mentioned, particularly if a large individual investment holdingwere required to be liquidated in an expedient manner.

 

During the years ended December 31, 2009, 2008 and 2007, we wereable to meet all of our cash obligations. We anticipate that our current cash and cash equivalent balances, salesand maturities of investments and our projected future cash flows fromoperations should be sufficient to cover our cash obligations under most lossscenarios through the foreseeable future.

 

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*** ***

 

***Capital Resources***

 

The following table summarizes our capital structure as of December 31,2009 and 2008:

 
| ** **                                 | ** ** | **December 31,** | ** **  |
|--------------------------------------------|------------|-----------------------|-------------|
| **(Millions)**                             | ** ** | **2009**              | ** **  | **2008** | ** ** |
| Senior Notes                               | ** ** | **$**                 | **229.0**   |   | $ | 250.0 |   |
| Junior Notes (those held by third parties) | ** ** | **100.0**             |        | 100.0 |   |
| Total Debt                                 | ** ** | **$**                 | **329.0**   |   | $ | 350.0 |   |
|                                       | ** ** | ** **            |        |   |   |
| Common Shareholders’ Equity           | ** ** | **1,728.5**           |        | 1,357.6 |   |
|                                       | ** ** | ** **            |        |   |   |
| Total Capital                              | ** ** | **$**                 | **2,057.5** |   | $ | 1,707.6 |   |

 

Our total capital increased by $349.9 million during 2009 as a resultof our recording comprehensive income of $463.8 million, raising $32.0 millionin equity capital through the termination of our second Forward Sale Agreement,recognizing $14.2 million of additional paid-in capital through theamortization and issuances of share based compensation, partially offset bydeclaring $26.5 million in dividends to our common shareholders, repurchasing$21.0 million of our Senior Notes and repurchasing $112.6 million of CommonShares.

 

Our Senior Notes are scheduled to mature on August 15, 2013.  Our Junior Notes mature on March 30,2036, but are redeemable at our option at par beginning March 30, 2011.Neither the Senior Notes nor the Junior Notes contain any covenants regardingfinancial ratios or specified levels of net worth or liquidity to which theCompany or any of its subsidiaries must adhere.

 

We may need to raise additional capital in the future, through theissuance of debt, equity or hybrid securities, in order to, among other things,write new business, pay significant losses, respond to, or comply with, anychanges in the capital requirements that rating agencies, regulatoryauthorities other parties use to evaluate us, acquire new businesses, invest inexisting businesses or to refinance our outstanding debt.

 

The issuance of any new debt, equity or hybrid financial instrumentsmight require terms and conditions that are less favorable to us and ourshareholders than those contained within our current capital structure.  More specifically, any new issuances ofequity or hybrid securities could result in the issuance of securities withrights, preferences and privileges that are senior or otherwise superior tothose of Common Shares and could prove to be dilutive to our existing CommonShares.  Further, if we cannot obtainadequate capital on favorable terms or otherwise, our business, operatingresults and financial condition could be adversely affected.

 

Letter of Credit Facilities

 

In the normal course of business, we maintain letter of creditfacilities and provide letters of credit to third parties. These letter ofcredit facilities were secured by collateral accounts containing cash andinvestments totaling $835.8 million and $724.5 million at December 31,2009 and 2008, respectively. The following table outlines these facilities asof December 31, 2009:

 

| **Secured operational Letter of Credit Facilities**         | ** ** | **Credit********Line** | ** ** | **Amount  drawn** | ** ** | **Expiry********Date** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|
|                                                        |       |                   |       |              |       |                   |       |
|  Montpelier  Re’s Syndicated facility: Tranche B  |       | $                      | 225.0      |              | $          | 122.9                  |       | Aug. 2010 |   |
|  Montpelier Re’s Syndicated 5-Year facility (I)   |       | $                      | 500.0      |              | $          | 42.2                   |       | June 2011 |   |
|  Montpelier Re’s Syndicated 5-Year facility  (II) |       | $                      | 215.0      |              | $          | 159.3                  |       | June 2012 |   |
|  Montpelier Re’s Bilateral facility               |       | $                      | 100.0      |              | $          | 12.8                   |       | None |   |
|  Lloyd’s Standby Facility                         |       | $                      | 230.0      |              | $          | 230.0                  |       | Dec. 2013 |   |

 

Montpelier Re amended its Tranche B syndicated secured facility in August 2005.  The amendment served to revise this facilityfrom a $250.0 million three-year facility to a $225.0 million five-yearfacility with a revised expiry date of August 2010. This facility issubject to an annual commitment fee of 0.275% on drawn balances and 0.075% onundrawn balances.

 

Montpelier Re amended its syndicated secured facility (I) in June 2006.The amendment served to revise this facility from a one-year $1.0 billionfacility, which expired in June 2007, to a five-year $500.0 millionfacility.  This facility is subject to anannual commitment fee of 0.325% on drawn balances and 0.075% on undrawnbalances.

 

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Montpelier Re entered into its five-year syndicated secured facility (II) inJune 2007 which was subsequently reduced from $250.0 million to $215.0million.  This facility is subject to anannual commitment fee of 0.275% on drawn balances and 0.08% on undrawnbalances.

 

Montpelier Re entered into its Bilateral facility in November 2005.This facility has no stated expiration date and is subject to an annualcommitment fee of 0.20% on drawn balances only.

 

In June 2007 the Company, Montpelier Re and MCL entered into theLloyd’s Standby Facility to support business written by Syndicate 5151. TheLloyd’s Standby Facility provided Montpelier with a secured £74.0 millionstandby letter of credit facility through December 31, 2012.

 

In October 2008 the Lloyd’s Standby Facility was amended andrestated to provide Montpelier with a secured £110.0 million standby letter ofcredit facility through December 31, 2013. In March 2009 the Lloyd’sStandby Facility was further amended, so that it now provides Montpelier with asecured $230.0 million standby letter of credit facility through December 31,2013.  The current facility is subject toan annual commitment fee of 0.60% on drawn balances and 0.21% on undrawnbalances.

 

The agreements governing these facilities contain covenants that limitour ability, among other things, to grant liens on our assets, sell our assets,merge or consolidate with others, incur debt and enter into certain burdensomeagreements.  In addition, the syndicatedsecured facilities and the Lloyd’s Standby Facility each require the Company tomaintain debt leverage of no greater than 30% and Montpelier Re to maintain an A.M.Best financial strength rating of no less than B++.  If we were to fail to comply with thesecovenants or fail to meet these financial ratios, the lenders could revokethese facilities and exercise remedies against the collateral. As of December 31,2009 and 2008, we were in compliance with all covenants.

 

We currently believe that we will be able to renew our operationalletter of credit facilities as they expire, if needed, although current pricingindications are less favorable than those of our existing facilities.  As such, our interest and financing expenses associated with such facilities mayincrease in the future, perhaps significantly. We are currently exploring the use of collateralized trust arrangementsas an alternative means of providing collateral to our cedants and to Lloyd’s.

 

***Contractual Obligations andCommitments***

 

Below is a schedule of our material contractual obligations andcommitments as of December 31, 2009:

 

| **Millions**                                  | ** ** | **Due in********One Year  or Less** | ** ** | **Due in Two********to Three********Years** | ** ** | **Due in Four   to Five********Years** | ** ** | **Due After********Five********Years** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------|------------|
| Loss and LAE                                  |       | $                                   | 253.1      |                                        | $          | 255.4                                  |       | $                                      | 99.6       |      | $          | 72.7 |   | $ | 680.8 |   |
| Debt (that held by third parties)             |       | —                              |       | —                                      |       | 229.0                                  |       | 100.0                                  |       | 329.0     |       |
| Interest and other finance expenses           |       | 25.6                                |       | 37.4                                        |       | 17.0                                   |       | 87.3                                   |       | 167.3     |       |
| Vested and earned incentive compensation      |       | 26.4                                |       | —                                      |       | —                                 |       | —                                 |       | 26.4      |       |
| Unfunded investment commitments               |       | 23.5                                |       | —                                      |       | —                                 |       | —                                 |       | 23.5      |       |
| Noncancellable operating leases               |       | 7.5                                 |       | 13.5                                        |       | 8.6                                    |       | 5.9                                    |       | 35.5      |       |
| Total contractual obligations and commitments |       | $                                   | 336.1      |                                        | $          | 306.3                                  |       | $                                      | 354.2      |      | $          | 265.9 |   | $ | 1,262.5 |   |

 

Our loss and LAE reserves do not have contractual maturity dates.  However, based on historical paymentpatterns, the preceding table includes an estimate of when we expect our lossreserves will be paid.

 

Our debt and interest and other financing obligations presented assumethat we do not exercise our option to redeem the Junior Notes at par in March 2011and that, for periods thereafter through March 2036, interest on the debtaccrues at the applicable floating rate of 3-month LIBOR plus 380 basispoints.  Our letter of credit facilities,each of which is cancellable within one year, are assumed to be fully cancelledat December 31, 2010.

 

Vested and earned incentive compensation represents amounts due toemployees at December 31, 2009 under our annual bonus and performanceshare plans for the applicable performance cycles ending as of that date. Thisamount excludes RSU awards which are paid in Common Shares.

 

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As of December 31, 2009, we had unfunded commitments to invest$23.5 million into three separate private investment funds. For purposes ofthis presentation, it is assumed that all of our unfunded commitments arecalled during 2010.

 

***Off-Balance Sheet Arrangements***

 

Our Foreign Exchange Contracts and Investment Options and Futures eachconstitute off-balance sheet arrangements.

 

Excluding the off-balance sheet derivative transactions outlined above,as of December 31, 2009, we are not party to any other off-balance sheettransaction that we believe is material to our investors.

 

***Cash Flows***

 

For the Year Ended December 31, 2009

 

Our cash flows provided from operations were $233.1 million whichresulted primarily from premiums received, net of acquisition costs, exceedingnet paid losses of $213.0 million.

 

Our cash flows used for investing activities totaled $175.6 million,resulting from the following:

 

·         we spent $393.6million on net purchases of fixed maturities,

 

·         we received$244.8 million from net sales of equity securities and other investments,

 

·         we received$9.5 million from net settlements of investment-related derivative contracts,

 

·         we had a $33.8million increase in our restricted cash, and

 

·         we spent $2.5million on capitalized assets.

 

Ourcash flows used for financing activities totaled $121.9 million, resulting fromthe following:

 

·         we spent $15.1million to repurchase and retire a portion of our Senior Notes,

 

·         we received$32.0 million in connection with the termination of the second Forward ShareAgreement,

 

·         we spent $112.6million repurchasing our common shares, and

 

·         we spent $26.2million on dividends to our common shareholders.

 

Wealso experienced a $5.6 million increase in cash and cash equivalents due toforeign exchange rate fluctuations.

 

Forthe Year Ended December 31, 2008

 

Ourcash flows provided from operations totaled $73.3 million which resultedprimarily from premiums received, net of acquisition costs, exceeding net paidlosses of $317.9 million.

 

Our cash flows provided frominvesting activities totaled $249.7 million, resulting from the following:

 

·         we received$301.6 million from net sales and maturities of fixed maturities,

 

·         we spent $254.8million on net purchases of equity securities and other investments,

 

·         we spent $1.8million in net settlements of investment-related derivative contracts,

 

·         we had $193.4million in net dispositions of securities lending collateral,

 

·         we spent $1.0million in connection with the termination of our securities lending program,

 

·         we had a $27.2million decrease in our restricted cash, and

 

·         we spent $14.9million on capitalized assets.

 

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Ourcash flows used for financing activities totaled $516.2 million which resultedfrom the following:

 

·         we spent $129.8million repurchasing our common shares,

 

·         we spent $28.4million on dividends to our common shareholders,

 

·         we spent $75.0million to retire Blue Ocean’s debt, paid $38.1 million in distributions andredemptions to Blue Ocean’s noncontrolling common shareholders and paid $21.0million in dividends and redemptions to Blue Ocean’s noncontrolling preferredshareholders,

 

·         we paid $30.5million to acquire all the remaining outstanding common shares of Blue Ocean,and

 

·         we had a $193.4million net reduction in securities lending payable.

 

Wealso experienced a $0.9 million increase in cash and cash equivalents due toforeign exchange rate fluctuations.

 

Forthe Year Ended December 31, 2007

 

Ourcash flows provided from operations totaled $100.1 million which resultedprimarily from premiums received, net of acquisition costs, exceeding net paidlosses of $361.2 million.

 

Ourcash flows provided from investing activities totaled $500.6 million, resultingfrom the following:

 

·         we received$451.3 million from net sales and maturities fixed maturities,

 

·         we spent $59.4million on net purchases of equity securities and other investments,

 

·         we spent $6.7million to acquire MUSIC,

 

·         we had $122.3million in net dispositions of securities lending collateral, and

 

·         we spent $6.9million on capitalized assets.

 

Ourcash flows used for financing activities totaled $462.4 million, resulting fromthe following:

 

·         we spent $124.7million repurchasing our common shares,

 

·         we spent $3.9million to amend the second Forward Share Agreement,

 

·         we spent $29.9million on dividends to our common shareholders,

 

·         we spent $135.2million in distributions and redemptions to Blue Ocean’s noncontrolling commonshareholders and paid $46.4 million in dividends and redemptions to Blue Ocean’snoncontrolling preferred shareholders, and

 

·         we had a $122.3million net reduction in securities lending payable.

 

Wealso experienced a $1.8 million increase in cash and cash equivalents due toforeign exchange rate fluctuations.

 

**IV.  Summary ofCritical Accounting Estimates**

 

Ourconsolidated financial statements have been prepared in accordance with GAAP.The preparation of these financial statements requires us to make estimates andassumptions that affect the reported and disclosed amounts of our assets andliabilities as of the balance sheet dates and the reported amounts of ourrevenues and expenses during the reporting periods. We believe the items thatrequire the most subjective and complex estimates are: (i) our loss andLAE reserves; (ii) our written and earned premiums; (iii) our cededreinsurance; and (iv) our share based compensation.

 

Thefollowing discussion provides detailed information regarding our use ofestimates and assumptions as it relates to such items.

 

***Loss and LAE Reserves***

 

Lossand LAE reserves consist of estimates of future amounts needed to pay claimsand related expenses for insured events that have occurred.  The process of estimating these reservesinvolves a considerable degree of judgment and, as of any given date, is inherentlyuncertain.

 

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Estimatingloss reserves requires us to make assumptions regarding reporting anddevelopment patterns, frequency and severity trends, claims settlementpractices, potential changes in the legal environment and other factors such asinflation and demand surge. These estimates and judgments are based on numerousfactors, and are often revised as we receive changes in loss amounts reportedby ceding companies, as additional information, experience or other databecomes available and is reviewed, as new or improved methodologies aredeveloped, or as laws change.

 

Ingeneral, loss and LAE relating to short-tail property risks are reported andsettled more promptly than those relating to long-tail risks, including themajority of casualty risks. However, the timeliness of loss reporting can beaffected by such factors as the nature of the event causing the loss, thelocation of the loss, whether the losses are from policies in force withprimary insurers or with reinsurers and where we fall within the cedant’soverall reinsurance program.

 

Ourloss and LAE reserves include a component for both outstanding case reservesfor claims that have been reported and for IBNR claims that have not beenreported. Our case reserve estimates are initially set on the basis of lossreports received from third parties. IBNR consists of a provision foradditional development in excess of the case reserves reported by cedingcompanies, as well as a provision for claims which have occurred but which havenot yet been reported to us by ceding companies.

 

OurIBNR reserves are determined using various actuarial methods as well as acombination of our own historical loss experience, historical insuranceindustry loss experience, estimates of pricing adequacy trends, and ourprofessional judgment. In the case of our reinsurance business, our reservingprocess is highly dependent on the loss information we receive from cedingcompanies.  The process we use toestimate our IBNR reserves involves projecting our estimated ultimate loss andLAE reserves and then subtracting paid claims and case reserves as notified bythe ceding company, to arrive at our IBNR reserve.

 

Ourreserving methodology does not lend itself well to a statistical calculation ofa range of estimates surrounding the best point estimate of our loss and lossadjustment expense reserves. Due to the low frequency and high severity natureof our business, our reserving methodology principally involves arriving at aspecific point estimate for the ultimate expected loss on a contract bycontract basis, and our aggregate loss reserves are the sum of the individualreserves established. Our internal actuaries review our reserving assumptionsand our methodologies on a quarterly basis. Our third quarter and year-end lossestimates are subject to a corroborative review by independent actuaries usinggenerally accepted actuarial principles. The Audit Committee of our Board ofDirectors receives our quarterly and annual reserve analyses.

 

Ourprimary focus is on short-tail property treaty reinsurance, written on both anexcess-of-loss and proportional basis. We also underwrite certain directinsurance and facultative reinsurance, as well as casualty specialty risks. Thenature and extent of management judgment involved in the reserving processdepends upon the type of business.

 

Mostof our treaty reinsurance contracts comprise business which has both a lowfrequency of claims occurrence and a high potential severity of loss, such asclaims arising from natural catastrophes, terrorism, large individual propertyrisks, and marine, space and aviation risks. Given the high-severity,low-frequency nature of these events, the losses typically generated do notlend themselves to traditional actuarial reserving methods. Therefore, ourreserving approach for these types of coverages is generally to estimate theultimate cost associated with a single loss event rather than analyzing thehistorical development patterns of past losses as a means of estimatingultimate losses for an entire accident year. We generally estimate our reservesfor these large events on a contract-by-contract basis by means of a review ofpolicies with known or potential exposure to a particular loss event.

 

Thetwo primary bases for estimating the ultimate loss associated with a particularevent and cedant are (a) actual and precautionary claims advices receivedfrom the cedant; and (b) the nature and extent of the impact the event isestimated to have on the industry as a whole. This reserving approach isgenerally applied to all large events. Immediately after the event, theestimated industry market loss, applied against our book of business, is the primarydriver of our ultimate loss from such event. In order to estimate the natureand extent of the event, we rely on output provided by commercially availablecatastrophe models, as well as proprietary models developed in-house. Theexposure of each cedant potentially affected by the event is analyzed on thebasis of this output. As the amount of information received from cedantsincreases during the period following an event, so does our reliance on thiscorrespondence. The quality of the cedant’s historical evaluation of losses andloss information received from other cedants in relation to the same event areconsidered as we shift weight from industry loss-based estimates to specificcedant information.

 

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Whilethe approach we use in reserving for large events is generally appliedconsistently, at any point in time the specific reserving assumptions may varyamong contracts. The assumptions for a specific contract may depend upon theclass of business, historical reporting patterns of the cedant, whether or notthe cedant provides an IBNR estimate, how much of the loss has been paid, thenumber of underlying claims still open and other factors. For example, theexpected loss development for a contract with 1% of claims still outstandingwould likely be less than for a contract with 50% of claims still open.

 

Fornon-catastrophe losses, we often apply trend-based actuarial methodologies insetting reserves, including paid and incurred loss development,Bornheutter-Ferguson and frequency and severity techniques. We also utilizeindustry loss ratio and development pattern information in conjunction with ourown experience. The weight given to a particular method will depend on manyfactors, including the homogeneity within the class of business, the volume oflosses, the maturity of the accident year and the length of the expecteddevelopment tail. For example, development methods rely on reported losses,while expected loss ratio methods are primarily based on expectations in placeprior to a notification of loss. Therefore, as an accident year matures, we mayshift weight from an expected loss ratio method to an incurred developmentmethod.

 

Tothe extent we rely on industry data to aid us in our reserve estimates there isa risk that the data may not match our risk profile or that the industry’sreserving practices overall differ from our own and those of our cedants. Inaddition, reserving can prove especially difficult should a significant losstake place near the end of a reporting period, particularly if the lossinvolves a catastrophic event. These factors further contribute to the degreeof uncertainty in our reserving process.

 

Asa predominantly broker market reinsurer for both excess-of-loss andproportional contracts, we must rely on loss information reported to brokers byprimary insurers who, in turn, must estimate their own losses at the policylevel, often based on incomplete and changing information. The information wereceive varies by cedant and may include paid losses, estimated case reserves,and, infrequently, an estimated provision for IBNR reserves. Reservingpractices and the quality of data reporting varies among ceding companies,which adds further uncertainty to the estimation of our ultimate losses. Thenature and extent of information received from ceding companies also varieswidely depending on the type of coverage, the contractual reporting terms(which are affected by market conditions and practices) and other factors. Dueto the lack of standardization of the terms and conditions of reinsurancecontracts, the wide variability of coverage provided to individual clients andthe tendency of those coverages to change rapidly in response to marketconditions, the ongoing economic impact of such uncertainties andinconsistencies cannot be reliably measured. Additional risks to us involved inthe reporting of retrocessional contracts include varying reservingmethodologies used by the original cedants and an additional reporting lag dueto the time required for the retrocedant to aggregate its assumed losses beforereporting them to us.  Furthermore, thenumber of contractual intermediaries is generally greater for retrocessionalbusiness than for direct business, thereby increasing the time lag andimprecision associated with loss reporting.

 

Timelags are inherent in reporting to the primary insurer then to the broker andthen to the reinsurer, especially in the case of excess-of-loss reinsurancecontracts. Also, the combined characteristics of low claim frequency and highclaim severity make the available data more volatile and less useful forpredicting ultimate losses. In the case of proportional contracts, we rely onan analysis of a contract’s historical experience, industry information, andthe professional judgment of underwriters in estimating reserves for thesecontracts. In addition, we utilize ultimate loss ratio forecasts when reportedby cedants, which are normally subject to a quarterly or six month lag forproportional business. Because of the degree of reliance that we necessarilyplace on ceding companies for claims reporting, our reserve estimates arehighly dependent on ceding companies’ management judgment. Furthermore, duringthe loss settlement period, which may last several years, additional facts regarding individual claims andtrends often will become known, and current laws and case law may change, allof which can affect ultimate expected losses.

 

Thenature and extent of loss information provided under many facultative and peroccurrence excess contracts, where company personnel work closely with theceding company in settling individual claims, may not differ significantly fromthe information received under a primary insurance contract. Loss informationfrom aggregate excess-of-loss contracts, including catastrophe losses andproportional share treaties, will often be less detailed. Occasionally, suchinformation is reported in summary format rather than on an individual claimbasis.

 

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Since we rely on estimates of paid losses, case reserves, and IBNRreserves provided by ceding companies in order to assist us in estimating ourown loss and LAE reserves, we maintain certain procedures designed to mitigatethe risk that such information is incomplete or inaccurate. These procedures include,for example, the comparison of expected premiums to reported premiums to helpus identify delinquent client periodic reports, ceding company audits tofacilitate loss reporting and identify inaccurate or incomplete claimreporting, and underwriting reviews to ascertain that the losses ceded arecovered as provided under the contract terms. We also use catastrophe modeloutput and industry market share information to evaluate the reasonableness ofreported losses, which are also compared to loss reports received from othercedants. In addition, each subsequent year of loss experience with a givencedant provides additional insight into the accuracy and timeliness ofpreviously reported information. These procedures are incorporated in ourinternal controls process on an ongoing basis, and are regularly evaluated andamended as market conditions, risk factors, and unanticipated areas of exposuredevelop. Since our follow up actions form part of our normal due diligenceprocess in claims handling matters, we do not capture data which records theextent to which ceding company claims are subsequently adjusted as a result ofthese activities alone, nor is it possible to determine the extent to which ouractions influence the accuracy of subsequent cedant reporting. However,unreliable reporting is a factor which influences our underwriters’ willingnessto offer terms to potential cedants. We believe that our diligence in thesematters promotes better reporting by brokers and cedants over the long term. Inour relatively short history, disputes with ceding companies have been rare andthose which have not been resolved in negotiation have been resolved througharbitration in accordance with contractual provisions.

 

The development of our prior-year losses is monitored during the courseof subsequent calendar years by comparing the actual reported losses againstexpected losses. The analysis of this loss development is an important factorin our ongoing refinement of the assumptions underlying our reserving process.  Our internal analysis of changes in prioryear reserve estimates is focused on changes in the estimated ultimate loss andtherefore management believes that it is not meaningful to split the movementof prior year reserve estimates between case reserves and IBNR. With regards toour short-tail property book of business, we do not feel that we can estimatethe expected breakdown of losses in the first year with a high level ofaccuracy. The percentage split between paid losses, case reserves, and IBNR wouldvary greatly depending on the number, nature and timing of losses throughoutthe year. However, we would expect that by the end of the year subsequent tothe year in which the loss occurred, the majority of these short-tail propertylosses would be reported to us, and by the end of the following year themajority would be paid.

 

Estimating loss reserves for our modest book of longer-tail casualtyreinsurance business, which can be either on an excess-of-loss or proportionalbasis, involves further uncertainties. In addition to the uncertaintiesinherent in the reserving process described above, casualty business can besubject to longer reporting lags than property business, and claims often takemany years to settle. During this period, additional factors and trends will berevealed and as they become apparent we will adjust our reserves. There is alsothe potential for the emergence of new types of losses within our casualtybook. Any factors that extend the time until claims are settled add uncertaintyto the reserving process. At December 31, 2009 and 2008, we recorded grossloss and LAE reserves related to our casualty business of $188.8 million and$182.5 million, respectively.

 

We do not typically experience significant claims processing backlogs,although such backlogs may occur following a major catastrophic event.  At December 31, 2009 and 2008, we didnot have a significant backlog in either our insurance or reinsurance claimsprocessing.

 

The uncertainties inherent in the reserving process, together with thepotential for unforeseen developments, including changes in laws and theprevailing interpretation of policy terms, may result in loss and LAEsignificantly greater or less than the reserves initially established. Changesto our prior year loss reserves will impact our current underwriting results byimproving our results if the prior year reserves prove to be redundant orimpairing our results if the prior year reserves prove to be insufficient. Weexpect volatility in our results in periods that significant loss events occurbecause U.S. GAAP does not permit insurers or reinsurers to reserve for lossevents until they have occurred and are expected to give rise to a claim. As aresult, we do not record contingency reserves to account for expected futurelosses. We anticipate that claims arising from future events will require theestablishment of substantial reserves from time to time.

 

We believe that our reserves for loss and LAE are sufficient to coverlosses that fall within the terms of our policies and agreements with ourinsured and reinsured customers on the basis of the methodologies used toestimate those reserves. However, there can be no assurance that our actuallosses will not exceed our total reserves. Any adjustments for reserves arereflected in our loss and LAE during the period in which they are determined.

 

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The following tables provide the details of our gross case reserves andIBNR, by line of business, at December 31, 2009 and 2008:

 

| **(Millions)**                         | ** ** | **Gross********IBNR********at Dec. 31,  2009** | ** ** | **Gross Case Reserves********at Dec. 31,  2009** | ** ** | **Gross  Reserves********at Dec. 31,  2009** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| Property Catastrophe - Treaty          |       | $                                                   | 112.7      |                                                  | $          | 68.8                                              | ** ** | **$** | **181.5** | ** ** |
| Property Specialty - Treaty            |       | 97.8                                                |       | 61.2                                                  |       | **159.0**                                         | ** ** |
| Other Specialty - Treaty               | ** ** | 173.7                                               |       | 51.9                                                  |       | **225.6**                                         | ** ** |
| Property and Specialty Individual Risk |       | 65.8                                                |       | 48.9                                                  |       | **114.7**                                         | ** ** |
| Total                                  | ** ** | $                                                   | 450.0      |                                                  | $          | 230.8                                             | ** ** | **$** | **680.8** | ** ** |

 
| **(Millions)**                         | ** ** | **Gross********IBNR********at Dec. 31,  2008** | ** ** | **Gross Case  Reserves********at Dec. 31,  2008** | ** ** | **Gross  Reserves********at Dec. 31,  2008** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|
| Property Catastrophe - Treaty          |       | $                                                   | 123.6      |                                                   | $          | 146.8                                             |       | $ | 270.4 |   |
| Property Specialty - Treaty            |       | 96.8                                                |       | 85.3                                                   |       | 182.1                                             |       |
| Other Specialty - Treaty               | ** ** | 175.1                                               |       | 82.3                                                   |       | 257.4                                             | ** ** |
| Property and Specialty Individual Risk |       | 34.3                                                |       | 64.7                                                   |       | 99.0                                              |       |
| Total                                  |       | $                                                   | 429.8      |                                                   | $          | 379.1                                             |       | $ | 808.9 |   |

 

With the exception of periods immediately following a naturalcatastrophe and or other large loss event, the portion of loss reservesrepresented by IBNR tends to be lower for large loss events than it does forother business we write. During 2009, a year with a low level of large lossesand sizable payments of existing reserves, our case reserves associated withsuch events decreased relative to total reserves.

 

Our reserving methodology does not lend itself well to a statisticalcalculation of a range of estimates surrounding the best point estimate of ourloss and loss adjustment expense reserves. Due to the low frequency and highseverity nature of our business, our reserving methodology principally involvesarriving at a point estimate for the ultimate expected loss on a contract bycontract basis, and our aggregate loss reserves are the sum of the individualreserves established.

 

We have determined that our best estimates for gross loss and LAEreserves at December 31, 2009 and 2008 were $680.8 million and $808.9million, respectively. Of these estimates, at December 31, 2009 and 2008,$67.0 million and $51.6 million related to our insurance business,respectively, and $613.8 million and $757.3 million related to our reinsurancebusiness, respectively.

 

Favorable development of prior period net losses experienced as apercentage of our opening net loss reserves across all underwriting years were11.0%, 14.7% and  4.1% for the yearsended December 31, 2009, 2008 and 2007, respectively. Based on this experience and the current makeup ofour loss reserves, we believe it is reasonably likely our net unpaid loss andLAE reserves could increase or decrease by up to 10% from current amounts. Asof December 31, 2009, we estimate that a 10% change in our net unpaid lossand LAE reserves would result in an increase or decrease of our net income andshareholders’ equity by approximately $61.1 million. The net income andshareholders’ equity impact of the change in net reserves may be partiallyoffset by adjustments to items such as reinstatement premiums, profitcommission expense, incentive compensation and income taxes.

 

***Written and Earned Premiums***

 

Though we are principally a provider of reinsurance, we write bothinsurance and reinsurance contracts.

 

Reinsurance contracts can be written on a risks-attaching orlosses-occurring basis. Under risks-attaching reinsurance contracts, all claimsfrom cedants’ underlying policies incepting during the contract period arecovered, even if they occur after the expiration date of the reinsurancecontract. In contrast, losses-occurring reinsurance contracts cover all claimsoccurring during the period of the contract, regardless of the inception datesof the underlying policies. Any claims occurring after the expiration of thelosses-occurring contract are not covered.

 

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Premiums written are recognized as revenues, net of any applicableunderlying reinsurance coverage, and are earned over the term of the relatedpolicy or contract.  For directinsurance, and facultative and losses-occurring contracts, the earnings periodis the same as the reinsurance contract. For risks-attaching contracts, theearnings period is based on the terms of the underlying insurance policies.

 

Insurance and facultative reinsurance contracts are written based onagreed upon terms and conditions which include a stated premium for coveragesprovided.  The stated premium  is then recorded as written premium at theeffective date of the policy.  Ingeneral, if the terms and conditions change during the policy period, eitherthrough policyholder request or underwriting audit, the policy would beendorsed to reflect the change in coverage. This endorsement usually generatesa change to the policy premium which is then recorded as an adjustment towritten premium.

 

Our assumed treaty reinsurance premium is written on an excess-of-lossor on a pro rata basis. Reinsurance contracts are generally written prior tothe time the underlying direct policies are written by cedants and accordinglythey must estimate such premiums when purchasing reinsurance coverage. For themajority of excess-of-loss contracts, including insurance contracts, a deposit or minimum premium is defined in thecontract wording. The deposit or minimum premium is based on the cedingcompanies’ estimated premiums, and this estimate is recorded as written premiumin the period the underlying risks incept. In the majority of cases, thispremium is adjustable at the end of the contract period to reflect the changesin underlying risks in force during the contract period. Subsequentadjustments, based on reports by the ceding companies of actual premium, arerecorded in the period they are determined, which is normally within six monthsto one year subsequent to the expiration of the policy. To date theseadjustments have not been significant.

 

Generally, on pro rata contracts and certain excess-of-loss contractsin which a deposit or minimum premium is not specified in the contract, anestimate of written premium is recorded in the period in which the underlyinginsurance policies incept. The premium estimate is based on informationprovided by ceding companies at the inception of the contract.  When the actual premium is reported by theceding company, generally on a quarterly or six month lag, it may besignificantly higher or lower than the estimate.

 

We regularly evaluate the appropriateness of these premium estimatesbased on the latest information available, which includes actual reportedpremium to date, the latest premium estimates as provided by cedants andbrokers, historical experience, management’s professional judgment, informationobtained during the underwriting renewal process, and a continuing assessmentof relevant economic conditions. Any adjustments to premium estimates arerecorded in the period in which they become known. Adjustments to originalpremium estimates could be material and may significantly impact earnings inthe period they are determined.

 

Excess-of-loss contracts often include contract terms that require anautomatic reinstatement of coverage in the event of a loss. The associatedreinstatement premium is generally calculated on the basis of (a) a fixedpercentage (normally 100%) of the deposit or minimum premium and (b) theproportion of the original limit exhausted. In a year of large loss events, reinstatement premiums will be higherthan in a year in which there are no such events. Reinstatement premiums arefully earned or expensed as applicable when a triggering loss event occurs andlosses are recorded. We accrue reinstatement premiums on a basis consistentwith our estimates of loss and LAE. Generally pro rata contracts do not contain provisions for thereinstatement of coverage.

 

We routinely review the creditworthiness of our cedants on the basis ofour market knowledge, the cedant’s current financial strength ratings, thetimeliness of cedants’ past payments and the status of current balances owing.In addition, we may also review the financial condition of ceding companies.Based on our reviews, we established allowances of $2.3 million and $0.8million for uncollectible premiums receivable as of December 31, 2009 and2008, respectively.

 

***Ceded Reinsurance***

 

In the normal course of business, we purchase reinsurance from thirdparties in order to manage our exposures. The amount of ceded reinsurance thatwe buy varies from year to year depending on our risk appetite, as well as theavailability and cost of the reinsurance coverage.  Reinsurance premiums ceded are accounted foron a basis consistent with those used in accounting for the underlying premiumsassumed, and are reported as a reduction of net premiums written. Certain ofour assumed pro-rata contracts incorporate reinsurance protection provided bythird-party reinsurers that inures to our benefit. These reinsurance premiumsare reported as a reduction to our gross premiums written.

 

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The cost of reinsurance purchased varies based on a number of factors.The initial premium associated with excess-of-loss reinsurance is generallybased on the underlying premiums we assume. As these reinsurance contracts aretypically purchased prior to the time the assumed risks are written, cededpremium recorded in the period of inception reflects an estimate of the amountthat we will ultimately pay. In the majority of cases, the premium initiallyrecorded is subsequently adjusted to reflect premium actually assumed by usduring the contract period. These adjustments are recorded in the period thatthey are determined, and to date they have not been significant. In addition,losses which pierce excess-of-loss reinsurance cover may generate reinstatementpremium ceded, depending on the terms of the contract. This reinstatementpremium ceded is recognized as written and expensed at the time the reinsurancerecovery is estimated and recorded.

 

The cost of quota share reinsurance is initially based on our estimatedgross premium written related to the specific lines of business covered by thereinsurance contract. As gross premiums are written during the period ofcoverage, reinsurance premiums ceded are adjusted in accordance with the termsof the quota share agreement.

 

Reinsurance recoverable on paid losses represents amounts currently duefrom reinsurers.  Reinsurance recoverableon unpaid losses represent amounts collectible from reinsurers once the lossesare paid.  The recognition of reinsurancerecoverable requires two key judgments. The first judgment involves an estimateof the amount of gross IBNR to be ceded to reinsurers. Ceded IBNR is generallydeveloped as part of our loss reserving process and consequently, the estimateis subject to similar risks and uncertainties as the estimate of grossIBNR.  The second judgment relates to theamount of the reinsurance recoverable balance that ultimately will not becollected from reinsurers due to insolvency, contractual dispute, or otherreasons.

 

As of December 31, 2009 and 2008, we recorded $44.5 million and$36.4 million in reinsurance recoverable on paid losses, respectively, and$69.6 million and $122.9 million in reinsurance recoverable on unpaid losses,respectively.  Based on a review of thefinancial condition of the reinsurers and other factors, we have determinedthat a reserve for uncollectible reinsurance recoverable on paid and unpaidloss and LAE was not considered necessary as of December 31, 2009 and2008.

 

We are currently involved in a dispute over two reinsurance contractswith MPCL. See Item 3, “*Legal Proceedings*.”

 

***Share Based Compensation***

 

The LTIP is our primary long-term incentive plan and was approved byour shareholders in May 2007. Incentive awards currently outstanding underthe LTIP consist of performance shares and RSUs.

 

Performance Shares

 

From 2002 to 2007, performance shares were a significant element of theCompany’s LTIP awards.  At target payout,each performance share represents the fair value of a common share. At the endof a performance period, which is generally the three-year period following thedate of grant, the value of each performance share is adjusted to represent aharvest of between zero and 200% of target depending on the achievement ofspecific performance criteria relating to our operating and financialperformance over the period. At the discretion of the CN Committee, any finalpayment in respect of such performance shares may take the form of cash, CommonShares or a combination of both.

 

Since performance shares are contingently payable, we initially accruethe projected performance share expense based on: (i)  the number ofperformance shares granted; (ii) the closing price of Common Shares on thedate of grant; and (iii) an assumed 100% harvest ratio. Beginning at themid-point of the performance cycle, and every subsequent quarter thereafter, were-assess the projected results for each outstanding performance share cycleand adjust our performance share accrual as necessary based on: (i) thenumber of performance shares granted; (ii) the current price of CommonShares as of the balance sheet date; and (iii) our current estimate of theultimate harvest ratio.  As a result,during the latter half of any performance share period, our performance shareexpense may fluctuate significantly as the harvest ratio and the market priceof Common Shares is adjusted.

 

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The primary performance target for all participants with respect toperformance shares granted for the 2005-2007, 2006-2008 and 2007-2009performance periods was the achievement of an underwriting return on an internallygenerated risk-based capital measure of 16% over the period.  Additionally, at the sole discretion of theCN Committee, the performance of certain members of senior management may befurther measured by reference to the ratio of the actual return on equity tothe return on risk-based capital and may result in an adjustment to the harvestof + / - 25%.

 

With respect to the 2005-2007 performance cycle, 400,000 performanceshares were originally granted to employees. Due to the impact of severe hurricane losses on our 2005 results, theestimated harvest ratio for this performance cycle was reduced to zero during2005 and such performance shares were formally cancelled without payment in2007. As a result, the Company recognized no performance share expense forgrants made under this performance cycle during the periods presented herein.

 

With respect to the 2006-2008 performance cycle, 164,000 performanceshares were originally granted to employees of which 153,000 remainedoutstanding at December 31, 2008. In accordance with our accountingpolicy, the expected ultimate harvest ratio for this performance cycle wassubsequently adjusted from 100% to 116% (95% in the case of certain members ofsenior management) and the reference price of Common Shares was reduced from$19.23 (the closing price on the date of grant) to $16.23 (the average of thelast five trading days in 2008).  TheCompany recognized performance share expense (income) for grants made underthis cycle of $(1.3) million during 2008 and $2.6 million during 2007.

 

With respect to the 2007-2009 performance cycle, 180,000 performanceshares were originally granted to employees of which 172,000 remainedoutstanding at December 31, 2009. In accordance with our accountingpolicy, the expected ultimate harvest ratio for this performance share tranchewas subsequently adjusted from 100% to 98% and the reference price of CommonShares was reduced from $18.92 (the closing price on the date of grant) to$17.74  (the average of the last fivetrading days in 2009).  The Companyrecognized performance share expense for grants made under this cycle of $1.5million during 2009, $0.4 million during 2008 and $1.1 million during 2007.

 

Since performance share grants were made to relatively few employees,we do not adjust our performance share accruals for assumed forfeitures.

 

No awards of performance shares have been made since 2007.

 

RSUs

 

RSUs are phantom restricted shares which, depending on the individualaward, vest in equal tranches over three, four or five-year periods, subject tothe recipient maintaining a continuous relationship with us (either as anemployee, a director or a consultant) through applicable vesting dates. Holdersof RSUs are not entitled to voting rights but are entitled to receive cash dividendequivalents.

 

Throughout 2006 and 2007, RSU awards consisted solely of: (i) grantsmade to induce individuals to join us; (ii) grants made to retain certainkey employees; (iii) grants made to reward employees exhibitingoutstanding individual performance; and (iv) grants made to non-managementmembers of the Board of Directors of the Company and MUAL as part of theirtotal remuneration.  In each of thesecases, the number of RSUs granted to the recipient were fixed and determinableon the grant date (“Fixed RSUs”).

 

During 2008 we began using a new form of RSU award, in addition toFixed RSUs, as the principal component of our ongoing long-term incentivecompensation for employees (“Variable RSUs”) instead of performance shareawards.  Variable RSU awards arecontingent awards in which the actual number of RSUs to be awarded is dependenton our performance during the initial year of the award cycle (the “Initial RSUPeriod”) meaning that the number of RSUs expected to be awarded for that cyclemay fluctuate during the period. The actual number of Variable RSUs to beconverted to Fixed RSUs is based on a targeted return on equity (“ROE”)assuming a standardized investment return. ROE is computed by dividing the sumof our actual underwriting result and standard investment result by our actualaverage shareholders’ equity for the period.

 

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For the Variable RSU award cycle from 2008 to 2011, the targetedperformance metric was based on a 2008 ROE of 11.22%.  At a target achieved ROE of 11.22% weexpected to grant approximately 600,000 Variable RSUs to participants, at athreshold ROE of 5.22% we expected to grant no Variable RSUs to participantsand at a maximum ROE of 21.22% we expected to grant approximately 1,200,000Variable RSUs to participants. Throughout the Initial RSU Period, our quarterly Variable RSU accrualfor this cycle varied in response to actual year-to-date results achieved andranged from 594,539 RSUs at June 30, 2008 to 169,848 RSUs at September 30,2008.  Based on the actual ROE achievedfor 2008 of 8.11%, the final number of Variable RSUs granted for the 2008-2011award cycle was determined to be 296,374 by the CN Committee and these awardshave been converted to Fixed RSUs.

 

For the Variable RSU award cycle from 2009 to 2012, the targetedperformance metric was based on a 2009 ROE of 9.77%.  At a target achieved ROE of 9.77% we expectedto grant approximately 650,000 Variable RSUs to participants, at a thresholdROE of 3.77% we expected to grant no Variable RSUs to participants and at amaximum ROE of 19.77% we expected to grant approximately 1,300,000 VariableRSUs to participants.  Throughout the InitialRSU Period, our quarterly Variable RSU accrual for this cycle varied inresponse to actual year-to-date results achieved and ranged from 1,260,327 RSUsat December 31, 2009 to 685,717 RSUs at March 31, 2009.  Based on the estimated ROE achieved for 2009of 19.11%, the final number of Variable RSUs to be granted for the 2009-2012award cycle is currently estimated to be approximately 1,260,327.  The final ROE and number of Variable RSUs tobe converted to Fixed RSUs will be determined by the CN Committee in March 2010.

 

At grant date the Company assumes a 3% to 9% forfeiture rate, dependingon the term of the award.  Actualforfeitures are periodically compared to assumed forfeitures and adjustmentsare made as deemed necessary.

 

The unamortized grant date fair value of the 508,442 Fixed RSUsoutstanding as of December 31, 2009 was $3.7 million and the unamortizedgrant date fair value of the 1,260,327 Variable RSUs outstanding as of December 31,2009 was $9.6 million.

 

For the years ended December 31, 2009, 2008 and 2007, werecognized $14.8 million, $8.3 million and $8.2 million of RSU expense.

 

**Item 7A.****       *****Quantitative and Qualitative Disclosures About Market Risk***

 

We believe that our balance sheet is principally exposed to four typesof market risk consisting of: (i) interest rate risk; (ii) foreigncurrency risk; (iii) equity risk; and (iv) credit price risk.  In addition, we believe that our balancesheet is also exposed to risk from natural catastrophes, derivative instrumentsand inflation.

 

**Market Risk**

 

Interest Rate Risk

 

***Fixed Maturity Investments.***  As a provider of short-tail insurance andreinsurance for losses resulting mainly from natural and man-made catastrophes,we could become liable for significant losses on short notice.  Since changes in market interest ratesgenerally translate into fluctuations in the fair value of our fixed maturityinvestments, we have structured our fixed maturity investment portfolio withhigh-quality securities with a short average duration in order to reduce our sensitivityto interest rate fluctuations and to provide adequate liquidity for thesettlement of our expected liabilities. Nonetheless, if our calculations with respect to the timing of thepayment of our liabilities are incorrect, or if we improperly structure ourinvestments, we could be forced to liquidate investments prior to maturity,potentially at a significant loss.

 

We generally manage the interest rate risk associated with our fixedmaturity investments by monitoring the average duration of the portfolio, whichallows us to achieve an acceptable yield without subjecting the portfolio to anunreasonable level of interest rate risk. As of December 31, 2009, ourfixed maturities had an average credit quality of “AA+” (Very Strong) byStandard & Poor’s and an average duration of 2.5 years. As of December 31,2008, our fixed maturities had an average credit quality of “AA+” (Very Strong)by Standard & Poor’s and an average duration of 2.3 years.

 

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The table below summarizes the estimated hypothetical pre-tax effectsof increases and decreases in market interest rates on our fixed maturityinvestments as of December 31, 2009 and 2008.

 

| **Fixed Maturity Investments********($ in millions)** | ** ** | **Fair Value** | ** **  | **Hypothetical********Change********in Market********Interest Rates** | ** **      | **Resulting********Estimated********Fair Value** | ** ** | **Resulting********Increase********(Decrease)********in Fair Value** | ** ** |
|------------------------------------------------------------|------------|----------------|-------------|-----------------------------------------------------------------------|-----------------|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **As of December 31, 2009**                           | ** ** | **$**          | **2,207.5** |                                                                  | 100 bp decrease |                                             | 2,255.8    |                                                                 | $          | 48.3 |   |
|                                                       |       |                |        | 100 bp increase                                                       |            | 2,151.7                                          |       | (55.8                                                                | )          |
|                                                       |       |           |        |                                                                  |            |                                             |       |                                                                 |       |
| As of December 31, 2008                               |       | $              | 1,706.6     |                                                                  | 100 bp decrease |                                             | $          | 1,737.8                                                              |       | $ | 31.2 |   |
|                                                       |       |                |        | 100 bp increase                                                       |            | 1,675.4                                          |       | (31.2                                                                | )          |
|                                                            |            |                |             |                                                                       |                 |                                                  |            |                                                                      |            |  |  |  |

 

***Debt.***  Our fixed-rate, long-term debt obligationsconsist of the Senior Notes and the Junior Notes. At December 31, 2009 and2008, the fair value of our Senior Notes was $227.6 million and $193.2 million,respectively, which compared to a carrying value of $228.6 million and $249.4million, respectively.  At December 31,2009 and 2008, the fair value of our Junior Notes was $72.2 million and $61.9million, respectively, which compared to a carrying value of $103.1 million and$103.1 million, respectively.

 

The Junior Notes mature on March 30, 2036 but are redeemable atour option at par beginning March 30, 2011.  The Junior Notes bear interest at 8.55% perannum through March 30, 2011, and thereafter at a floating rate of 3-monthLIBOR plus 380 basis points, reset quarterly.

 

Foreign Currency Risk

 

We often collect premiums and pay losses in foreign currencies. We alsomaintain a portion of our investment portfolio in investments in foreigncurrencies. Accordingly, we are exposed to fluctuations in the exchange ratesof these currencies.

 

Our reporting currency is the U.S. dollar.  The British pound is the functional currencyfor the operations of Syndicate 5151, MUAL, PUAL, MCL, MUSL and MMSL and theSwiss franc is the functional currency for the operations of MEAG. The U.S.dollar is the functional currency for all our other operations. The assets andliabilities of these foreign operations are translated to U.S. dollars atexchange rates in effect at the balance sheet date, and the related revenuesand expenses are converted using average exchange rates for the period. Netforeign exchange gains and losses arising from translating these foreignoperations into U.S. dollars are reported as a separate component ofshareholders’ equity, with changes therein reported as a component of othercomprehensive income.

 

Our U.K. operations had net assets denominated in British pounds ofapproximately $3.7 million at December 31, 2009.  Assuming a hypothetical 10% increase ordecrease in the rate of exchange from British pounds to U.S. dollars as of December 31,2009, the carrying value of the net assets of our London operations denominatedin British pounds would be expected to have respectively increased or decreasedby $0.4 million.

 

During 2009, 2008 and 2007, we recorded net foreign exchangetransaction gains (losses) in our consolidated statements of operations of$(2.5) million, $7.6 million and $6.1 million, respectively.  During 2009, 2008 and 2007, we recorded netforeign currency translation gains (losses) in our consolidated statements ofcomprehensive income (loss) of $0.8 million, $(6.3) million and $(0.2) million,respectively.

 

From time to time we have entered into foreign currency exchangeagreements which constitute an obligation to purchase or sell a specifiedcurrency at a future date at a price set at the inception of the contract.These derivative instruments do not eliminate fluctuations in the value of ourassets and liabilities denominated in foreign currencies; rather, they aredesigned to protect us against adverse movements in foreign exchange rates.

 

At December 31, 2009 and December 31, 2008, we were a partyto outstanding foreign currency exchange agreements having a gross notionalexposure of $30.5 million and $33.0 million, respectively.  We recorded net income (expense) associatedwith our Foreign Exchange Contracts of $(0.6) million, $(4.1) million and $3.2million during 2009, 2008 and 2007, respectively.

 

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Equity Price Risk

 

The fair value of our equity securities and certain of our otherinvestments are based on quoted market prices or our estimates of fair value(which is based, in part, on quoted market prices) as of the balance sheetdate.  Market prices of equitysecurities, in general, are subject to fluctuations which could cause theamount to be realized upon sale or conversion to differ significantly from thecarrying value as of the balance sheet date. These fluctuations may result from perceived changes in the underlyingeconomic characteristics of the investee, the relative price of alternative investments,general market conditions and supply and demand imbalances for a particularsecurity or instrument.

 

Credit Risk

 

Our financial instruments, which potentially subject us toconcentrations of credit risk, consist principally of our investment securities(primarily our fixed maturity investments), our insurance and reinsurancebalances receivable and our reinsurance recoverables.

 

***Fixed Maturity Investments.***   We believe that we have a high quality fixedmaturity investment portfolio meaning that we would expect that our exposure tothe loss of principal resulting from issuer credit difficulties to be less thanthat of an entity with a lower quality fixed maturity portfolio.  We measure the quality of our fixed maturityinvestment portfolio based on its average overall rating, which was “AA+” (VeryStrong) by Standard & Poor’s at December 31, 2009, and by theoverall strength and consistency of its fair value.

 

We also believe that we have no significant concentrations of creditrisk from a single issue or issuer within our investment portfolio other thanconcentrations in U.S. government and U.S. government-sponsored enterprises.Our investment guidelines prohibit us from owning an undue concentration of asingle issue or issuer, other than U.S.-backed securities, and we did not ownan aggregate fixed maturity investment in a single entity, other thanU.S.-backed securities, in excess of 10% of our common shareholders’ equity at December 31,2009 and 2008.

 

As of December 31, 2009, 86% of our fixed maturity investmentswere either rated “A” (Strong) or better by Standard & Poor’s orrepresented U.S. government or U.S. government-sponsored enterprise securities,13% were rated “BBB” (Good) or below by Standard & Poor’s and 1% wereunrated and primarily represented participations in secured bank loans.

 

As of December 31, 2008, 89% of our fixed maturity investmentswere either rated “A” (Strong) or better by Standard & Poor’s orrepresented U.S. government or U.S. government-sponsored enterprise securities,9% were rated “BBB” (Good) or below by Standard & Poor’s and 2% wereunrated and primarily represented participations in secured bank loans.

 

We currently hold commercial mortgage backed securities (“CMBSSecurities”) within our fixed maturity portfolio.  As of December 31, 2009, we held $63.0million of CMBS Securities with an amortized cost of $66.8 million.  The majority of these securities were rated “AAA”(Extremely Strong) and the balance were rated “AA” (Very Strong) by Standard &Poor’s as of December 31, 2009.  Asof December 31, 2008, we held $67.2 million of CMBS Securities with anamortized cost of $77.9 million.

 

We currently hold non-agency collateralized residential mortgageobligations (“Non-Agency CMOs”) within our fixed maturity portfolio.  Non-Agency CMOs are not backed by a U.S.government-sponsored enterprise.  As of December 31,2009, we held $59.3 million of Non-Agency CMOs with an amortized cost of $61.0million.  As of December 31, 2009,$26.4 million of these securities were rated “BBB” (Good) or better by Standard &Poor’s.  As of December 31, 2008, weheld $138.8 million of Non-Agency CMOs with an amortized cost of $151.8million.

 

We currently hold fixed maturity investments that are subject to creditenhancements provided by third-party financial guarantors.  As of December 31, 2009, we held $30.5million of credit enhanced investments with an amortized cost of $32.0million.   We estimate that theseinvestments held at December 31, 2009 would be rated “BBB-” (Good) orbetter by Standard & Poor’s excluding the effects of financialguarantee enhancements, if they were rated on that basis.  As of December 31, 2008, we held $35.4million of credit enhanced investments with an amortized cost of $47.3 million.

 

We currently hold fixed maturity investments that have exposure tosubprime and Alternative A mortgage markets. The following tables outlines oursubprime securities and Alternative A securities at December 31, 2009 and2008:

 

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| **As of December 31, 2009********($ in millions)**                                     | ** ** | **Amortized  Cost** | ** ** | **Fair********Value** | ** ** | **Weighted  Average  Life********in Years** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| Subprime securities rated “AAA” (Extremely Strong)  by Standard & Poor’s |       | $                   | 14.8       |                  | $          | 14.5                                        |       | 1.7 |   |
| Subprime securities rated less than “AAA”                                              |       | 1.8                 |       | 0.5                   |       | 5.0                                         |       |
| ** **                                                                                       | ** ** | ** **          | ** ** | ** **            | ** ** | ** **                                  | ** ** |
| Alternative-A securities****rated “AAA”                                                |       | $                   | 5.6        |                  | $          | 5.4                                         |       | 3.0 |   |
| Alternative-A securities rated less than “AAA”                                         |       | 6.1                 |       | 5.7                   |       | 1.3                                         |       |

 

| **As of December 31, 2008********($ in millions)** | ** ** | **Amortized  Cost** | ** ** | **Fair********Value** | ** ** | **Weighted  Average  Life********in Years** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| Subprime securities rated “AAA”                    |       | $                   | 8.7        |                  | $          | 8.2                                         |       | 0.9 |   |
| ** **                                                   | ** ** | ** **          | ** ** | ** **            | ** ** | ** **                                  | ** ** |
| Alternative-A securities****rated “AAA”            |       | $                   | 15.0       |                  | $          | 14.2                                        |       | 2.6 |   |
| Alternative-A securities rated less than “AAA”     |       | 3.3                 |       | 3.0                   |       | 1.6                                         |       |

 

***Insurance and Reinsurance Balances Receivable.***  We underwrite the majority of our businessthrough independent insurance and reinsurance brokers.  Credit risk exists to the extent that one ormore of these brokers are unable to fulfill their contractual obligations tous.  For example, we are frequentlyrequired to pay amounts owed on claims under policies to brokers, and thesebrokers, in turn, pay these amounts to the ceding companies that have reinsureda portion of their liabilities with us. In some jurisdictions, if a brokerfails to make such a payment, we might remain liable to the ceding company forthe deficiency. In addition, in certain jurisdictions, when the ceding companypays premiums for these policies to brokers, these premiums are considered tohave been paid and the ceding insurer is no longer liable to us for thoseamounts, whether or not we have actually received them.

 

***Reinsurance Recoverable.***  We remain liable to the extent that anythird-party reinsurer or other obligor fails to meet its reinsuranceobligations and, with respect to certain contracts that carry underlyingreinsurance protection, we would be liable in the event that the cedingcompanies are unable to collect amounts due from underlying third-partyreinsurers.

 

Under our reinsurance security policy, reinsurers are generallyrequired to be rated “A-” (Excellent) or better by A.M. Best (or anequivalent rating with another recognized rating agency) at the time the policyis written. We consider reinsurers that are not rated or do not fall within theabove rating threshold on a case-by-case basis when the coverage iscollateralized up to policy limits, net of any premiums owed. We monitor thefinancial condition and ratings of our reinsurers on an ongoing basis.

 

As of December 31, 2009 and 2008, we did not have any materialreinsurance recoverables from reinsurers rated less than “A-”, except in thoseinstances where we held adequate collateral.

 

**Natural Catastrophe Risk**

 

We have exposure to natural catastrophes around the world.  We manage our exposure to catastrophes usinga combination of CATM, third-party vendor models, underwriting judgment, andour own reinsurance purchases.  See*“Natural Catastrophe Risk Management”*contained in Item 7 herein.

 

**Derivative Instruments**

 

We enter into derivative contracts from time to time in order to managecertain of our business risks and to supplement our investing and underwritingactivities.

 

The primary risks we seek to manage through our use of derivativeinstruments are underwriting risk and foreign exchange risk.  Derivative instruments designed to manage ourunderwriting risk have included:  (i) theHurricane Option;  (ii) the ILWSwap; and (iii) the CAT Bond Protection. We entered into these derivativeinstruments in order to achieve reinsurance-like protection for specific lossevents associated with certain lines of our business. We also entered into theForward Sale Agreements and Share Issuance Agreement in order to manage therisks associated with a significant loss of capital, which could most likelyoccur as a result of significant underwriting losses. Each of these derivativecontracts was closed at December 31, 2009.

 

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Foreign exchange risk, specifically the risk associated with us makingclaim payments in foreign currencies, is managed through the use of the ForeignExchange Contracts.

 

As an extension of our investing activities, our investment managershave entered into the Investment Options and Futures.

 

As an extension of our underwriting activities, we have participated inthe CAT Bond Facility and have entered into the ILW Contract.  These derivative instruments providedreinsurance-like protection to third parties for specific loss eventsassociated with certain lines of business. Each of these derivative contracts were closed at December 31,2009.

 

None of our derivatives is designated as hedging instruments.

 

**Effects of Inflation**

 

Our investment returns may also be impacted by changing rates ofinflation and other economic conditions. In addition, we also take demand surge into account in our catastropheloss models. The effects of inflation are also considered in pricing and inestimating reserves for loss and loss adjustment expenses.

 

**Item 8.****          *****Financial Statements and Supplementary Data***

 

The financial statements and supplementary data have been filed as apart of this Annual Report on Form 10-K as indicated in the Index toConsolidated Financial Statements and Financial Statement Schedules appearingon page 86 of this report.

 

**Item 9.****          *****Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure***

 

None.

 

**Item 9A.   *Controls and Procedures***

 

OurPrincipal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”)have evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) of the Exchange Act) as of December 31,2009 and 2008.  Based on that evaluation,our PEO and PFO have concluded that our disclosure controls and procedures areeffective.

 

OurPEO and PFO have also evaluated the effectiveness of our internal control overfinancial reporting as of December 31, 2009 and 2008.  Based on that evaluation, our PEO and PFOhave concluded that our internal controls over financial reporting areeffective.  Management’s annual report oninternal control over financial reporting is included on page F-43 of thisreport. The report of independent registered public accounting firm ofPricewaterhouseCoopers is included on page F-44 of this report.

 

Therehas been no change in our internal controls over financial reporting during thefourth quarter of 2009 that has materially affected, or is reasonably likely tomaterially affect our internal control over financial reporting.

 

**Item 9B.   *Other Information***

 

None.

 

**PART III**

 

**Item 10.****         *****Directors, Executive Officers and Corporate Governance***

 

Reported under the captions *“Directors,Executive Officers and Corporate Governance”*, *“Section 16(a) Beneficial OwnershipReporting Compliance”*in the Company’s 2010 Proxy Statement, hereinincorporated by reference.

 

The Company’s Code of Conduct and Ethics, which applies to alldirectors, officers and employees in carrying out their responsibilities to andon behalf of the Company, is available at www.montpelierre.bm and is includedas Exhibit 14 to this report.  TheCompany’s Code of Conduct and Ethics is also available in print free of chargeto any shareholder upon request.

 

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There have been no material changes to the procedures by which shareholdersmay recommend nominees to the Company’s Board of Directors. The procedures forshareholders to nominate directors are reported under the caption*“The Board and Committees - ShareholderRecommendations”* in the Company’s 2010 Proxy Statement, hereinincorporated by reference.

 

**Item 11.****         *****Executive Compensation***

 

Reported under the caption *“ExecutiveCompensation”* in the Company’s 2010 Proxy Statement, hereinincorporated by reference.

 

**Item 12.****         *****Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters***

 

Reported under the captions *“SecurityOwnership of Certain Beneficial Owners and Management”* in theCompany’s 2010 Proxy Statement, herein incorporated by reference and *“Securities Authorized for Issuance Under Equity CompensationPlans”* contained in Item 5 herein.

 

**Item 13.   *Certain Relationships and Related Transactions andDirector Independence***

 

Reported under the captions *“CertainRelationships and Related Transactions”* and *“The Board and Committees”*in the Company’s2010 Proxy Statement, herein incorporated by reference.

 

**Item 14.**   ***PrincipalAccounting Fees and Services***

 

Reported under the caption *“Appointmentof Independent Auditor”* in the Company’s 2010 Proxy Statement,herein incorporated by reference.

 

**PART IV**

 

**Item 15.****             *****Exhibits and Financial Statement Schedules***

 

**(a)****         ****DocumentsFiled as Part of the Report**

 

The financial statements and financial statement schedules and reportof independent registered public accounting firm have been filed as part ofthis Annual Report on Form 10-K as indicated in the Index to ConsolidatedFinancial Statements and Financial Statement Schedules appearing on page 86of this report.  A listing of exhibitsfiled as part of the report appear on pages 81 through 84 of this report.

 

**(b)****         ****Exhibits**

 

The exhibits followed by an asterisk (*) indicate exhibits physicallyfiled with this Annual Report on Form 10-K. All other exhibit numbersindicate exhibits filed by incorporation by reference.

 

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| **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         |       | Second Amended  and Restated Bye-Laws (incorporated herein by reference to Exhibit 3.1  to the Company’s Quarterly Report on Form 10-Q dated August 7,  2008).                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1         |       | Specimen  Ordinary Share Certificate. (*)                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2         |       | 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).                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3         |       | 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 November 20, 2007, between Anthony Taylor and the  Registrant (incorporated herein by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed November 21, 2007).                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3        |       | Service  Agreement among Thomas G.S. Busher and Montpelier Re Holdings Ltd. dated  April 3, 2008 (incorporated herein by reference to Exhibit 10.1 to  the Company’s Form 8-K filed April 3, 2008).                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4        |       | Service  Agreement, dated as of January 24, 2002, between Thomas G.S. Busher and  MUSL (which was assigned to MUSL by MMSL in January 2009) (incorporated  herein by reference to Exhibit 10.6 to the Company’s Registration Statement  on Form S-1, Registration No. 333-89408).                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5        |       | Service  Agreement among Christopher L. Harris and the Company dated March 13,  2008 (incorporated herein by reference to Exhibit 10.1 to the Company’s  Form 8-K filed March 13, 2008).                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6        |       | Service  Agreement among Michael S. Paquette and the Company dated March 11, 2008  (incorporated herein by reference to Exhibit 10.1 to the Company’s  Form 8-K filed March 11, 2008).                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7        |       | Amendment to  Service Agreement among Michael S. Paquette and the Company dated  February 27, 2009 (incorporated herein by reference to Exhibit 10.7  to the Company’s Annual Report on Form 10-K filed February 27,  2009).                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8        |       | Service  Agreement, dated as of May 14, 2007, between Stanley J. Kott and  Montpelier Re Holdings Ltd., with its subsidiaries and affiliated companies  (incorporated herein by reference to Exhibit 10.5 to the Company’s  Quarterly Report on Form10-Q filed May 6, 2009).                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9        |       | Service  Agreement, dated as of January 24, 2006, between William Pollett and  Montpelier Reinsurance Ltd. (incorporated herein by reference to  Exhibit 10.6 to the Company’s Quarterly Report on Form10-Q filed  May 6, 2009).                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10       |       | Service  Agreement, dated as of September 8, 2004, between Kernan V. Oberting and  Montpelier Reinsurance Ltd. (incorporated herein by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  September 9, 2004).                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11       |       | Letter  Agreement, dated as of April 1, 2008, between Kernan V. Oberting and  Montpelier Re Holdings Ltd. (incorporated herein by reference to  Exhibit 10.1 to the Company’s Form 8-K filed April 2, 2008).                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.12       |       | Consulting  Agreement, dated as of April 1, 2008, between KVO Capital Management,  LLC and Montpelier Re Holdings Ltd. (incorporated herein by reference to Exhibit 10.2  to the Company’s Form 8-K filed April 2, 2008).                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13       |       | Investment  Management Agreement, dated as of April 1, 2008 between KVO Capital  Management, LLC and Montpelier Reinsurance Ltd. (incorporated herein by  reference to Exhibit 10.3 to the Company’s Form 8-K filed  April 2, 2008).                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.14       |       | Service  Agreement, dated as of January 24, 2002, between Nicholas Newman-Young  and Montpelier Marketing Services (UK) Limited (incorporated herein by  reference to Exhibit 10.7 to the Company’s Registration Statement on  Form S-1, Registration No. 333-89408).                                                                       |

 

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| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.15       |       | Compromise  Agreement among Nicholas Newman-Young and Montpelier Marketing Services  Limited dated April 3, 2008 (incorporated herein by reference to  Exhibit 10.1 to the Company’s Form 8-K filed April 3, 2008).                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16       |       | Severance Plan,  dated as of August 27, 2004, among certain Executives and the Company  (incorporated herein by reference to Exhibit 10.4 to the Company’s  Current Report on Form 8-K filed September 1, 2004).                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17       |       | Montpelier  Reinsurance Ltd. Amended and Restated Deferred Compensation Plan  (incorporated herein by reference to Exhibit 10.25 to the Company’s  Annual Report on Form 10-K filed March 4, 2005).                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18       |       | Share Option  Plan, as amended August 27, 2004 (incorporated herein by reference to  Exhibit 10.7 to the Company’s Current Report on Form 8-K filed  September 1, 2004).                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19       |       | Performance Unit  Plan as amended August 27, 2004 (incorporated herein by reference to  Exhibit 10.6 to the Company’s Current Report on Form 8-K filed  September 1, 2004).                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20       |       | Montpelier Re  Holdings Ltd. Amended and Restated Directors Share Plan (incorporated herein  by reference to Exhibit 10.13 to the Company’s Annual Report on  Form 10-K dated February 28, 2008).                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21       |       | Montpelier Re  Holdings Ltd. Long-Term Incentive Plan as amended May 23, 2007  (incorporated herein by reference to Exhibit 10.14 to the Company’s  Annual Report on Form 10-K filed February 28, 2008).                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.22       |       | Form of  Performance Share Award under the Montpelier Re Holdings Ltd. Long-Term  Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed February 28, 2005).                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.23       |       | Form of  Performance Share and Restricted Share Unit Award Agreement under  Montpelier’s Long-Term Incentive Plan (incorporated herein by reference to  Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed  March 14, 2006).                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.24       |       | Form of  Montpelier Re Holdings Ltd. Long Term Incentive Plan Annual Bonus and  Restricted Share Unit Award Agreement (incorporated herein by reference to  Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed  February 28, 2008).                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.25       |       | Form of  Annual Restricted Share Unit Award Agreement under the Montpelier Re Holdings  Ltd. Long-Term Incentive Plan (incorporated herein by reference to  Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed  February 27, 2009).                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.26       |       | Form of  Restricted Share Unit Award Agreement under the Montpelier Re Holdings Ltd.  Long-Term Incentive Plan (incorporated herein by reference to  Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed  February27, 2009).                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.27       |       | Form of  Montpelier Re Holdings Ltd. Long Term Incentive Plan Restricted Share Unit  Award Agreement (incorporated herein by reference to Exhibit 10.18 to  the Company’s Annual Report on Form 10-K filed February 28, 2008).                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.28       |       | Montpelier Re  Holdings Ltd. 2007 Annual Bonus Plan (incorporated herein by reference to  Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed  February 28, 2008).                                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.29       |       | Montpelier Re  Holdings Ltd. 2009 Annual Bonus Plan (incorporated herein by reference to  Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed  February 27, 2009).                                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.30       |       | Second Amended  and Restated Letter of Credit Reimbursement and Pledge Agreement, among the  Company and Bank of America, N.A. and a syndicate of lending institutions,  dated as of August 4, 2005 (incorporated herein by reference to  Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q filed  August 9, 2005).                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.31       |       | First Amendment  to the Second Amended and Restated Letter of Credit Reimbursement and Pledge  Agreement, among Montpelier Reinsurance Ltd., Montpelier Re Holdings Ltd.,  the various financial institutions party thereto and Bank of America, N.A.,  as administrative agent (incorporated herein by reference to  Exhibit 10.2 to the Company’s Current Report on Form 8-K filed  June 13, 2006). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.32       |       | Amended and  Restated Letter of Credit Reimbursement and Pledge Agreement among Montpelier  Reinsurance Ltd., the lenders thereto, Bank of America, N.A., as  administrative agent and HSBC Bank USA, National Association as syndication  agent (incorporated herein by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed June 13, 2006).                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.33       |       | Standing  Agreement for Letters of Credit between Montpelier Reinsurance Ltd. and the  Bank of New York (incorporated herein by reference to Exhibit 10.2 to  the Company’s Current Report on Form 8-K filed November 18, 2005).                                                                                                                                                                      |

 

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| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.34       |       | Purchase  Agreement among Montpelier Re Holdings Ltd., WLR Recovery Fund, II, L.P.  and WLR Recovery Fund, III, L.P. (incorporated herein by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  June 1, 2006).                                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.35       |       | Registration  Rights Agreement among Montpelier Re Holdings Ltd., WLR Recovery  Fund, II, L.P. and WLR Recovery Fund, III, L.P. (incorporated herein  by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K filed June 1, 2006).                                                                                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.36       |       | Forward Sale  Agreement, among Montpelier Re Holdings Ltd. and Credit Suisse International  (incorporated herein by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed June 2, 2006).                                                                                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.37       |       | Amendment to the  Forward Sale Agreement, among Montpelier Re Holdings Ltd. and Credit Suisse  International (incorporated herein by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed January 3, 2007).                                                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.38       |       | Forward Sale  Agreement, among Montpelier Re Holdings Ltd. and Credit Suisse International  (incorporated herein by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed June 2, 2006).                                                                                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.39       |       | Amendment to the  Forward Sale Agreement, among Montpelier Re Holdings Ltd. and Credit Suisse  International (incorporated herein by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed December 10, 2007).                                                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.40       |       | Share Issuance  Agreement, among Montpelier Re Holdings Ltd., Credit Suisse Securities (USA)  LLC and Credit Suisse International (incorporated herein by reference to  Exhibit 10.3 to the Company’s Current Report on Form 8-K filed  June 2, 2006).                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.41       |       | Termination  Agreement, among Montpelier Re Holdings Ltd., Credit Suisse Securities (USA)  LLC and Credit Suisse International dated February 27, 2009  (incorporated herein by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed March 3, 2009).                                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.42       |       | Credit Agreement  dated June 8, 2007 among Montpelier Reinsurance Ltd., Montpelier Re  Holdings, Ltd. the lenders party thereto, Bank of America, N.A., as  administrative agent and HSBC Bank USA, National Association as syndication  agent (incorporated herein by reference to Exhibit 10.01 to the  Company’s Form 8-K filed June 13, 2007).                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.43       |       | First Amendment  Agreement, dated November 27, 2007 among Montpelier Reinsurance,  Montpelier Re Holdings, the lenders party thereto, Bank of America, N.A., as  administrative agent and HSBC Bank USA, National Association as syndication  agent (incorporated herein by reference to Exhibit 10.32 to the  Company’s Annual Report on Form 10-K filed February 28, 2008).                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.44       |       | Letter of Credit  Reimbursement and Pledge Agreement dated June 8, 2007 among Montpelier  Reinsurance Ltd., the lenders party thereto, Bank of America, N.A., as  administrative agent and HSBC Bank USA, National Association as syndication  agent (incorporated herein by reference to Exhibit 10.02 to the  Company’s Form 8-K filed June 13, 2007).                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.45       |       | First Amendment  Agreement to the Credit Agreement dated as of October 31, 2008, which  became effective November 10, 2008, among Montpelier Reinsurance Ltd.,  various financial institutions and Bank of America, N.A. as Administrative  Agent (incorporated herein by reference to Exhibit 99.1 to the Company’s  Form 8-K filed November 12, 2008).                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.46       |       | Standby Letter  of Credit Facility Agreement dated June 21, 2007 among Montpelier  Reinsurance Ltd. (as Company), Montpelier Re Holdings Limited (as Parent),  Montpelier Capital Limited (as Account Party) and The Royal Bank of Scotland  plc (as Mandated Lead Arranger and as Agent and Security Trustee)  (incorporated herein by reference to Exhibit 99.1 to the Company’s  Form 8-K filed June 25, 2007).                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.47       |       | Amended and  Restated Letter of Credit Facility Agreement dated March 24, 2009 among  Montpelier Reinsurance Ltd. (as Company), Montpelier Re Holdings Ltd. (as  Parent), Montpelier Capital Limited (as Account Party), The Royal Bank of  Scotland plc and ING Bank N.V., London Branch (as an Original Lenders and  Mandated Lead Arrangers), and The Royal Bank of Scotland plc (acting as Agent  and Security Trustee),(incorporated herein by reference to Exhibit 10.1  to the Company’s Form 8-K filed March 24, 2009). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.48       |       | Security  Agreement dated as of June 21, 2007 between Montpelier Reinsurance Ltd.  (the Pledgor) and The Royal Bank of Scotland plc in its capacity as Security  Trustee of the Finance Parties (incorporated herein by reference to  Exhibit 99.2 to the Company’s Form 8-K filed June 25, 2007).                                                                                                                                                                                                                              |

 

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| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.49       |       | Control  Agreement dated June 21, 2007, among Montpelier Reinsurance Ltd., The  Royal Bank of Scotland plc, as Security Trustee for itself and the other  lending institutions party to the Standby Letter of Credit Facility Agreement  dated as of June 21, 2007, and The Bank of New York, as Custodian  (incorporated herein by reference to Exhibit 99.3 to the Company’s  Form 8-K filed June 25, 2007). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.50       |       | Stock Purchase  Agreement between GAINSCO, Inc., MGA Insurance Company, Inc. and  Montpelier Re U.S. Holdings Ltd. (incorporated herein by reference to  Exhibit 10.1 to the Company’s Form 8-K filed August 13, 2007).                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.51       |       | Share Purchase  Agreement among WLR Recovery Fund II L.P., WLR Recovery Fund III L.P., Wilbur  L. Ross, Jr. and Montpelier Re Holdings Ltd. dated February 26,  2010. (*)                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 11          |       | Statement Re:  Computation of Per Share Earnings (included in Note 1 of the Notes to  Consolidated Financial Statements). (*)                                                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 12          |       | Statement Re:  Computation of Ratios. (*)                                                                                                                                                                                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 14          |       | Code of Ethics.  (*)                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 21          |       | Subsidiaries of  the Registrant, filed with this report. (*)                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 23          |       | Consent of  PricewaterhouseCoopers, filed with this report. (*)                                                                                                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 24          |       | Power of  Attorney (included as part of signatures page). (*)                                                                                                                                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1        |       | Certification of  Christopher L. Harris, Chief Executive Officer of Montpelier Re Holdings  Ltd., pursuant to Rules 13a-14(a) and 15d-14(a) of the  Securities Exchange Act of 1934, as amended. (*)                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2        |       | Certification of  Michael S. Paquette, Chief Financial Officer of Montpelier Re Holdings Ltd.,  pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities  Exchange Act of 1934, as amended. (*)                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32          |       | Certifications  of Christopher L. Harris and Michael S. Paquette, Chief Executive Officer and  Chief Financial Officer, respectively, of Montpelier Re Holdings Ltd.,  pursuant to 18 U.S.C. Section 1350. (*)                                                                                                                                                                                                                          |

 

Pursuant to Item602(b)(4)(iii) of Regulation S-K, copies of certain instruments definingthe rights of holders of our debt are not filed and, in lieu thereof, we agreeto furnish copies to the SEC upon request.

 

**(c)****         ****FinancialStatement Schedules**

 

The financial statement schedules and report of independent registeredpublic accounting firm have been filed as part of this Annual Report on Form 10-Kas indicated in the Index to Consolidated Financial Statements and FinancialStatement Schedules appearing on page 86 of this report.

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 

|                              | **MONTPELIER RE HOLDINGS LTD.** |
|-----------------------------------|---------------------------------|
|                              |                            |   |
|                              |                            |   |
| Date: February 26, 2010 | By:                             | /s/ MICHAEL S. PAQUETTE |
|                              |                            | Executive  Vice President and Chief Financial Officer |

 

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**Power of Attorney**

 

**KNOW ALL MEN** by these presents, that theundersigned does hereby make, constitute and appoint Thomas G.S. Busher,Christopher L. Harris, Michael S. Paquette, Jonathan B. Kim, and Allison D.Kiene and each of them, as true and lawful attorney-in-fact and agent of theundersigned, with full power of substitution, resubstitution and revocation,for and in the name, place and stead of the undersigned, to execute and deliverthe Annual Report on Form 10-K for the fiscal year ended December 31,2009, and any and all amendments thereto; such Form 10-K and each suchamendment to be in such form and to contain such terms and provisions as saidattorney or substitute shall deem necessary or desirable; giving and grantingunto said attorney, or to such person or persons as in any case may beappointed pursuant to the power of substitution herein given, full power andauthority to do and perform any and every act and thing whatsoever requisite,necessary or, in the opinion of said attorney or substitute, able to be done inand about the premises as fully and to all intents and purposes as theundersigned might or could do if personally present, hereby ratifying andconfirming all that said attorney or such substitute shall lawfully do or causeto be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1934, this Form 10-Khas been signed by the following persons in the capacities indicated on the 26th day of February, 2010.

 
| **Signature**              | ** ** | **Title**                                                       |
|----------------------------|------------|-----------------------------------------------------------------|
|                       |       |                                                            |
| /s/ CHRISTOPHER L. HARRIS  |       | President, Chief  Executive Officer and Director                |
| Christopher L. Harris      |       | (Principal Executive  Officer)                                  |
|                       |       |                                                            |
| /s/ MICHAEL S. PAQUETTE    |       | Executive Vice  President and Chief Financial Officer           |
| Michael S. Paquette        |       | (Principal Financial Officer  and Principal Accounting Officer) |
|                       |       |                                                            |
| /s/ ANTHONY TAYLOR         |       | Chairman                                                        |
| Anthony Taylor             |       |                                                            |
|                       |       |                                                            |
| /s/ THOMAS G.S. BUSHER     |       | Deputy Chairman,  Executive Vice President,                     |
| Thomas G.S. Busher         |       | Chief Operating Officer  and Director                           |
|                       |       |                                                            |
| /s/ JOHN D. COLLINS        |       |                                                            |
| John D. Collins            |       | Director                                                        |
|                       |       |                                                            |
| /s/ MORGAN W. DAVIS        |       |                                                            |
| Morgan W. Davis            |       | Director                                                        |
|                       |       |                                                            |
| /s/ CLEMENT S. DWYER JR.   |       |                                                            |
| Clement S. Dwyer Jr.       |       | Director                                                        |
|                       |       |                                                            |
| /s/ ALLAN W. FULKERSON     |       |                                                            |
| Allan W. Fulkerson         |       | Director                                                        |
|                       |       |                                                            |
| /s/ J. RODERICK HELLER III |       |                                                            |
| J. Roderick Heller III     |       | Director                                                        |
|                       |       |                                                            |
| /s/ WILBUR L. ROSS, JR.    |       |                                                            |
| Wilbur L. Ross, Jr.   |       | Director                                                        |
|                       |       |                                                            |
| /s/ JOHN F. SHETTLE, JR.   |       |                                                            |
| John F. Shettle, Jr.  |       | Lead Director                                                   |
|                       |       |                                                            |
| /s/ CANDACE L. STRAIGHT    |       |                                                            |
| Candace L. Straight        |       | Director                                                        |
|                       |       |                                                            |
| /s/ IAN M. WINCHESTER      |       |                                                            |
| Ian M. Winchester          |       | Director                                                        |

 

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**Index to Consolidated Financial Statements andFinancial Statement Schedules**

 

| ** **                                                                                                                                   | **Form**    |
|----------------------------------------------------------------------------------------------------------------------------------------------|-------------|
| ** **                                                                                                                                   | **10-K**    |
| ** **                                                                                                                                   | **page(s)** |
| ** **                                                                                                                                   |        |
| **Consolidated  Financial Statements:**                                                                                                      |        |
|                                                                                                                                         |        |
| Consolidated Balance Sheets at December 31, 2009  and 2008                                                                              | F-1         |
|                                                                                                                                         |        |
| Consolidated Statements of Operations and  Comprehensive Income for each of the years ended December 31, 2009, 2008 and 2007            | F-2         |
|                                                                                                                                         |        |
| Consolidated Statements of Shareholders’ Equity for  each of the years ended December 31,  2009, 2008 and 2007                     | F-3         |
|                                                                                                                                         |        |
| Consolidated Statements of Cash Flows for each of the  years ended December 31,  2009, 2008 and 2007                                    | F-4         |
|                                                                                                                                         |        |
| Notes to Consolidated Financial Statements                                                                                                   | F-5         |
|                                                                                                                                         |        |
| **Other  Financial Information:**                                                                                                            |        |
|                                                                                                                                         |        |
| Management’s Responsibility For Financial Statements  and Management’s Annual Report  on Internal Control over Financial Reporting | F-43        |
|                                                                                                                                         |        |
| Report of Independent Registered Public Accounting  Firm                                                                                     | F-44        |
|                                                                                                                                         |        |
| Selected Quarterly Financial Data (unaudited)                                                                                                | F-45        |
|                                                                                                                                         |        |
| **Financial  Statement Schedules:**                                                                                                          |        |
|                                                                                                                                         |        |
| I.   Summary of Investments - Other than  Investments in Related Parties                                                           | FS-1        |
|                                                                                                                                         |        |
| II.  Condensed  Financial Information - Parent Only                                                                                     | FS-2        |
|                                                                                                                                         |        |
| III. Supplementary Insurance Information                                                                                                     | FS-4        |
|                                                                                                                                         |        |
| IV.  Reinsurance                                                                                                                             | FS-5        |
|                                                                                                                                         |        |
| VI. Supplemental Information for Property and Casualty  Insurance Underwriters                                                               | FS-6        |

 

86

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**MONTPELIER RE HOLDINGS LTD.**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                 | ** ** | **December 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **(In  millions of U.S. dollars, except share and per share amounts)**                                                     | ** ** | **2009**              | ** **  | **2008** | ** ** |
| **Assets**                                                                                                                 | ** ** | ** **            |        |   |   |
| Fixed  maturity investments, at fair value (amortized cost: $2,177.8 and $1,755.8)                                         | ** ** | **$**                 | **2,207.5** |   | $ | 1,706.6 |   |
| Equity  securities, at fair value (cost: $150.3 and $310.0)                                                                | ** ** | **167.2**             |        | 242.3 |   |
| Other  investments (cost: $95.1 and $156.2)                                                                                | ** ** | **94.1**              |        | 148.3 |   |
| Total  investments                                                                                                         | ** ** | **2,468.8**           |        | 2,097.2 |   |
| Cash  and cash equivalents                                                                                                 | ** ** | **202.1**             |        | 260.9 |   |
| Restricted  cash                                                                                                           | ** ** | **40.9**              |        | 7.1 |   |
| Reinsurance  recoverable on unpaid losses                                                                                  | ** ** | **69.6**              |        | 122.9 |   |
| Reinsurance  recoverable on paid losses                                                                                    | ** ** | **44.5**              |        | 36.4 |   |
| Premiums  receivable                                                                                                       | ** ** | **161.5**             |        | 168.5 |   |
| Unearned  premium ceded                                                                                                    | ** ** | **14.7**              |        | 20.8 |   |
| Deferred  acquisition costs                                                                                                | ** ** | **38.2**              |        | 28.4 |   |
| Accrued  investment income                                                                                                 | ** ** | **14.9**              |        | 14.0 |   |
| Unsettled  sales of investments                                                                                            | ** ** | **1.5**               |        | 1.4 |   |
| Other  assets                                                                                                              | ** ** | **45.6**              |        | 40.0 |   |
| **Total Assets**                                                                                                           | ** ** | **$**                 | **3,102.3** |   | $ | 2,797.6 |   |
| **Liabilities**                                                                                                            | ** ** | ** **            |        |   |   |
| Loss  and loss adjustment expense reserves                                                                                 | ** ** | **$**                 | **680.8**   |   | $ | 808.9 |   |
| Debt                                                                                                                       | ** ** | **331.7**             |        | 352.5 |   |
| Unearned  premium                                                                                                          | ** ** | **215.4**             |        | 185.2 |   |
| Insurance  and reinsurance balances payable                                                                                | ** ** | **35.2**              |        | 43.8 |   |
| Unsettled  purchases of investments                                                                                        | ** ** | **8.6**               |        | 3.1 |   |
| Accounts  payable, accrued expenses and other liabilities (See Note 15)                                                    | ** ** | **102.1**             |        | 46.5 |   |
| Total  Liabilities                                                                                                         | ** ** | **1,373.8**           |        | 1,440.0 |   |
|                                                                                                                       | ** ** | ** **            |        |   |   |
| Commitments  and contingent liabilities (see Note 16)                                                                      | ** ** | **—**            |        | — |   |
|                                                                                                                       | ** ** | ** **            |        |   |   |
| **Common Shareholders’ Equity**                                                                                       | ** ** | ** **            |        |   |   |
| Common  Shares at 1/6 cent par value per share - authorized 1,200,000,000 shares; issued  82,027,493 and 93,368,434 shares | ** ** | **0.1**               |        | 0.2 |   |
| Additional  paid-in capital                                                                                                | ** ** | **1,541.2**           |        | 1,599.0 |   |
| Treasury  shares at cost: 2,028,698 and 1,541,730 shares                                                                   | ** ** | **(32.3**             | **)**       | (23.8 | ) |
| Retained  earnings (deficit)                                                                                               | ** ** | **222.4**             |        | (214.6 | ) |
| Accumulated  other comprehensive loss                                                                                      | ** ** | **(2.9**              | **)**       | (3.2 | ) |
| Total  Common Shareholders’ Equity                                                                                    | ** ** | **1,728.5**           |        | 1,357.6 |   |
| **Total Liabilities and Common Shareholders’ Equity**                                                                 | ** ** | **$**                 | **3,102.3** |   | $ | 2,797.6 |   |

 

See Notes to Consolidated FinancialStatements

 

F-1

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Table of Contents

 

**MONTPELIERRE HOLDINGS LTD.**

**CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME**

 
| ** **                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In  millions of U.S. dollars, except per share and per warrant amounts)** | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenues**                                                                 | ** ** | ** **                       |       |   |   |   |   |
| Gross  premiums written                                                      | ** ** | **$**                            | **634.9**  |   | $ | 620.1 |   | $ | 653.8 |   |
| Reinsurance  premiums ceded                                                  | ** ** | **(32.7**                        | **)**      | (78.9 | ) | (104.8 | ) |
| Net  premiums written                                                        | ** ** | **602.2**                        |       | 541.2 |   | 549.0 |   |
| Change  in net unearned premiums                                             | ** ** | **(29.0**                        | **)**      | (12.7 | ) | 8.2 |   |
| Net  premiums earned                                                         | ** ** | **573.2**                        |       | 528.5 |   | 557.2 |   |
| Net  investment income                                                       | ** ** | **81.0**                         |       | 86.4 |   | 132.5 |   |
| Net  realized and unrealized investment gains (losses)                       | ** ** | **181.8**                        |       | (244.9 | ) | 26.5 |   |
| Net  foreign exchange gains (losses)                                         | ** ** | **(2.5**                         | **)**      | 7.6 |   | 6.1 |   |
| Net  income (expense) from derivative instruments                            | ** ** | **7.3**                          |       | (14.3 | ) | (0.3 | ) |
| Gain  on early extinguishment of debt                                        | ** ** | **5.9**                          |       | — |   | — |   |
| Other  revenue                                                               | ** ** | **0.5**                          |       | 1.0 |   | 2.0 |   |
| Total  revenues                                                              | ** ** | **847.2**                        |       | 364.3 |   | 724.0 |   |
| **Expenses**                                                                 | ** ** | ** **                       |       |   |   |   |   |
| Underwriting  expenses:                                                      | ** ** | ** **                       |       |   |   |   |   |
| Loss  and loss adjustment expenses                                           | ** ** | **138.7**                        |       | 295.1 |   | 177.5 |   |
| Acquisition  costs                                                           | ** ** | **80.5**                         |       | 83.9 |   | 78.3 |   |
| General  and administrative expenses                                         | ** ** | **137.1**                        |       | 102.0 |   | 85.9 |   |
| Non-underwriting  expenses:                                                  | ** ** | ** **                       |       |   |   |   |   |
| Interest  and other financing expenses                                       | ** ** | **26.3**                         |       | 26.8 |   | 34.5 |   |
| Total  expenses                                                              | ** ** | **382.6**                        |       | 507.8 |   | 376.2 |   |
| **Income (loss) before income taxes and extraordinary item**                 | ** ** | **464.6**                        |       | (143.5 | ) | 347.8 |   |
| Income  tax provision                                                        | ** ** | **(1.1**                         | **)**      | (1.1 | ) | (0.1 | ) |
| **Net income (loss) before extraordinary item**                              | ** ** | **463.5**                        |       | (144.6 | ) | 347.7 |   |
| Excess  of fair value of acquired net assets over cost - Blue Ocean          | ** ** | **—**                       |       | 1.0 |   | — |   |
| **Net income (loss)**                                                        | ** ** | **463.5**                        |       | (143.6 | ) | 347.7 |   |
| Net  income attributable to noncontrolling interest in Blue Ocean            | ** ** | **—**                       |       | (1.9 | ) | (31.9 | ) |
| **Net income (loss) attributable to the Company**                            | ** ** | **463.5**                        |       | (145.5 | ) | 315.8 |   |
| Change  in foreign currency translation                                      | ** ** | **0.8**                          |       | (6.3 | ) | (0.2 | ) |
| Change  in fair value of Symetra                                             | ** ** | **(0.5**                         | **)**      | 0.9 |   | (1.6 | ) |
| **Comprehensive income (loss)**                                              | ** ** | **$**                            | **463.8**  |   | $ | (150.9 | ) | $ | 314.0 |   |
| **Basic and diluted earnings per share**                                     | ** ** | **$**                            | **5.36**   |   | $ | (1.69 | ) | $ | 3.29 |   |
| **Dividends declared per share**                                             | ** ** | **$**                            | **0.315**  |   | $ | 0.300 |   | $ | 0.300 |   |
| **Dividends declared per warrant**                                           | ** ** | **—**                       |       | — |   | 0.075 |   |

 

See Notes to Consolidated FinancialStatements

 

F-2

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Tableof Contents

 

**MONTPELIERRE HOLDINGS LTD.**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**

 
| ** **                                                                           | ** ** | **Total**              | ** **  | ** ** | ** ** | ** **     | ** ** | ** **   | ** **  | ** **    | ** ** | ** **         | ** ** | ** **         | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|-------------|------------|------------|----------------|------------|--------------|-------------|---------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                           | ** ** | **common**             | ** **  | **Common** | ** ** | **Additional** | ** ** | **Treasury** | ** **  | **Retained**  | ** ** | **Accum.  other**  | ** ** | **Noncontrolling** | ** ** |
| ** **                                                                           | ** ** | **shareholders’** | ** **  | **shares** | ** ** | **paid-in**    | ** ** | **shares**   | ** **  | **earnings**  | ** ** | **comprehensive**  | ** ** | **interest  in**   | ** ** |
| **(In millions of U.S. dollars)**                                                    | ** ** | **equity**             | ** **  | **at par** | ** ** | **capital**    | ** ** | **at cost**  | ** **  | **(deficit)** | ** ** | **income  (loss)** | ** ** | **Blue  Ocean**    | ** ** |
|                                                                                 |       |                   |        |       |       |           |       |         |        |          |       |               |       |               |       |
| Balances  at January 1, 2007                                                    |       | $                      | 1,731.3     |       | $          | 0.2            |       | $            | 1,819.2     |          | $          | —             |       | $                  | (376.0     | ) | $ | 49.5 |   | $ | 238.4 |   |
|                                                                                 |       |                   |        |       |       |           |       |         | ** **  | ** **    |       |               |       |               |       |
| Net  income                                                                          |       | 347.7                  |        | —     |       | —         |       | —       |        | 315.8         |       | —             |       | 31.9               |       |
| Other  comprehensive loss                                                            |       | (1.8                   | )           | —     |       | —         |       | —       |        | —        |       | (1.8               | )          | —             |       |
| Repurchases  of Common Shares and warrants                                           |       | (128.7                 | )           | —     |       | (128.7         | )          | —       |        | —        |       | —             |       | —             |       |
| Distributions  to and repurchases from Blue Ocean’s noncontrolling shareholders |       | (181.6                 | )           | —     |       | —         |       | —       |        | —        |       | —             |       | (181.6             | )          |
| Cumulative  effect of adopting accounting guidance regarding fair value measurements |       | —                 |        | —     |       | —         |       | —       |        | 45.5          |       | (45.5              | )          | —             |       |
| Director  Share Plan amendment                                                       |       | (0.5                   | )           | —     |       | (0.5           | )          | —       |        | —        |       | —             |       | —             |       |
| Amendment  of forward sale agreement                                                 |       | (3.9                   | )           | —     |       | (3.9           | )          | —       |        | —        |       | —             |       | —             |       |
| Expense  recognized for RSUs and DSUs                                                |       | 8.2                    |        | —     |       | 8.2            |       | —       |        | —        |       | —             |       | —             |       |
| Dividends  declared on Common Shares                                                 |       | (28.4                  | )           | —     |       | —         |       | —       |        | (28.4         | )          | —             |       | —             |       |
| Dividends  declared on warrants                                                      |       | (0.5                   | )           | —     |       | —         |       | —       |        | (0.5          | )          | —             |       | —             |       |
|                                                                                 |       |                   |        |       |       |           |       |         |        |          |       |               |       |               |       |
| Balances  at December 31, 2007                                                  |       | $                      | 1,741.8     |       | $          | 0.2            |       | $            | 1,694.3     |          | $          | —             |       | $                  | (43.6      | ) | $ | 2.2 |   | $ | 88.7 |   |
|                                                                                 |       |                   |        |       |       |           |       |         |        |          |       |               |       |               |       |
| Net  loss                                                                            |       | (143.6                 | )           | —     |       | —         |       | —       |        | (145.5        | )          | —             |       | 1.9                |       |
| Other  comprehensive loss                                                            |       | (5.4                   | )           | —     |       | —         |       | —       |        | —        |       | (5.4               | )          | —             |       |
| Issuances  of Common Shares from treasury                                            |       | —                 |        | —     |       | (4.9           | )          | 4.9          |        | —        |       | —             |       | —             |       |
| Repurchases  of Common Shares                                                        |       | (125.7                 | )           | —     |       | (97.0          | )          | (28.7        | )           | —        |       | —             |       | —             |       |
| Distributions  to and repurchases from Blue Ocean’s noncontrolling shareholders |       | (90.6                  | )           | —     |       | —         |       | —       |        | —        |       | —             |       | (90.6              | )          |
| Expense  recognized for RSUs                                                         |       | 8.3                    |        | —     |       | 8.3            |       | —       |        | —        |       | —             |       | —             |       |
| RSUs  withheld for income taxes                                                      |       | (1.7                   | )           | —     |       | (1.7           | )          | —       |        | —        |       | —             |       | —             |       |
| Dividends  declared on Common Shares                                                 |       | (25.5                  | )           | —     |       | —         |       | —       |        | (25.5         | )          | —             |       | —             |       |
|                                                                                 |       |                   |        |       |       |           |       |         |        |          |       |               |       |               |       |
| Balances  at December 31, 2008                                                  |       | $                      | 1,357.6     |       | $          | 0.2            |       | $            | 1,599.0     |          | $          | (23.8              | )          | $                  | (214.6     | ) | $ | (3.2 | ) | $ | — |   |
|                                                                                 |       |                   |        |       |       |           |       |         | ** **  | ** **    |       |               |       |               |       |
| Net  income                                                                          |       | 463.5                  |        | —     |       | —         |       | —       |        | 463.5         |       | —             |       | —             |       |
| Other  comprehensive income                                                          |       | 0.3                    |        | —     |       | —         |       | —       |        | —        |       | 0.3                |       | —             |       |
| Issuances  of Common Shares from treasury                                            |       | 0.4                    |        | —     |       | (10.2          | )          | 10.6         |        | —        |       | —             |       | —             |       |
| Repurchases  of Common Shares                                                        |       | (112.6                 | )           | —     |       | (93.5          | )          | (19.1        | )           | —        |       | —             |       | —             |       |
| Termination  of Forward Sale Agreements and Share Issuance Agreement                 |       | 32.0                   |        | (0.1       | )          | 32.1           |       | —       |        | —        |       | —             |       | —             |       |
| Expense  recognized for RSUs                                                         |       | 14.8                   |        | —     |       | 14.8           |       | —       |        | —        |       | —             |       | —             |       |
| RSUs  withheld for income taxes                                                      |       | (1.0                   | )           | —     |       | (1.0           | )          | —       |        | —        |       | —             |       | —             |       |
| Dividends  declared on Common Shares                                                 |       | (26.5                  | )           | —     |       | —         |       | —       |        | (26.5         | )          | —             |       | —             |       |
|                                                                                 |       |                   |        |       |       |           |       |         |        |          |       |               |       |               |       |
| **Balances at December 31, 2009**                                               | ** ** | **$**                  | **1,728.5** | ** ** | **$**      | **0.1**        | ** ** | **$**        | **1,541.2** | ** **    | **$**      | **(32.3**          | **)**      | **$**              | **222.4**  | ** ** | **$** | **(2.9** | **)** | **$** | **—** | ** ** |

 

See Notes to Consolidated FinancialStatements

 

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**MONTPELIERRE HOLDINGS LTD.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In  millions of U.S. dollars)**                                                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Cash flows from operations:**                                                             | ** ** | ** **                       |       |   |   |   |   |
| Net  income (loss)                                                                          | ** ** | **$**                            | **463.5**  |   | $ | (143.6 | ) | $ | 347.7 |   |
| Charges  (credits) to reconcile net income (loss) to net cash from operations:              | ** ** | ** **                       |       |   |   |   |   |
| Excess  of fair value of acquired net assets over cost - Blue Ocean                         | ** ** | **—**                       |       | (1.0 | ) | — |   |
| Gain  on early extinguishment of debt                                                       | ** ** | **(5.9**                         | **)**      | — |   | — |   |
| Net  realized and unrealized investment (gains) losses                                      | ** ** | **(181.8**                       | **)**      | 244.9 |   | (26.5 | ) |
| Net  realized and unrealized (gains) losses on investment-related derivative  instruments   | ** ** | **(8.1**                         | **)**      | 1.8 |   | — |   |
| Net  amortization (accretion) and depreciation of assets and liabilities                    | ** ** | **10.3**                         |       | (0.1 | ) | (7.0 | ) |
| Expense  recognized for RSUs and DSUs                                                       | ** ** | **14.8**                         |       | 8.3 |   | 8.2 |   |
| Net  change in:                                                                             | ** ** | ** **                       |       |   |   |   |   |
| Loss  and loss adjustment expense reserves, net of amounts acquired                         | ** ** | **(130.1**                       | **)**      | (39.9 | ) | (248.7 | ) |
| Reinsurance  recoverable on paid and unpaid losses, net of amounts acquired                 | ** ** | **47.9**                         |       | 4.6 |   | 56.0 |   |
| Unearned  premium                                                                           | ** ** | **19.1**                         |       | 13.4 |   | (31.8 | ) |
| Insurance  and reinsurance balances payable                                                 | ** ** | **(8.2**                         | **)**      | 4.0 |   | (36.5 | ) |
| Unearned  premium ceded                                                                     | ** ** | **7.1**                          |       | (0.4 | ) | 23.4 |   |
| Deferred  acquisition costs                                                                 | ** ** | **(7.7**                         | **)**      | (3.7 | ) | 2.6 |   |
| Premiums  receivable                                                                        | ** ** | **8.3**                          |       | (19.0 | ) | 11.2 |   |
| Accounts  payable, accrued expenses and other liabilities                                   | ** ** | **8.3**                          |       | (4.1 | ) | 4.7 |   |
| Other                                                                                       | ** ** | **(4.4**                         | **)**      | 8.1 |   | (3.2 | ) |
| **Net cash provided from operations**                                                       | ** ** | **233.1**                        |       | 73.3 |   | 100.1 |   |
| **Cash flows from investing activities:**                                                   | ** ** | ** **                       |       |   |   |   |   |
| Purchases  of fixed maturity investments                                                    | ** ** | **(2,347.9**                     | **)**      | (1,773.8 | ) | (1,399.7 | ) |
| Purchases  of equity securities                                                             | ** ** | **(311.8**                       | **)**      | (474.3 | ) | (72.5 | ) |
| Purchases  of other investments                                                             | ** ** | **(95.7**                        | **)**      | (150.9 | ) | (53.4 | ) |
| Sales,  maturities, calls and pay downs of fixed maturity investments                       | ** ** | **1,954.3**                      |       | 2,075.4 |   | 1,851.0 |   |
| Sales  and redemptions of equity securities                                                 | ** ** | **485.8**                        |       | 350.4 |   | 66.5 |   |
| Sales  and redemptions of other investments                                                 | ** ** | **166.5**                        |       | 20.0 |   | — |   |
| Settlements  of investment-related derivative instruments                                   | ** ** | **9.5**                          |       | (1.8 | ) | — |   |
| Purchase  of MUSIC, net of cash acquired                                                    | ** ** | **—**                       |       | — |   | (6.7 | ) |
| Net  disposition of securities lending collateral                                           | ** ** | **—**                       |       | 192.4 |   | 122.3 |   |
| Net  change in restricted cash                                                              | ** ** | **(33.8**                        | **)**      | 27.2 |   | — |   |
| Acquisitions  of capitalized assets                                                         | ** ** | **(2.5**                         | **)**      | (14.9 | ) | (6.9 | ) |
| **Net cash (used for) provided from investing activities**                                  | ** ** | **(175.6**                       | **)**      | 249.7 |   | 500.6 |   |
| **Cash flows from financing activities:**                                                   | ** ** | ** **                       |       |   |   |   |   |
| Repurchases  and scheduled repayments of debt                                               | ** ** | **(15.1**                        | **)**      | (75.0 | ) | — |   |
| Repurchases  of Common Shares and warrants                                                  | ** ** | **(112.6**                       | **)**      | (129.8 | ) | (124.7 | ) |
| Settlement  of Forward Sale Agreements                                                      | ** ** | **32.0**                         |       | — |   | — |   |
| Amendment  of Forward Sale Agreement                                                        | ** ** | **—**                       |       | — |   | (3.9 | ) |
| Dividends  paid on Common Shares and warrants                                               | ** ** | **(26.2**                        | **)**      | (28.4 | ) | (29.9 | ) |
| Purchase  of noncontrolling interest in Blue Ocean                                          | ** ** | **—**                       |       | (30.5 | ) | — |   |
| Distributions  to and repurchases from Blue Ocean’s noncontrolling common shareholders | ** ** | **—**                       |       | (38.1 | ) | (135.2 | ) |
| Dividends  to and repurchases from Blue Ocean’s noncontrolling preferred shareholders  | ** ** | **—**                       |       | (21.0 | ) | (46.4 | ) |
| Change  in securities lending payable                                                       | ** ** | **—**                       |       | (193.4 | ) | (122.3 | ) |
| **Net cash used for financing activities**                                                  | ** ** | **(121.9**                       | **)**      | (516.2 | ) | (462.4 | ) |
| **Effect of exchange rate fluctuations on cash and cash  equivalents**                      | ** ** | **5.6**                          |       | 0.9 |   | 1.8 |   |
| **Net (decrease) increase in cash and cash equivalents during  the year**                   | ** ** | **(58.8**                        | **)**      | (192.3 | ) | 140.1 |   |
| Cash  and cash equivalents - beginning of year                                              | ** ** | **260.9**                        |       | 453.2 |   | 313.1 |   |
| **Cash and cash equivalents - end of year**                                                 | ** ** | **$**                            | **202.1**  |   | $ | 260.9 |   | $ | 453.2 |   |

 

See Notes to Consolidated FinancialStatements

 

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Expressed in millions of United States (“U.S.”)Dollars,**

**except per share amounts or as otherwise described)**

 

**NOTE 1.****            ****Summary ofSignificant Accounting Policies**

 

***Basis of presentation***

 

Montpelier Re Holdings Ltd. (the “Company” or the “Registrant”) wasincorporated as an exempted Bermuda limited liability company under the laws ofBermuda on November 14, 2001.  TheCompany, through its subsidiaries in Bermuda, the United States (the “U.S.”),the United Kingdom (the “U.K.”) and Switzerland (collectively “Montpelier”),provides customized and innovative insurance and reinsurance solutions to theglobal market.  The Company’sheadquarters and principal executive offices are located at Montpelier House,94 Pitts Bay Road Pembroke, Bermuda HM 08.

 

The Company currently operates through three reportable segments:Montpelier Bermuda, Montpelier Syndicate 5151 and MUSIC.  Prior to its liquidation and dissolution in2009, Blue Ocean constituted a fourth reportable segment.  Each segment is a separate underwritingplatform through which the Company writes insurance and reinsurance business.The segment disclosures provided herein present the operations of MontpelierBermuda, Montpelier Syndicate 5151 and MUSIC prior to the effects ofintercompany quota share reinsurance agreements among them.

 

Detailed financial information about each of the Company’s reportablesegments for the three years ended December 31, 2009 is presented in Note13. The activities of the Company and certain of its intermediate holding andservice companies, collectively referred to as “Corporate and Other,” are alsopresented.

 

The nature and composition of each of the Company’s reportable segmentsand its Corporate and Other activities are as follows:

 

*Montpelier Bermuda*

 

The Montpelier Bermuda segment consists of the collective assets andoperations of Montpelier Reinsurance Ltd. (“Montpelier Re”) and Montpelier MarketingServices Limited (“MMSL”).

 

Montpelier Re, the Company’s principal wholly-owned operatingsubsidiary based in Pembroke, Bermuda, is registered as a Bermuda Class 4insurer.  Montpelier Re seeks to identifyand underwrite attractive insurance and reinsurance opportunities by utilizingproprietary risk pricing and capital allocation models and catastrophe modelingtools.

 

MMSL, the Company’s wholly-owned U.K. subsidiary based in London,provides marketing services to Montpelier Re.

 

*Montpelier Syndicate 5151*

 

The Montpelier Syndicate 5151 segment consists of the collective assetsand operations of Montpelier Syndicate 5151 (“Syndicate 5151”), MontpelierCapital Limited  (“MCL”),  Montpelier Underwriting Agencies Limited (“MUAL”),Montpelier Underwriting Services Limited (“MUSL”), Montpelier Underwriting Inc.(“MUI”), Montpelier Europa AG (“MEAG”) and Paladin Underwriting Agency Limited(“PUAL”).

 

Syndicate 5151, the Company’s wholly-owned Lloyd’s of London (“Lloyd’s”)syndicate based in London, was established in July 2007. Syndicate 5151underwrites primarily short-tail lines, mainly property insurance andreinsurance, engineering, marine hull, cargo and specie and a limited amount ofspecialty casualty classes sourced from the London, U.S. and European markets.

 

MCL, the Company’s wholly-owned U.K. subsidiary based in London, servesas Syndicate 5151’s sole corporate member.

 

MUAL, the Company’s wholly-owned Lloyd’s Managing Agent based inLondon, has managed Syndicate 5151 since January 1, 2009. Through December 31,2008, Syndicate 5151 was managed by Spectrum Syndicate Management Limited (“Spectrum”),a third-party Lloyd’s Managing Agent, also based in London.

 

MUSL, the Company’s wholly-owned subsidiary based in London, providessupport services to Syndicate 5151 and MUAL.

 

MUI,  MEAG and PUAL serve as theCompany’s wholly-owned Lloyd’s Coverholders. Each Coverholder is authorized to enter into contracts of insurance andreinsurance and/or issue documentation on behalf of Syndicate 5151. MUI, the Company’swholly-owned U.S. subsidiary based in Hartford, Connecticut, underwritesinsurance and reinsurance 

 

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business on behalf of Syndicate 5151 through managing general agentsand intermediaries with a focus on treaty business.  MEAG, the Company’s wholly-owned Swisssubsidiary based in Zug, Switzerland, focuses on insurance and reinsurancemarkets in Continental Europe and the Middle East on behalf of Syndicate 5151and  Montpelier Re.  PUAL, the Company’s newly formed,wholly-owned U.K. subsidiary based in London, underwrites business on behalf ofboth Syndicate 5151 and third parties, with a focus on specialist contractors,recycling and crime classes of business. PUAL wrote no business that incepted during the periods presentedherein.

 

*MUSIC*

 

The MUSIC segment consists solely of the assets and operations ofMontpelier U.S. Insurance Company (“MUSIC”), the Company’s wholly-owned U.S.subsidiary based in Scottsdale, Arizona.

 

MUSIC, formerly known as General Agents Insurance Company of America, Inc.,is an Oklahoma domiciled stock property and casualty insurance corporation thatwe acquired from GAINSCO, Inc. (“GAINSCO”) in November  2007.  MUSIC is a domestic surplus lines insurer inOklahoma and is authorized as an excess and surplus lines insurer in 47 additionalstates and the District of Columbia.  Atthe time of acquisition, MUSIC had no employees or in force premium. MUSICunderwrites smaller commercial property and casualty risks that do not conformto standard insurance lines.

 

*Blue Ocean*

 

The Blue Ocean segment consisted of the collective assets andoperations of Blue Ocean Re Holdings Ltd. (“Blue Ocean”) and Blue OceanReinsurance Ltd. (“Blue Ocean Re”).

 

Blue Ocean, formerly the Company’s wholly-owned Bermuda subsidiarybased in Pembroke, Bermuda, was liquidated and dissolved in December 2009.  Blue Ocean served as the holding company forBlue Ocean Re which was also based in Pembroke, Bermuda. Blue Ocean Re had, inthe past, provided property catastrophe retrocessional reinsurance and wasformerly registered as a Bermuda Class 3 insurer. Blue Ocean Re wasderegistered as a Bermuda insurer in 2008 and was subsequently amalgamated intoBlue Ocean.

 

The Company acquired all the outstanding share capital of BlueOcean  in June 2008 (the “Blue OceanTransaction”).  Prior to the Blue OceanTransaction, the Company owned 42.2% of Blue Ocean’s outstanding common shares.Prior to Blue Ocean’s repurchase of all its outstanding preferred shares in January 2008,the Company owned 33.6% of such preferred shares.

 

Prior to Blue Ocean becoming a wholly-owned subsidiary it wasconsolidated into the Company’s financial statements.

 

*Corporate and Other*

 

The Company’s Corporate and Other activities consist of the assets andoperations of the Company and certain of its intermediate holding and servicecompanies, including Montpelier Technical Resources Ltd. (“MTR”) and MontpelierAgency Ltd. (“MAL”).

 

MTR, the Company’s wholly-owned U.S. subsidiary with its main officesin Woburn, Massachusetts and Hanover, New Hampshire, provides accounting,finance, risk management, information technology, internal audit, humanresources and advisory services to many of the Company’s subsidiaries.

 

MAL, the Company’s wholly-owned Bermuda subsidiary based in Pembroke,Bermuda, provided Blue Ocean Re with underwriting, risk management, claimsmanagement, ceded retrocession agreement management, actuarial and accountingservices.  MAL has conducted nosignificant operations subsequent to the Blue Ocean Transaction.

 

The Company’s consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the U.S. (“GAAP”).  All significant intercompany transactions andbalances have been eliminated on consolidation. The preparation of financialstatements in accordance with GAAP requires management to make estimates andassumptions that affect reported and disclosed amounts of assets andliabilities, as well as disclosure of contingent assets and liabilities asof  the balance sheet date and thereported amounts of revenues and expenses during the reporting period. Estimatesalso affect the reported amounts of income and expenses for the reportingperiod. Actual results could differ materially from those estimates. The majorestimates reflected in the Company’s consolidated financial statements include,but are not limited to, loss and loss adjustment expense (“LAE”) reserves,written and earned premiums, ceded reinsurance and share based compensation.

 

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***Premiums and related costs***

 

Reinsurance contracts can be written on a risks-attaching orlosses-occurring basis. Under risks-attaching reinsurance contracts, all claimsfrom cedants’ underlying policies incepting during the contract period arecovered, even if they occur after the expiration date of the reinsurancecontract. In contrast, losses-occurring reinsurance contracts cover all claimsoccurring during the period of the contract, regardless of the inception datesof the underlying policies. Any claims occurring after the expiration of thelosses-occurring contract are not covered.

 

Premiums written are recognized as revenues, net of any applicableunderlying reinsurance coverage, and are earned over the term of the relatedpolicy or contract.  For direct insurance,and facultative and losses-occurring contracts, the earnings period is the sameas the reinsurance contract. For risks-attaching contracts, the earnings periodis based on the terms of the underlying insurance policies.

 

For contracts that have a risk period of three years or less, thepremiums are earned ratably over the term. For the relatively few contractswith risk periods greater than three years, premiums are earned in accordancewith predetermined schedules that reflect the level of risk associated witheach period in the contract term. These schedules are reviewed periodically andare adjusted as deemed necessary.

 

For the majority of Montpelier’s excess-of-loss contracts, writtenpremium is based on the deposit or minimum premium as defined in the contract.Subsequent adjustments, based on reports of actual premium or revisions inestimates by ceding companies, are recorded in the period in which they aredetermined.  For Montpelier’s pro-ratacontracts and excess-of-loss contracts where no deposit or minimum premium isspecified in the contract, written premium is recognized based on estimates ofultimate premiums provided by the ceding companies. Initial estimates ofwritten premium are recognized in the period in which the underlying risks incept.Subsequent adjustments, based on reports of actual premium by the cedingcompanies, or revisions in estimates, are recorded in the period in which theyare determined. Unearned premiums represent the portion of premiums writtenthat are applicable to future insurance or reinsurance coverage provided bypolicies or contracts in force.

 

Premiums receivable are recorded at amounts due less any provision fordoubtful accounts.  As of December 31,2009 and 2008, Montpelier’s provision for doubtful accounts was $2.3 millionand $0.8 million, respectively.

 

When a reinsurance contract provides for a reinstatement of coveragefollowing a covered loss, the associated reinstatement premium is recorded asboth written and earned when Montpelier determines that such a loss event hasoccurred.

 

Deferred acquisition costs are comprised of ceding commissions,brokerage, premium taxes and excise taxes, each of which relates directly tothe writing of insurance and reinsurance contracts. These deferred acquisitioncosts are generally amortized over the underlying risk period of the relatedcontracts. However, if the sum of a contract’s expected losses and LAE, anddeferred acquisition costs exceeds related unearned premiums and projectedinvestment income, a premium deficiency is determined to exist. In this event,deferred acquisition costs are immediately expensed to the extent necessary toeliminate the premium deficiency.  If thepremium deficiency exceeds deferred acquisition costs then a liability isaccrued for the excess deficiency. During the years ended December 31, 2009, 2008 and 2007, Montpelierrecorded increases (reductions) in its premium deficiency of $(0.7) million$0.1 and $0.9 million, respectively, related to the operations of Syndicate5151.

 

Included in acquisition costs are profit commissions incurred. Accruedprofit commissions are included in insurance and reinsurance balances payable.

 

***Loss and LAE reserves***

 

Montpelier maintains reserves for losses and LAE to cover the estimatedliability for both reported and unreported claims. A significant portion ofMontpelier’s current business is in the Property Catastrophe - Treaty class ofbusiness and other classes with high attachment points of coverage. As aresult, reserving for losses relating to such programs can be imprecise.Montpelier’s exposures are also highly leveraged, meaning that the proportionalimpact of any change in the estimate of total loss incurred by the cedent ismagnified in the layers at which Montpelier’s coverage attaches.  Additionally, the high-severity,low-frequency nature of the exposures limits the volume of claims experienceavailable from which to reliably predict ultimate losses following a lossevent, and renders certain traditional loss estimation techniques inapplicable.

 

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Loss and loss adjustment expense reserves for all classes of businessinclude components for reported claims (“case reserves”) and losses incurredbut not reported (“IBNR”). Case reserve estimates are initially set on thebasis of loss reports received from third parties. Estimated IBNR reservesconsist of a provision for additional development in excess of the casereserves reported by ceding companies as well as a provision for claims whichhave occurred but which have not yet been reported to us by ceding companies.IBNR reserves are estimated by management using various actuarial methods aswell as a combination of Montpelier’s own loss experience, historical insuranceindustry loss experience and management’s professional judgment. Montpelier’sinternal actuaries review the reserving assumptions and methodologies on aquarterly basis and its loss estimates are subject to an annual corroborativereview by independent actuaries using generally accepted actuarial principles.

 

The uncertainties inherent in the reserving process, reliance anddelays in ceding companies reporting losses, together with the potential forunforeseen adverse developments, may result in loss and LAE reserves ultimatelybeing significantly greater or less than the reserve provided at the end of anygiven reporting period. The degree of uncertainty is further increased when asignificant loss event takes place near the end of a reporting period. Loss andloss adjustment expense reserve estimates are regularly reviewed and updated asnew information becomes known. Any resulting adjustments are reflected inincome in the period in which they become known.

 

***Ceded reinsurance***

 

In the normal course of business, Montpelier purchases reinsurance fromthird parties in order to manage its exposures. The amount of ceded reinsurancethat Montpelier buys varies from year-to-year depending on its risk appetite,as well as the availability and cost of the reinsurance coverage. Reinsurancepremiums ceded are accounted for on a basis consistent with those used inaccounting for the underlying premiums assumed, and are reported as a reductionof net premiums written. Certain of Montpelier’s assumed pro-rata contractsincorporate reinsurance protection provided by third-party reinsurers thatinures to Montpelier’s benefit. These reinsurance premiums are reported as areduction in gross premiums written.

 

The cost of reinsurance purchased varies based on a number of factors.The initial premium associated with excess-of-loss reinsurance is generallybased on the underlying premiums assumed by Montpelier. As these reinsurancecontracts are typically purchased prior to the time the assumed risks arewritten, ceded premium recorded in the period of inception reflects an estimateof the amount that Montpelier will ultimately pay. In the majority of cases,the premium initially recorded is subsequently adjusted to reflect premiumactually assumed by Montpelier during the contract period. These adjustmentsare recorded in the period that they are determined, and to date they have notbeen significant. In addition, losses which pierce excess-of-loss reinsurancecover may generate reinstatement premium ceded, depending on the terms of thecontract. This reinstatement premium ceded is recognized as written andexpensed at the time the reinsurance recovery is estimated and recorded.

 

The cost of quota share reinsurance is initially based on Montpelier’sestimated gross premium written related to the specific lines of businesscovered by the reinsurance contract. As gross premiums are written during theperiod of coverage, reinsurance premiums ceded are adjusted in accordance withthe terms of the quota share agreement.

 

Reinsurance recoverable on paid losses represent amounts currently duefrom reinsurers.  Reinsurance recoverableon unpaid losses represent amounts collectible from reinsurers once the lossesare paid.  The recognition of reinsurancerecoverable requires two key judgments. The first judgment involves theestimation of the amount of gross IBNR to be ceded to reinsurers. Ceded IBNR isgenerally developed as part of Montpelier’s loss reserving process andconsequently, its estimation is subject to similar risks and uncertainties asthe estimation of gross IBNR.  The secondjudgment relates to the amount of the reinsurance recoverable balance thatultimately will not be collected from reinsurers due to insolvency, contractualdispute, or other reasons.

 

***Investments and cash***

 

During 2007 the Company adopted accounting guidance issued by the FASBaddressing fair value measurements. As a result of this adoption, all ofMontpelier’s fixed maturity investments and equity securities are carried atfair value, with the net unrealized appreciation or depreciation on suchsecurities reported within net realized and unrealized gains (losses) in theCompany’s statement of operations. Prior to the adoption of this accountingguidance, a significant portion of Montpelier’s fixed maturity investments andequity securities were carried at fair value and classified asavailable-for-sale, with the net unrealized appreciation or depreciation onsuch securities reported as a separate component of shareholders’ equity andchanges therein reported as a component of other comprehensive income.

 

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Investments are recorded on a trade date basis. The fair value of theinvestment portfolio is determined based on bid prices (as opposed to askprices), which are not adjusted for transaction costs. Gains and losses onsales of investments are determined on the first-in, first-out basis and areincluded in income when realized. Realized gains and losses typically resultfrom the actual sale of securities. Unrealized gains and losses represent thegain or loss that would result from a hypothetical sale of securities on thereporting date. In instances where the Company becomes aware of a significantunrealized loss with little or no likelihood of recovery, it writes down thecost basis of the investment and recognizes the loss as being realized.

 

Some of Montpelier’s investment managers are entitled to performancefees determined as a percentage of the portfolio’s net total return achievedover specified periods. Montpelier’s net realized and unrealized investmentgains and net income (expense) from derivative instruments are presented net ofany associated performance fees. During 2009, Montpelier incurred performancefees related to investments and investment-related derivative instruments of$8.3 million and $1.4 million, respectively. See Note 15. No performance feeswere incurred during 2008 or 2007.

 

Other investments are carried at either fair value or on the equitymethod of accounting (which is based on underlying net asset values) andconsist primarily of investments in limited partnership interests and privateinvestment funds, event-linked securities (“CAT Bonds”), private placements andcertain derivative instruments.  SeeNotes 5 and 7.

 

Cash and cash equivalents include cash and fixed income investmentswith maturities of less than three months, as measured from the date ofpurchase. Restricted cash of $40.9 million at December 31, 2009 consistedof $39.4 million of collateral supporting open short sale investment andderivative positions and $1.5 million of overseas deposit accounts held atLloyd’s. Restricted cash of $7.1 million at December 31, 2008 consisted of$6.8 million of collateral supporting open short sale investment positions and$0.3 million of overseas deposit accounts held at Lloyd’s.

 

Net investment income is stated net of investment management, custodyand other investment-related expenses. Investment income is recognized whenearned and includes interest and dividend income together with the amortizationof premiums and the accretion of discounts on fixed maturities purchased atamounts different from their par value.

 

In August 2008 Montpelier terminated its securities lendingprogram resulting in a realized loss of $1.0 million.  See Note 5. Prior to the termination, Montpelier lent certain of its fixed maturityinvestments to other institutions for short periods of time through a lendingagent and received a fee from the borrower for the temporary use of thesecurities.

 

***Common shares held in treasury***

 

In May  2008 shareholders approved the adoption of the Company’sSecond Amended and Restated Bye-laws (the “Amended Bye-laws”). The AmendedBye-laws incorporated various provisions of The Bermuda Companies Amendment Actof 2006 which, among other things, enabled the Company to hold its commonshares (“Common Shares”) in treasury.

 

The Company’s treasury shares are carried at cost and any resultinggain or loss on subsequent issuances is determined on a last-in, first-outbasis.  As of December 31, 2009 and2008, the Company had inception-to-date gains from issuances of its treasuryshares of $2.9 million and $1.2 million, respectively, which has been recordedas additional paid-in capital. See Note 9.

 

***Funds withheld***

 

Funds withheld by reinsured companies represent insurance balancesretained by ceding companies in accordance with contractual terms. Montpeliertypically earns investment income on these balances during the period the fundsare held.  At December 31, 2009 and2008, funds withheld balances of $4.0 and $2.5 million, respectively, wererecorded within other assets on the Company’s consolidated balance sheets.

 

***Earnings per share***

 

In calculating earnings per share, the Company’s outstanding  Restricted Share Units (“RSUs”) and DirectorShare Unit (“DSUs”) are considered to be participating securities.  See Note 10.

 

For purposes of determining earnings per share, the Company’s earningsper share numerators are reduced by net income attributable to noncontrollinginterests, the portion of current earnings allocated to participatingsecurities and dividends declared on any outstanding warrants to acquire CommonShares.

 

The Company’s per share denominator is based on the average number ofCommon Shares outstanding, less average Common Shares issued under the ShareIssuance Agreement, plus average vested participating securities.

 

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The following table outlines the Company’s computation of earnings pershare for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Earnings per share numerators:**                                       | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Net  income (loss) attributable to the Company before extraordinary item | ** ** | **$**                            | **463.5**  |   | $ | (146.5 | ) | $ | 315.8 |   |
| Excess  of fair value of acquired net assets over cost - Blue Ocean      |       | —                           |       | 1.0 |   | — |   |
| Net  income (loss) attributable to the Company                           | ** ** | **$**                            | **463.5**  |   | $ | (145.5 | ) | $ | 315.8 |   |
| Less:  net earnings allocated to participating securities                | ** ** | **(8.6**                         | **)**      | — |   | (2.7 | ) |
| Less:  dividends declared on outstanding warrants                        |       | —                           |       | — |   | (0.5 | ) |
| Net  income (loss) attributable to common shareholders                   | ** ** | **$**                            | **454.9**  |   | $ | (145.5 | ) | $ | 312.6 |   |
| **Earnings per share denominator (Millions of Common Shares):**          | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Average  Common Shares outstanding                                       | ** ** | **86.2**                         |       | 93.6 |   | 105.3 |   |
| Less:  average Common Shares under the Share Issuance Agreement          | ** ** | **(1.3**                         | **)**      | (7.9 | ) | (10.5 | ) |
| Average  vested participating securities                                 |       | —                           |       | 0.4 |   | 0.1 |   |
| Earnings  per share denominator                                          | ** ** | **84.9**                         |       | 86.1 |   | 94.9 |   |
| Per  share data:                                                         | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| Net  income (loss) attributable to the Company before extraordinary item | ** ** | **$**                            | **5.36**   |   | $ | (1.70 | ) | $ | 3.29 |   |
| Excess  of fair value of acquired net assets over cost - Blue Ocean      |       | —                           |       | .01 |   | — |   |
| Basic  and diluted earnings per share                                    | ** ** | **$**                            | **5.36**   |   | $ | (1.69 | ) | $ | 3.29 |   |

 

In December 2008 the Company amended certain outstanding RSUawards to accelerate the distribution of the underlying Common Shares tocoincide more closely to their vesting date. See Note 10. As a result of thisamendment, beginning in 2009, the Company no longer has any vestedparticipating securities outstanding at any given time.

 

***Noncontrolling interest***

 

Prior to Blue Ocean becoming a wholly-owned subsidiary of theCompany in 2008, the portion of Blue Ocean’s equity not owned by the Companywas considered to be owned by Blue Ocean’s noncontrolling shareholders. SeeNote 8.

 

***Foreign currency exchange***

 

The U.S. dollar is the Company’s reporting currency.  The British pound is the functional currencyfor the operations of Syndicate 5151, MUAL, PUAL, MCL, MUSL and MMSL and theSwiss franc is the functional currency for the operations of MEAG. The U.S.dollar is the functional currency for all other operations. The assets andliabilities of these foreign operations are translated to U.S. dollars atexchange rates in effect at the balance sheet date, and the related revenuesand expenses are converted using average exchange rates for the period. Netforeign exchange gains and losses arising from translating these foreignoperations into U.S. dollars are reported as a separate component ofshareholders’ equity, with changes therein reported as a component of other comprehensiveincome.

 

The following rates of exchange to the U.S. dollar were used totranslate the results of the Company’s U.K. and Swiss operations:

 
| **Currency**         | ** ** | **Closing Rate********December 31, 2007** | ** ** | **Closing Rate********December 31, 2008** | ** ** | **Closing Rate********December 31, 2009** | ** ** |
|----------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| British  pound (GBP) |       | 1.9843                                         |       | 1.4592                                         |       | 1.5948                                         |       |
| Swiss  franc (CHF)   |       | 0.8827                                         |       | 0.9357                                         |       | 0.9647                                         |       |

 

Other transactions involving certain monetary assets and liabilitiesdenominated in foreign currencies have been translated into U.S. dollars atexchange rates in effect at the balance sheet date, and the related revenuesand expenses are converted using either specific or average exchange rates forthe period, as appropriate.  Net foreignexchange gains and losses arising from these activities are reported as a componentof net income in the period in which they arise.

 

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Table of Contents

 

***Changes in accounting principles andrecent accounting pronouncements***

 

In March 2008 the Financial Accounting Standards Board (the “FASB”)issued new accounting guidance on disclosures about derivative instruments andhedging activities. The new guidance was effective for fiscal years beginningafter November 15, 2008. The new guidance amended and enhanced thedisclosure requirements for derivative instruments and hedging activities.Entities are required to provide enhanced disclosures about: (i) how andwhy the entity uses derivative instruments; (ii) how derivativeinstruments and related hedged items are accounted for; and (iii) howderivative instruments and related hedged items affect the entity’s financialposition, financial performance, and cash flows. The Company’s adoption of thisguidance had no impact on the presentation of the Company’s operations orfinancial condition and did not significantly impact the Company’s disclosuresregarding derivative instruments.

 

In June 2008 the FASB issued new accounting guidance oninstruments granted in share-based payment transactions. This new guidance waseffective for fiscal years beginning after December 15, 2008, andaddresses whether instruments granted in share based payment transactions areparticipating securities prior to vesting and therefore need to be included inthe earnings allocation in computing earnings per share under the two-classmethod. The requirements of this new guidance did not impact the Company’sdetermination of earnings per share.

 

In October 2008 the FASB issued new accounting guidance ondetermining the fair value of a financial asset when the market for that assetis not active. This new guidance did not materially impact the presentation ofthe Company’s operations or financial condition.

 

In the first quarter of 2009 the Company adopted new accountingguidance for noncontrolling interests. As a result of this adoption, incomeattributable to noncontrolling interests, formerly referred to as “minorityinterest,” is now included in “net income before extraordinary item”, with “netincome attributable to the Company,” presented as a separate line on theCompany’s consolidated statements of operations. Prior to this adoption,minority interest represented an expense that served to reduce net income.  For the year ended December 31, 2009,the Company did not have any net income attributable to noncontrollinginterests. For the years ended December 31, 2008 and 2007, the Company hadnet income attributable to noncontrolling interests in Blue Ocean of $1.9million and $31.9 million, respectively. The new guidance also requiresnoncontrolling interests to be presented as a component of shareholders’ equityon the balance sheet, shown separately from the equity attributable to theCompany’s shareholders.  Prior to thisadoption, the Company’s minority interest was presented separately from itsliabilities and shareholders’ equity. The Company did not have any equity innoncontrolling interests as of December 31, 2009 and 2008.

 

In April 2009 the FASB issued new accounting guidance that outlinesfactors to be considered by a reporting entity in determining whether a marketfor an asset or liability is active. Factors indicating inactivity in a marketinclude: few recent transactions; price quotations that are not based oncurrent information or which vary substantially over time or among marketmakers; a significant increase in implied liquidity risk premiums, yields orperformance indicators; a wide bid-ask spread; and a significant decline orabsence of a market for new issuances or limited information released publicly.In circumstances where the reporting entity concludes that there has been asignificant decrease in the volume of market activity for an asset or liabilityas compared to normal market activity, transactions or quoted prices may notreflect fair value. In such circumstances, the new guidance requires analysisof the transactions or quoted prices and, where appropriate, adjustment toestimate fair value. In addition, the new guidance expands interim disclosuresto require a description of the inputs and valuation techniques used toestimate fair value and a discussion of changes during the period. The Companyadopted this new guidance during the second quarter of  2009. This adoption did not have a materialimpact on the presentation of the Company’s operations or financial position.

 

In April 2009 the FASB issued new accounting guidance requiringdisclosures about the fair value of certain financial instruments for interimreporting periods. The Company adopted this guidance during the second quarterof  2009.

 

In May 2009 the FASB issued new accounting guidance requiringcompanies to evaluate events or transactions that occur after the balance sheetdate through the date that the financial statements are issued or available tobe issued. This guidance did not materially change the manner in which theCompany reports subsequent events, either through recognition or disclosure.The Company adopted this guidance during the second quarter of  2009.

 

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In June 2009 the FASB approved the *FASB Accounting Standards Codification* (the “Codification”)as the single source of authoritative nongovernmental U.S. GAAP.  The Codification was effective for financialstatements that cover interim and annual periods ending after September 15,2009. The Codification was not designed to change U.S. GAAP other than byresolving certain minor inconsistencies that previously existed. Rather it isintended to make it easier to find and research GAAP applicable to a particulartransaction or specific accounting issue.

 

In June 2009 the FASB issued new accounting guidance which willchange the way entities account for securitizations and special-purposeentities. The new guidance will require more information about transfers offinancial assets, including securitization transactions, and where companieshave continuing exposure to the risks related to transferred financial assets.It eliminates the concept of a qualifying special-purpose entity, changes therequirements for derecognizing financial assets, and requires additionaldisclosures. The new guidance will also change how a company determines when anentity that is insufficiently capitalized or is not controlled through voting(or similar rights) should be consolidated. The new guidance will impact thebalance sheets of certain financial institutions beginning in 2010, and is notexpected to have a material impact on the presentation of the Company’soperations or financial condition.

 

In September 2009 the FASB issued new accounting guidance on usingnet asset values per share provided by investees to estimate the fair value ofalternative investments. The guidance permits an entity to use net asset valueas a practical expedient on an investment-by-investment basis and also requiresdisclosure about the attributes of such investments. This guidance, which the Company adopted during the fourthquarter of 2009, did not have a material impact on the presentation of theCompany’s operations or financial position. The Company’s enhanced disclosureresulting from this new accounting guidance is incorporated in Note 5.

 

In January 2010 the FASB issued new accounting guidance intendedto improve disclosures about fair value measurements. As discussed in Note 5,U.S. GAAP establishes a hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value into three broad levels. The newly issuedaccounting guidance adds requirements for disclosures about transfers into andout of these levels, as well as for separate disclosures about purchases,sales, issuances and settlements relating to one of these levels. As thisguidance relates exclusively to financial statement disclosure, it will nothave an impact on the presentation of the Company’s operations or financialposition.

 

**NOTE 2.****            ****Acquisitionof MUSIC**

 

On November 1, 2007, Montpelier completed its acquisition of MUSICfor $9.8 million in cash (the “MUSIC Acquisition”).  The assets and liabilities acquired pursuantto the MUSIC Acquisition, each at fair value, included $8.6 million of cash andinvestments, $20.2 million of reinsurance recoverables, $20.2 million of lossand LAE reserves and $3.6 million of other liabilities.  The acquisition of MUSIC did not constitutethe acquisition of a significant subsidiary as defined under Rule 1-02(w) ofRegulation S-X.

 

In connection with the MUSICAcquisition, Montpelier recorded a $4.8 million intangible asset representingthe fair value of MUSIC’s excess and surplus lines authorizationsacquired.  This intangible asset isconsidered by Montpelier to have an indefinite useful life.  As such, the intangible asset will not beamortized but will be tested no less than annually for impairment.  If the carrying amount of the intangibleasset is greater than the fair values established during impairment testing,the carrying value will be immediately written-down to the fair value with acorresponding impairment loss recognized in the Company’s consolidatedstatement of operations.  Through December 31,2009, the Company has not recognized any impairment to this intangible asset.

 

Prior to the MUSIC Acquisition, MUSIC wrote general liability,commercial auto liability, specialty and umbrella lines of business. From 2003to 2007 MUSIC did not write any new business and entered into run-off.  The gross loss and LAE reserves we acquiredare subject to various protective arrangements that we entered into inconnection with the MUSIC Acquisition. These protective arrangements wereestablished specifically for the purpose of minimizing our exposure to the pastbusiness underwritten by MUSIC and any adverse developments to MUSIC’s lossreserves as they existed at the time of the acquisition.

 

As of December 31, 2009, MUSIC had remaining gross loss and LAEreserves relating to business underwritten prior to the MUSIC Acquisition of$6.1 million (the “Acquired Reserves”). In support of the Acquired Reserves, atDecember 31, 2009, MUSIC held a trust deposit maintained by GAINSCO andreinsurance recoverable from third-party reinsurers rated “A-” (Excellent) orbetter by A.M. Best in a combined amount exceeding $6.1 million. Inaddition, the Company has the benefit of a full indemnity from GAINSCO coveringany adverse development from its past business. If the Acquired Reserves wereto develop unfavorably during future periods and the various protectivearrangements, including GAINSCO’s indemnity, ultimately proved to beinsufficient, these liabilities would become the Company’s responsibility.

 

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**NOTE 3.****            ****Unpaid Lossand LAE Reserves**

 

The following table summarizes Montpelier’s unpaid loss and LAE reserveactivities for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross  loss and LAE reserves - beginning              | ** ** | **$**                            | **808.9**  |   | $ | 860.7 |   | $ | 1,089.2 |   |
| Reinsurance  recoverable on unpaid losses - beginning | ** ** | **(122.9**                       | **)**      | (152.5 | ) | (197.3 | ) |
| Net  loss and LAE reserves - beginning                | ** ** | **686.0**                        |       | 708.2 |   | 891.9 |   |
|                                                  |       |                             |       |   |   |   |   |
| Losses  and LAE incurred relating to:                 |       |                             |       |   |   |   |   |
| Current  year losses                                  | ** ** | **214.4**                        |       | 399.2 |   | 213.9 |   |
| Prior  year losses                                    | ** ** | **(75.7**                        | **)**      | (104.1 | ) | (36.4 | ) |
| Total  incurred losses and LAE                        | ** ** | **138.7**                        |       | 295.1 |   | 177.5 |   |
|                                                  |       |                             |       |   |   |   |   |
| Net  impact of foreign currency movements             | ** ** | **(0.5**                         | **)**      | 0.6 |   | — |   |
|                                                  |       |                             |       |   |   |   |   |
| Loss  and LAE paid:                                   |       |                             |       |   |   |   |   |
| Current  year losses                                  | ** ** | **(30.1**                        | **)**      | (125.4 | ) | (26.0 | ) |
| Prior  year losses                                    | ** ** | **(182.9**                       | **)**      | (192.5 | ) | (335.2 | ) |
| Total  loss and LAE paid                              | ** ** | **(213.0**                       | **)**      | (317.9 | ) | (361.2 | ) |
|                                                  |       |                             |       |   |   |   |   |
| Net  loss and LAE reserves - ending                   | ** ** | **611.2**                        |       | 686.0 |   | 708.2 |   |
| Reinsurance  recoverable on unpaid losses - ending    | ** ** | **69.6**                         |       | 122.9 |   | 152.5 |   |
| Gross  loss and LAE reserves - ending                 | ** ** | **$**                            | **680.8**  |   | $ | 808.9 |   | $ | 860.7 |   |

 

***Loss and LAE development — 2009***

 

During the year ended December 31, 2009, Montpelier experienced$75.7 million in net favorable development on prior year loss and LAE reservesrelating to the following loss events:

 

·      2005 Hurricanes Katrina,Rita and Wilma ($10.9 million decrease),

·      2008 Hurricane Ike ($6.4million decrease),

·      2005 explosion ($4.5 millionsubrogation recovery),

·      2007 California wildfires($4.0 million decrease),

·      2007 mining accident (claimsettlement resulting in a $3.8 million decrease),

·      2007 European windstormKyrill and U.K. floods (decreases of $2.4 million each).

 

The remaining favorable development on prior year loss and LAE reservesrelated to smaller adjustments made across multiple lines of business.

 

***Loss and LAE development — 2008***

 

During the year ended December 31, 2008, Montpelier experienced$104.1 million in net favorable development on prior year loss and LAE reservesrelating to the following loss events:

 

·      2005 Hurricanes Katrina,Rita and Wilma ($16.8 million decrease),

·      2007 U.K. floods ($14.2million decrease),

·      2007 European windstormKyrill ($6.2 million decrease),

·      2005 train crash ($8.0million subrogation recovery),

·      2007 Australia floods ($2.4million decrease),

·      2007 California wildfires($2.2 million decrease),

·      2004 hurricanes ($1.6million decrease),

·      2007 Cyclone Gonu ($1.4million decrease),

·      Several large individualrisk losses ($26.1 million decrease),

·      Reductions in medicalmalpractice reserves made in response to cedant-specific reported lossinformation received in subsequent years ($9.8 million decrease).

 

The remaining favorable development on prior year loss and LAE reservesrelated to smaller adjustments made across multiple lines of business.

 

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***Loss and LAE development — 2007***

 

During the year ended December 31, 2007, Montpelier experienced$36.4 million in net favorable development on prior year loss and LAE reserves.This decrease was primarily the result of IBNR releases across multiple linesof business.

 

Montpelier’s reserving process is highly dependent on the lossinformation received from its cedants. With respect to the prior year lossdevelopment reported during 2009, 2008 and 2007, the information and experienceobtained subsequent to the last reporting date incorporated changes in lossamounts reported by ceding companies, as well as reductions in IBNR recorded asa result of loss advices and other information and events.

 

The following table outlines Montpelier’s composition of its gross andnet ending loss and LAE reserves as of December 31, 2009 and 2008:

 
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Component of ending gross loss and LAE reserves:** | ** ** | ** **            |       |   |   |
| IBNR  reserves                                       | ** ** | **$**                 | **450.0**  |   | $ | 429.8 |   |
| Case  reserves                                       | ** ** | **230.8**             |       | 379.1 |   |
| Gross  Loss and LAE reserves                         | ** ** | **$**                 | **680.8**  | ** ** | $ | 808.9 | ** ** |
| ** **                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Component of ending net loss and LAE reserves:**   | ** ** | ** **            |       |   |   |
| IBNR  reserves                                       | ** ** | **$**                 | **411.6**  |   | $ | 370.5 |   |
| Case  reserves                                       | ** ** | **199.6**             |       | 315.5 |   |
| Net  Loss and LAE reserves                           | ** ** | **$**                 | **611.2**  |   | $ | 686.0 |   |

 

**NOTE 4.****            ****CededReinsurance With Third Parties**

 

In the normal course of business, Montpelier purchases reinsurance fromthird parties in order to manage its exposures. The amount of ceded reinsurance that Montpelier buys varies fromyear-to-year depending on its risk appetite, availability and cost.  All of Montpelier’s reinsurance purchases todate have represented prospective cover, meaning that the coverage has beenpurchased to protect us against the risk of future losses as opposed tocovering losses that have already occurred but have not yet paid. The majorityof Montpelier’s reinsurance contracts are excess-of-loss contracts covering oneor more lines of business. To a lesser extent, Montpelier has also purchasedquota share reinsurance with respect to specific lines of its business.Montpelier also purchases industry loss warranty policies which providecoverage for certain losses incurred, provided they are triggered by eventsexceeding a specified industry loss size as well as Montpelier’s own incurredloss. For non-Industry Loss Warranty excess-of-loss reinsurance contracts, theattachment point and exhaustion of these contracts are based solely on theamount of Montpelier’s actual losses incurred from an event or events.

 

In addition, for certain pro-rata contracts that Montpelier entersinto, the associated direct insurance contracts carry underlying reinsuranceprotection from third-party reinsurers, known as inuring reinsurance, whichMontpelier nets against its gross premiums written.

 

Montpelier remains liable for losses it incurs to the extent that anythird-party reinsurer is unable or unwilling to make timely payments underreinsurance agreements.  Montpelier wouldbe liable in the event that the ceding companies are unable to collect amountsdue from underlying third-party reinsurers.

 

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Tableof Contents

 

The effects of reinsurance on Montpelier’s written and earned premiumsand on losses and LAE were as follows:

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Premiums  written:    | ** ** | ** **                       |       |   |   |   |   |
| Direct                | ** ** | **$**                            | **74.3**   |   | $ | 51.7 |   | $ | 42.3 |   |
| Assumed               | ** ** | **560.6**                        |       | 568.4 |   | 611.5 |   |
| Ceded                 | ** ** | **(32.7**                        | **)**      | (78.9 | ) | (104.8 | ) |
| Net  premiums written | ** ** | **$**                            | **602.2**  |   | $ | 541.2 |   | $ | 549.0 |   |
| Premiums  earned:     | ** ** | ** **                       |       |   |   |   |   |
| Direct                | ** ** | **$**                            | **56.3**   |   | $ | 43.9 |   | $ | 48.4 |   |
| Assumed               | ** ** | **557.2**                        |       | 563.1 |   | 636.9 |   |
| Ceded                 | ** ** | **(40.3**                        | **)**      | (78.5 | ) | (128.1 | ) |
| Net  premiums earned  | ** ** | **$**                            | **573.2**  |   | $ | 528.5 |   | $ | 557.2 |   |
| Loss  and LAE:        | ** ** | ** **                       |       |   |   |   |   |
| Direct                | ** ** | **$**                            | **24.9**   |   | $ | 28.7 |   | $ | (1.2 | ) |
| Assumed               | ** ** | **85.7**                         |       | 295.7 |   | 185.6 |   |
| Ceded                 | ** ** | **28.1**                         |       | (29.3 | ) | (6.9 | ) |
| Net  loss and LAE     | ** ** | **$**                            | **138.7**  |   | $ | 295.1 |   | $ | 177.5 |   |

 

Under Montpelier’s reinsurance security policy, reinsurers aregenerally required to be rated “A-” (Excellent) or better by A.M. Best (oran equivalent rating with another recognized rating agency) at the time thepolicy is written. Montpelier also considers reinsurers that are not rated ordo not fall within the above threshold on a case-by-case basis whencollateralized up to policy limits, net of any premiums owed.  Montpelier monitors the financial conditionand ratings of its reinsurers on an ongoing basis.

 

Montpelier records provisions for uncollectible reinsurance recoverablewhen collection becomes unlikely due to the reinsurer’s inability to pay.  Montpelier does not believe that there areany amounts uncollectible from its reinsurers at this time.

 

Certain of Montpelier’s ceded reinsurance contracts provide forrecoveries of additional premiums, reinstatement premiums and for foregoneno-claims bonuses, which are incurred when losses are ceded to thesereinsurance contracts.

 

The A.M. Best ratings of Montpelier’s reinsurers related toreinsurance recoverable on paid losses at December 31, 2009 and 2008, areas follows:

 
| ** **                                    | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Rating**                                    | ** ** | **Amount**                 | ** ** | **% of Total**             | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| A++                                           | ** ** | **$**                      | **—** | ** **                 | **—** | **%** | $ | 29.3 |   | 81 | % |
| A+                                            | ** ** | **42.7**                   | ** ** | **96**                     |       | 0.5 |   | 1 |   |
| A                                             | ** ** | **1.7**                    | ** ** | **4**                      |       | 0.8 |   | 2 |   |
| A-                                            | ** ** | **0.1**                    | ** ** | **—**                 |       | 5.8 |   | 16 |   |
| Total  reinsurance recoverable on paid losses | ** ** | **$**                      | **44.5**   | ** **                 | **100**    | **%** | $ | 36.4 |   | 100 | % |

 

The A.M. Best ratings of Montpelier’s reinsurers related toreinsurance recoverable on unpaid losses at December 31, 2009 and 2008,are as follows:

 
| ** **                                      | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Rating**                                      | ** ** | **Amount**                 | ** ** | **% of Total**             | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| A++                                             | ** ** | **$**                      | **0.4**    | ** **                 | **1**      | **%** | $ | 27.9 |   | 23 | % |
| A+                                              | ** ** | **27.7**                   | ** ** | **40**                     |       | 17.9 |   | 15 |   |
| A                                               | ** ** | **30.1**                   | ** ** | **43**                     |       | 38.6 |   | 31 |   |
| A-                                              | ** ** | **2.3**                    | ** ** | **3**                      |       | 8.1 |   | 7 |   |
| Unrated  by A.M. Best                      | ** ** | **3.0**                    | ** ** | **4**                      |       | 21.6 |   | 17 |   |
| Recoverable  under MUSIC guarantee (See Note 2) | ** ** | **6.1**                    | ** ** | **9**                      |       | 8.8 |   | 7 |   |
| Total  reinsurance recoverable on unpaid losses | ** ** | **$**                      | **69.6**   | ** **                 | **100**    | **%** | $ | 122.9 |   | 100 | % |

 

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Montpelier is subject to litigation and arbitration proceedings in thenormal course of its business.  Suchproceedings generally involve insurance or reinsurance contract disputes whichare typical for the property and casualty insurance and reinsurance industry ingeneral and are considered in connection with Montpelier’s net loss and LAEreserves.

 

On October 17, 2007, following the failure ofcontractually-mandated mediation, Montpelier Re received a notice ofarbitration from Manufacturers Property and Casualty Limited (“MPCL”), asubsidiary of Manulife Financial Corporation of Toronto, Canada (“Manulife”).  The notice involves two contracts pursuant towhich Montpelier Re purchased reinsurance protection from MPCL (the “DisputedContracts”).  MPCL seeks in thearbitration to rescind, in whole or in part, the Disputed Contracts, and seeksfurther relief, including but not limited to attorney fees and interest.

 

The hearings in the arbitration were concluded in February of 2010and we are currently awaiting the decision of the arbitrators.

 

The Company continues to believe that MPCL’s case is without merit andthat the Disputed Contracts are fully enforceable. In addition, Montpelier Rehas sought relief from MPCL for attorney fees and interest costs.

 

In the event that MPCL is awarded full rescission of the DisputedContracts, in addition to any relief that Montpelier Re could be ordered toprovide MPCL, Montpelier Re would be required to: (i) assume the unpaidceded losses expected to be incurred under the Disputed Contracts which, net ofreinsurance premiums earned and accrued, total $47.5 million; and (ii) assume(and repay to MPCL) the paid ceded losses incurred under the Disputed Contractswhich, net of deposit, reinstatement and additional premiums, total $26.3million.

 

**NOTE 5.    Investments**

 

***Fixed maturity Investments andEquity Securities***

 

The table below shows the aggregate cost (or amortized cost) and fairvalue of Montpelier’s fixed maturity investments and equity securities, byinvestment type, as of the dates indicated:

 
| ** **                                                               | ** ** | **December 31, 2009**         | ** **  | **December 31, 2008** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------|-------------|----------------------------|------------|
| ** **                                                               | ** ** | **Cost or  Amortized********Cost** | ** **  | **Fair********Value**      | ** ** | **Cost or  Amortized********Cost** | ** ** | **Fair********Value** | ** ** |
| **Fixed maturity investments:**                                          | ** ** | ** **                         |        |                       |       |   |   |   |   |
| Residential  mortgage-backed securities                                  | ** ** | **$**                              | **651.7**   |                       | $          | **653.6** |   | $ | 445.5 |   | $ | 442.9 |   |
| Corporate  debt securities                                               | ** ** | **537.1**                          | ** **  | **571.7**                  |       | 484.1 |   | 460.5 |   |
| Debt  securities issued by the U.S. Treasury and its agencies            | ** ** | **461.4**                          | ** **  | **461.0**                  |       | 343.8 |   | 345.5 |   |
| U.S.  government-sponsored enterprise securities                         | ** ** | **336.1**                          | ** **  | **335.2**                  |       | 206.5 |   | 209.2 |   |
| Commercial  mortgage-backed securities                                   | ** ** | **66.8**                           | ** **  | **63.0**                   |       | 77.9 |   | 67.2 |   |
| Debt  securities issued by states of the U.S. and political subdivisions | ** ** | **24.0**                           | ** **  | **24.6**                   |       | 90.1 |   | 92.2 |   |
| Other  debt obligations                                                  | ** ** | **100.7**                          | ** **  | **98.4**                   |       | 107.9 |   | 89.1 |   |
| Total  fixed maturity investments                                        | ** ** | **$**                              | **2,177.8** |                       | $          | **2,207.5** |   | $ | 1,755.8 |   | $ | 1,706.6 |   |
|                                                                     |       |                               |        |                       |       |   |   |   |   |
| **Equity securities:**                                                   | ** ** | ** **                         | ** **  | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Energy                                                                   | ** ** | **$**                              | **35.2**    |                       | $          | **44.3** |   | $ | 44.6 |   | $ | 32.3 |   |
| Financial                                                                | ** ** | **33.9**                           | ** **  | **38.1**                   |       | 56.8 |   | 46.4 |   |
| Technology                                                               | ** ** | **23.2**                           | ** **  | **26.9**                   |       | 31.7 |   | 25.2 |   |
| Consumer  goods                                                          | ** ** | **15.9**                           | ** **  | **18.0**                   |       | 72.1 |   | 54.1 |   |
| Materials                                                                | ** ** | **15.9**                           | ** **  | **16.1**                   |       | 37.8 |   | 26.5 |   |
| Other                                                                    | ** ** | **26.2**                           | ** **  | **23.8**                   |       | 67.0 |   | 57.8 |   |
| Total  equity securities                                                 | ** ** | **$**                              | **150.3**   |                       | $          | **167.2** |   | $ | 310.0 |   | $ | 242.3 |   |

 

As of December 31, 2009, 86% of Montpelier’s fixed maturityinvestments were either rated “A” (Strong) or better by Standard &Poor’s or represented U.S. government or U.S. government-sponsored enterprisesecurities, 13% were rated “BBB” (Good) or below by Standard & Poor’sand 1% were unrated and primarily represented participations in secured bankloans.

 

F-16

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Table ofContents

 

In addition to the equity securities presented above, Montpelier alsohad open short equity positions recorded within its other liabilities of $38.6million and $5.9 million at December 31, 2009 and 2008, respectively, withassociated net unrealized gains (losses) of $(0.5) million and $0.9 million,respectively.

 

The contractual maturity of Montpelier’s fixed maturity investments at December 31,2009 and 2008 is presented below:

 
| ** **                                   | ** ** | **December 31, 2009** | ** **  | **December 31, 2008** | ** ** |
|----------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                   | ** ** | **Amortized********Cost**  | ** **  | **Fair********Value**      | ** ** | **Amortized********Cost** | ** ** | **Fair********Value** | ** ** |
| Fixed maturity  investments:                 | ** ** | ** **                 | ** **  | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Due  in one year or less                     | ** ** | **$**                      | **244.4**   | ** **                 | **$**      | **248.3** |   | $ | 386.4 |   | $ | 387.1 |   |
| Due  after one year through five years       | ** ** | **828.6**                  | ** **  | **842.6**                  |       | 503.4 |   | 491.9 |   |
| Due  after five years through ten years      | ** ** | **244.2**                  | ** **  | **253.4**                  |       | 152.1 |   | 147.2 |   |
| Due  after ten years                         | ** ** | **41.5**                   | ** **  | **48.2**                   |       | 82.6 |   | 81.2 |   |
| Mortgage-backed  and asset-backed securities | ** ** | **819.2**                  | ** **  | **815.0**                  |       | 631.3 |   | 599.2 |   |
| Total  fixed maturity investments            | ** ** | **$**                      | **2,177.8** |                       | $          | **2,207.5** |   | $ | 1,755.8 |   | $ | 1,706.6 |   |

 

***Other Investments***

 

Montpelier’s investments in limited partnership interests and privateinvestment funds are carried at either their fair value or their underlying netasset value, depending on Montpelier’s ownership share. For those funds carriedat fair value, the underlying net asset value is used as a best estimate offair value.  Montpelier’s CAT Bonds,private placement and derivative instruments are carried at fair value.  The table below shows the aggregate cost andcarrying value of Montpelier’s other investments, by investment type, as of thedates indicated:

 
| ** **                                     | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **Cost**                   | ** ** | **Carrying********Value**  | ** ** | **Cost** | ** ** | **Carrying********Value** | ** ** |
| Other  investments carried at net asset value: | ** ** | ** **                 | ** ** | ** **                 |       |   |   |   |   |
| Limited  partnership interests and other       | ** ** | **$**                      | **33.9**   | ** **                 | **$**      | **33.9** |   | $ | 46.4 |   | $ | 46.3 |   |
|                                           | ** ** | ** **                 | ** ** | ** **                 |       |   |   |   |   |
| Other  investments carried at fair value:      | ** ** | ** **                 | ** ** | ** **                 |       |   |   |   |   |
| CAT  Bonds                                     | ** ** | **$**                      | **10.0**   | ** **                 | **$**      | **10.0** |   | $ | 66.3 |   | $ | 60.9 |   |
| Limited  partnership interests                 | ** ** | **27.9**                   | ** ** | **26.5**                   |       | 23.2 |   | 17.1 |   |
| Symetra  common shares                         | ** ** | **20.0**                   | ** ** | **22.6**                   |       | 20.0 |   | 23.2 |   |
| Derivative  instruments                        | ** ** | **3.3**                    | ** ** | **1.1**                    |       | 0.3 |   | 0.8 |   |
| Total  other investments carried at fair value | ** ** | **$**                      | **61.2**   | ** **                 | **$**      | **60.2** |   | $ | 109.8 |   | $ | 102.0 |   |
|                                           | ** ** | ** **                 | ** ** | ** **                 |       |   |   |   |   |
| Other  investments                             | ** ** | **$**                      | **95.1**   | ** **                 | **$**      | **94.1** |   | $ | 156.2 |   | $ | 148.3 |   |

 

Montpelier’s limited partnership and private investment fund income andthe net appreciation or depreciation on CAT Bonds is reported as net realizedand unrealized gains (losses) in the Company’s consolidated statements ofoperations. The net appreciation or depreciation on Montpelier’s derivativeinstruments is reported as net revenue (expense) from derivative instruments.

 

Montpelier’s interests in limited partnerships and private investmentfunds that are carried at fair value relate to vehicles that invest indistressed mortgages. Redemptions from these investments occur at thediscretion of the investment manager or, in other cases, subject to a unanimousvote of the partners. Montpelier does not expect to redeem a significantportion of these investments prior to 2012.

 

Montpelier’s investment in the common stock of Symetra FinancialCorporation (“Symetra”) was acquired in a private placement in 2004. Through December 31,2009, the net appreciation or depreciation on Symetra was reported as aseparate component of shareholders’ equity, with changes therein reported as acomponent of other comprehensive income. Symetra has been routinely reviewed to determine if it has sustained animpairment in value that is considered to be other than temporary. Montpelierhas not recognized any impairment on its investment in Symetra during theperiods presented herein.

 

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Tableof Contents

 

In January 2010, Symetra’s common shares began trading on the NewYork Stock Exchange under symbol “SYA”. As a result, beginning in the first quarter of 2010, Montpelier’sinvestment in Symetra will be presented as an equity security on the Company’sconsolidated balance sheets and changes in its fair value will be recorded asnet realized and unrealized gains (losses) on the Company’s consolidatedstatements of operations.

 

CAT Bonds are debt instruments whose principal and interest areforgiven if specified trigger events occur.**** In May 2008, Montpelier purchased the CATBonds underlying its former CAT Bond Facility for $71.6 million. See Note7.  During June 2009, Montpeliersold its remaining CAT Bonds and, in October 2009, Montpelier purchased$10.0 million of additional CAT Bonds.

 

Montpelier also entered into various investment option and futurescontracts during 2008 and 2009.  See Note7.

 

***Fair Value Hierarchy***

 

U.S. GAAP establishes a hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value into the three broad levelsdescribed below. The level in the hierarchy within which a given fair valuemeasurement falls is determined based on the lowest level input that issignificant to the measurement.

 

·          Level 1 inputs - unadjusted,quoted prices in active markets for identical assets or liabilities.

 

·          Level 2 inputs - informationother than quoted prices included within Level 1 that is observable for theasset or liability, either directly or indirectly. Level 2 inputs includequoted prices for similar assets or liabilities in active markets, quotedprices for identical or similar assets or liabilities in markets that are notactive, and observable inputs other than quoted prices, such as interest ratesand yield curves.

 

·          Level 3 inputs —unobservable inputs.

 

The Company uses an independent service provider to assist the Companywith its investment accounting function. This service provider, as well as theCompany’s investment managers, in turn use several pricing services and brokersto assist with the determination of the fair value of the Company’s marketablesecurities. The ultimate pricing source varies based on the security andpricing service, but investments valued on the basis of observable (Levels 1and 2) inputs are generally assigned values on the corroborative basis usingmultiple prices derived from actual transactions. Securities valued on thebasis of non-binding broker quotes are classified as Level 3.

 

In accordance with U.S. GAAP, the valuation techniques used byMontpelier and its pricing services maximize the use of observable inputs;unobservable inputs are used to measure fair value only to the extent thatobservable inputs are unavailable. Montpelier uses the market approach andincome approach valuation techniques. There have been no changes in the Company’suse of valuation techniques since its adoption of the relevant accountingguidance.

 

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Table of Contents

 

The following tables present Montpelier’s investments carried at fairvalue, categorized by the level within the hierarchy in which the fair valuemeasurements fall, at December 31, 2009 and 2008.

 

| ** **                                                        | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                        | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total Fair  Value** | ** ** |
| Fixed  maturity investments:                                      |       |                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential  mortgage-backed securities                           |       | $                          | 3.3        |   | $ | 589.8 |   | $ | 60.5 | ** ** | **$** | **653.6** | ** ** |
| Corporate  debt securities                                        |       | —                     |       | 493.0 |   | 78.7 | ** ** | **571.7** | ** ** |
| Debt  securities issued by the U.S. Treasury and its agencies     |       | 287.3                      |       | 173.7 |   | — | ** ** | **461.0** | ** ** |
| U.S.  government-sponsored enterprise securities                  |       | —                     |       | 335.2 |   | — | ** ** | **335.2** | ** ** |
| Commercial  mortgage-backed securities                            |       | —                     |       | 63.0 |   | — | ** ** | **63.0** | ** ** |
| Debt  securities issued by U.S. states and political subdivisions |       | —                     |       | 24.6 |   | — | ** ** | **24.6** | ** ** |
| Other  debt obligations                                           |       | —                     |       | 88.1 |   | 10.3 | ** ** | **98.4** | ** ** |
| Total  fixed maturity investments                                 |       | $                          | 290.6      |   | $ | 1,767.4 |   | $ | 149.5 | ** ** | **$** | **2,207.5** | ** ** |
|                                                              |       |                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity  securities:                                               |       |                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Energy                                                            |       | $                          | 44.3       |   | $ | — |   | $ | — | ** ** | **$** | **44.3** | ** ** |
| Financial                                                         |       | 28.9                       |       | 5.2 |   | 4.0 | ** ** | **38.1** | ** ** |
| Technology                                                        |       | 26.1                       |       | 1.5 |   | — | ** ** | **27.6** | ** ** |
| Consumer  goods                                                   |       | 17.7                       |       | 0.3 |   | — | ** ** | **18.0** | ** ** |
| Materials                                                         |       | 16.0                       |       | 0.1 |   | — | ** ** | **16.1** | ** ** |
| Other                                                             |       | 22.4                       |       | 0.7 |   | — | ** ** | **23.1** | ** ** |
| Total  equity securities                                          |       | $                          | 155.4      |   | $ | 7.8 |   | $ | 4.0 | ** ** | **$** | **167.2** | ** ** |
|                                                              |       |                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other  investments                                                |       | $                          | —     |   | $ | 11.1 |   | $ | 49.1 | ** ** | **$** | **60.2** | ** ** |
| Total  investments                                                |       | $                          | 446.0      |   | $ | 1,786.3 |   | $ | 202.6 | ** ** | **$** | **2,434.9** | ** ** |

 
| ** **                                                        | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                        | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total Fair  Value** | ** ** |
| Fixed  maturity investments:                                      |       |                       |       |   |   |   |   |   |   |
| Residential  mortgage-backed securities                           |       | $                          | —     |   | $ | 428.1 |   | $ | 14.8 | ** ** | **$** | 442.9 | ** ** |
| Corporate  debt securities                                        |       | —                     |       | 333.8 |   | 126.7 |   | 460.5 |   |
| Debt  securities issued by the U.S. Treasury and its agencies     |       | 218.4                      |       | 127.1 |   | — |   | 345.5 |   |
| U.S.  government-sponsored enterprise securities                  |       | —                     |       | 209.2 |   | — |   | 209.2 |   |
| Commercial  mortgage-backed securities                            |       | —                     |       | 67.2 |   | — |   | 67.2 |   |
| Debt  securities issued by U.S. states and political subdivisions |       | —                     |       | 92.2 |   | — |   | 92.2 |   |
| Other  debt obligations                                           |       | —                     |       | 71.7 |   | 17.4 |   | 89.1 |   |
| Total  fixed maturity investments                                 |       | $                          | 218.4      |   | $ | 1,329.3 |   | $ | 158.9 |   | $ | 1,706.6 |   |
|                                                              |       |                       |       |   |   |   | ** ** | ** ** | ** ** |
| Equity  securities by sector:                                     |       |                       |       |   |   |   | ** ** | ** ** | ** ** |
| Energy                                                            |       | $                          | 32.3       |   | $ | — |   | $ | — |   | $ | 32.3 |   |
| Financial                                                         |       | 43.7                       |       | 1.7 |   | 1.0 |   | 46.4 |   |
| Technology                                                        |       | 25.2                       |       | — |   | — |   | 25.2 |   |
| Consumer  goods                                                   |       | 52.5                       |       | 1.6 |   | — |   | 54.1 |   |
| Materials                                                         |       | 26.5                       |       | — |   | — |   | 26.5 |   |
| Other                                                             |       | 56.4                       |       | 1.0 |   | 0.4 |   | 57.8 |   |
| Total  equity securities                                          |       | $                          | 236.6      |   | $ | 4.3 |   | $ | 1.4 |   | $ | 242.3 |   |
|                                                              |       |                       |       |   |   |   | ** ** | ** ** | ** ** |
| Other  investments                                                |       | $                          | —     |   | $ | 71.0 |   | $ | 31.0 |   | $ | 102.0 |   |
| Total  investments                                                |       | $                          | 455.0      |   | $ | 1,404.6 |   | $ | 191.3 | ** ** | **$** | 2,050.9 | ** ** |

 

Montpelier’s open short equity positions are valued on the basis ofLevel 1 inputs.

 

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Table of Contents

 

Investments classified as Level 3 as of December 31, 2009 and 2008primarily consisted of the following: (i) with respect to fixed maturityinvestments, certain corporate bonds, bank loans and asset-backed securities,many of which are not publicly traded or are not actively traded; (ii) withrespect to equity securities, preferred instruments and non-U.S. equitysecurities; and (iii) with respect to other investments, Montpelier’sinvestment in Symetra and certain limited partnerships.

 

As of December 31, 2009 and 2008, the Company’s Level 3investments represented 8.3% and 9.3% of its total investments measured at fairvalue, respectively. During 2008 and 2009, increased pricing transparencyassociated with certain of Montpelier’s fixed maturities historicallyclassified as Level 3 resulted in a shift of such investments to Level 2.  During the first quarter of 2010, Montpelier’sinvestment in Symetra common shares will be reclassified from Level 3 to Level1.

 

The following tables present a reconciliation of the beginning andending balances for all investments measured at fair value on a recurring basisusing Level 3 inputs during the year ended December 31, 2009 and 2008:

 

| ** **                                                        | ** ** | **Year Ended December 31, 2009**            | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **Beginning********Level 3********balance** | ** ** | **Net  payments,  purchases  and sales** | ** ** | **Net realized  losses** | ** ** | **Net  unrealized  gains  (losses)** | ** ** | **Net  transfers in  (out)** | ** ** | **Ending********Level 3  balance** | ** ** |
| Fixed  maturity investments:                                      |       |                                             |       |   |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Residential  mortgage-backed securities                           |       | $                                                | 14.8       |   | $ | 76.9 |   | $ | — |   | $ | (0.1 | ) | $ | (31.1 | ) | **$** | **60.5** | ** ** |
| Commercial  mortgage-backed securities                            |       | —                                           |       | — |   | — |   | — |   | — | ** ** | **—** | ** ** |
| Corporate  debt securities                                        |       | 126.7                                            |       | 11.7 |   | (1.0 | ) | 23.6 |   | (82.3 | ) | **78.7** | ** ** |
| Debt  securities issued by the U.S. Treasury and its agencies     |       | —                                           |       | — |   | — |   | — |   | — | ** ** | **—** | ** ** |
| Debt  securities issued by U.S. states and political subdivisions |       | —                                           |       | — |   | — |   | — |   | — | ** ** | **—** | ** ** |
| Other  debt obligations                                           |       | 17.4                                             |       | (7.0 | ) | — |   | — |   | (0.1 | ) | **10.3** | ** ** |
| Total  fixed maturity investments                                 |       | $                                                | 158.9      |   | $ | 81.6 |   | $ | (1.0 | ) | $ | 23.5 |   | $ | (113.6 | ) | **$** | **149.5** | ** ** |
|                                                              |       |                                             |       |   |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Equity  securities:                                               |       |                                             |       |   |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Consumer  goods                                                   |       | $                                                | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — | ** ** | **$** | **—** | ** ** |
| Financial                                                         |       | 1.0                                              |       | 3.0 |   | — |   | — |   | — | ** ** | **4.0** | ** ** |
| Energy                                                            |       | —                                           |       | — |   | — |   | — |   | — | ** ** | **—** | ** ** |
| Materials                                                         |       | —                                           |       | — |   | — |   | — |   | — | ** ** | **—** | ** ** |
| Technology                                                        |       | —                                           |       | — |   | — |   | — |   | — | ** ** | **—** | ** ** |
| Other                                                             |       | 0.4                                              |       | (0.4 | ) | — |   | — |   | — | ** ** | **—** | ** ** |
| Total  equity securities                                          |       | $                                                | 1.4        |   | $ | 2.6 |   | $ | — |   | $ | — |   | $ | — | ** ** | **$** | **4.0** | ** ** |
|                                                              |       |                                             |       |   |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Other  investments                                                |       | $                                                | 31.0       |   | $ | 3.5 |   | $ | — |   | $ | 2.2 |   | $ | 12.4 | ** ** | **$** | **49.1** | ** ** |
| Total  investments                                                | ** ** | **$**                                            | 191.3      |   | $ | 87.7 |   | $ | (1.0 | ) | $ | 25.7 |   | $ | (101.2 | ) | **$** | **202.6** | ** ** |

 

| ** **                         | ** ** | **Year Ended December 31, 2008** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **Fixed  Maturity  Investments**      | ** ** | **Equity  Securities** | ** ** | **Other  Investments** | ** ** | **Securities  Lending  Collateral** | ** ** | **Total Fair  Value** | ** ** |
| Beginning  Level 3 balance         |       | $                                     | 193.0      |   | $ | — |   | $ | 22.3 |   | $ | 99.7 |   | $ | 315.0 |   |
| Net  payments, purchases and sales |       | 98.2                                  |       | 3.8 |   | (1.0 | ) | (98.4 | ) | 2.6 |   |
| Net  realized gains (losses)       |       | —                                |       | 0.1 |   | (0.3 | ) | (0.9 | ) | (1.1 | ) |
| Net  unrealized gains (losses)     |       | (27.3                                 | )          | (2.5 | ) | 1.0 |   | 0.3 |   | (28.5 | ) |
| Net  transfers in (out)            |       | (105.0                                | )          | — |   | 9.0 |   | (0.7 | ) | (96.7 | ) |
| Ending  Level 3 balance            |       | $                                     | 158.9      |   | $ | 1.4 |   | $ | 31.0 |   | $ | — |   | $ | 191.3 |   |

 

F-20

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Table of Contents

 

***Changes in Carrying Value***

 

Changes in the carrying value of Montpelier’s investment portfolio andits short equity positions for the years ended December 31, 2009, 2008 and2007, consisted of the following:

 

| ** **                                 | ** ** | **Net Realized  Gains (Losses)  on Investments** | ** ** | **Net Unrealized  Gains (Losses)  on Investments** | ** ** | **Net Foreign  Exchange and  Derivative  Income  (Expense) From  Investments (1)** | ** ** | **Total Changes  in Carrying  Value Reflected  in Earnings** | ** ** | **Changes in  Carrying Value  Reflected in  Other  Comprehensive  Income** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **Year Ended December 31, 2009****:** |       |                                                            |       |                                                              |       |                                                                                                   | ** ** | ** **                                                                       | ** ** | ** **                                                                                | ** ** |
| Fixed  maturity investments                |       | $                                                               | 25.4       |                                                              | $          | 78.8                                                                                                   |       | $                                                                                | 0.3        | ** **                                                                                | **$**      | **104.5** | ** ** | **$** | **—** | ** ** |
| Equity  securities                         |       | —                                                          |       | 74.6                                                              |       | (2.3                                                                                                   | )          | **72.3**                                                                         | ** ** | **—**                                                                                | ** ** |
| Other  investments                         |       | (5.5                                                            | )          | 8.5                                                               |       | 7.5                                                                                                    | ** ** | **10.5**                                                                         | ** ** | **(0.5**                                                                                  | **)**      |
| Year  Ended December 31, 2008:        |       |                                                            |       |                                                              |       |                                                                                                   | ** ** | ** **                                                                       | ** ** | ** **                                                                                | ** ** |
| Fixed  maturity investments                |       | $                                                               | (22.2      | )                                                                 | $          | (60.6                                                                                                  | )          | $                                                                                | 1.3        |                                                                                      | $          | (81.5 | ) | $ | — |   |
| Equity  securities                         |       | (5.9                                                            | )          | (97.6                                                             | )          | (4.4                                                                                                   | )          | (107.9                                                                           | )          | —                                                                                    |       |
| Other  investments                         |       | (44.5                                                           | )          | (14.5                                                             | )          | (2.3                                                                                                   | )          | (61.3                                                                            | )          | 0.9                                                                                       |       |
| Securities  lending                        |       | (1.0                                                            | )          | 1.4                                                               |       | —                                                                                                 |       | 0.4                                                                              |       | —                                                                                    |       |
| Year  Ended December 31, 2007:        |       |                                                            |       |                                                              |       |                                                                                                   |       |                                                                             |       |                                                                                      |       |
| Fixed  maturity investments                |       | $                                                               | 6.0        |                                                              | $          | 15.3                                                                                                   |       | $                                                                                | 2.4        |                                                                                      | $          | 23.7 |   | $ | — |   |
| Equity  securities                         |       | 20.6                                                            |       | (13.1                                                             | )          | 3.7                                                                                                    |       | 11.2                                                                             |       | —                                                                                    |       |
| Other  investments                         |       | —                                                          |       | (0.9                                                              | )          | 3.2                                                                                                    |       | 2.3                                                                              |       | (1.6                                                                                      | )          |
| Securities  lending                        |       | —                                                          |       | (1.4                                                              | )          | —                                                                                                 |       | (1.4                                                                             | )          | —                                                                                    |       |

 

----

(1)          Represents realized andunrealized foreign exchange gains from investments and income (expense) derivedfrom the Company’s investments in the CAT Bond Facility, Foreign ExchangeContracts and Investment Options and Futures (See Note 7).  These derivatives are carried at fair valueas other investments in the Company’s consolidated balance sheets.

 

***Net Investment Income***

 

Montpelier’s net investment income for 2009, 2008 and 2007 consisted ofthe following:

 

| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Fixed  maturity investments | ** ** | **$**                            | **83.2**   |   | $ | 80.0 |   | $ | 123.8 |   |
| Cash  and cash equivalents  | ** ** | **0.5**                          |       | 3.7 |   | 10.5 |   |
| Equity  securities          | ** ** | **3.0**                          |       | 5.4 |   | 5.1 |   |
| Other  investments          | ** ** | **2.3**                          |       | 4.7 |   | — |   |
| Securities  lending income  | ** ** | **—**                       |       | 0.4 |   | 0.4 |   |
| Total  investment income    | ** ** | **89.0**                         |       | 94.2 |   | 139.8 |   |
| Investment  expenses        | ** ** | **(8.0**                         | **)**      | (7.8 | ) | (7.3 | ) |
| Net  investment income      | ** ** | **$**                            | **81.0**   |   | $ | 86.4 |   | $ | 132.5 |   |

 

***Other matters***

 

Some of Montpelier’s investment managers are entitled to performancefees determined as a percentage of the portfolio’s net total return achievedover specified periods. Montpelier’s net realized and unrealized investmentgains and net income (expense) from derivative instruments are presented net ofany associated performance fees. See Note 1.

 

Sales of investments totaled $1,820.1 million, $1,774.0 million and $1,271.1million for the years ended December 31, 2009, 2008, and 2007,respectively.  Maturities, calls andpaydowns of investments totaled $786.5 million, $672.1 million and $646.4million for the years ended December 31, 2009, 2008 and 2007, respectively.There were no non-cash exchanges or involuntary sales of investment securitiesduring 2009, 2008 or 2007.

 

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MUSIC is required to maintain deposits with certain insuranceregulatory agencies in the U.S. in order to maintain its insurancelicenses.  The fair value of suchdeposits totaled $6.8 million, $4.5 million and $4.8 million at December 31,2009, 2008 and 2007, respectively.

 

**NOTE 6.  Debtand Other Financing Arrangements**

 

***Senior Debt (“Senior Notes”)***

 

During 2003, the Company issued $250.0 million in senior unsecureddebt. The Senior Notes bear interest at a fixed rate of 6.125% per annum,payable semi-annually in arrears on February 15 and August 15 of eachyear. The Senior Notes are scheduled to mature on August 15, 2013, and donot contain any covenants regarding financial ratios or specified levels of networth or liquidity to which the Company or any of its subsidiaries must adhere.

 

In March 2009 the Company repurchased and retired $21.0 million inface value of its Senior Notes. The Company recognized a gain of $5.9 millionon the transaction representing the difference between the $15.1 million in considerationpaid and the carrying value of the Senior Notes repurchased. The gain has beenrecorded on the Company’s consolidated statements of operations as a separatecomponent of its revenues.

 

The unamortized carrying value of the Senior Notes at December 31,2009 and December 31, 2008, was $228.6 million and $249.4 million,respectively.

 

The Company incurred interest on the Senior Notes of $14.3 million,$15.3 million and $15.3 million during the years ended December 31, 2009,2008 and 2007, respectively.  The Companypaid $14.8 million, $15.3 million and $15.3 million in interest on the SeniorNotes during the years ended December 31, 2009, 2008 and 2007,respectively.

 

***Junior Subordinated Debt Securities(“Junior Notes”)***

 

In January 2006 the Company, through Montpelier Capital Trust III,participated in a private placement of $100.0 million of floating rate capitalsecurities (the “Trust Preferred Securities”). The Trust Preferred Securitiesmature on March 30, 2036, are redeemable at Montpelier Capital Trust III’soption at par beginning March 30, 2011, and require quarterlydistributions of interest to the holders. The Trust Preferred Securities bearinterest at 8.55% per annum through March 30, 2011, and thereafter at afloating rate of 3-month LIBOR plus 380 basis points, reset quarterly. TheTrust Preferred Securities do not contain any covenants regarding financialratios or specified levels of net worth or liquidity to which the Company orany of its subsidiaries must adhere.

 

Montpelier Capital Trust III simultaneously issued all of its sharecapital to the Company for a purchase price of $3.1 million. The Company’sinvestment of $3.1 million in the share capital of Montpelier Capital Trust IIIis recorded in other investments on the Company’s consolidated balance sheets.

 

Montpelier Capital Trust III used the proceeds from the sale of theTrust Preferred Securities and the issuance of its common securities topurchase junior subordinated debt securities, due March 30, 2036, in theprincipal amount of $103.1 million issued by the Company. The Junior Notes bearinterest at the same rates as the Trust Preferred Securities discussed above.

 

The Company incurred and paid interest expense of $8.7 million on theJunior Notes during each of the years ended December 31, 2009, 2008 and2007.  The Company paid $8.7 million ininterest on the Junior Notes during each of the years ended December 31,2009, 2008 and 2007.

 

***Blue Ocean Debt***

 

In November 2006 Blue Ocean obtained a secured loan of $75.0million from a syndicate of lenders (the “Blue Ocean Debt”).  The Blue Ocean Debt had a maturity date of February 28,2008.  Costs related to this facility of$1.7 million were amortized over the expected period to maturity.  The Blue Ocean Debt bore interest on the outstandingprincipal amount at a rate equal to a base rate plus a margin of 200 basispoints.  The Blue Ocean Debt was repaidin full in January 2008.

 

During the years ended December 31, 2008 and 2007, Blue Oceanincurred interest expense on the Blue Ocean Debt of $0.2 million and $5.6million, respectively, and paid interest of $0.5 million and $5.3 million,respectively.

 

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***Letter of Credit Facilities***

 

In the normal course of business, the Company, Montpelier Re and MCLmaintain letter of credit facilities and Montpelier Re and MCL provide lettersof credit to third parties. These letter of credit facilities were secured bycollateral accounts containing cash and investments totaling $835.8 million and$724.5 million at December 31, 2009 and 2008, respectively. The followingtable outlines these facilities as of December 31, 2009:

 

| **Secured operational Letter of Credit Facilities**   | ** ** | **Credit********Line** | ** ** | **Amount  drawn** | ** ** | **Expiry********Date** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|
| Montpelier  Re’s Syndicated facility: Tranche B  |       | $                      | 225.0      |              | $          | 122.9                  |       | Aug. 2010 |   |
| Montpelier  Re’s Syndicated 5-Year facility (I)  |       | $                      | 500.0      |              | $          | 42.2                   |       | June 2011 |   |
| Montpelier  Re’s Syndicated 5-Year facility (II) |       | $                      | 215.0      |              | $          | 159.3                  |       | June 2012 |   |
| Montpelier  Re’s Bilateral facility              |       | $                      | 100.0      |              | $          | 12.8                   |       | None |   |
| Lloyd’s  Standby Facility                        |       | $                      | 230.0      |              | $          | 230.0                  |       | Dec. 2013 |   |

 

Montpelier Re amended its Tranche B syndicated secured facility in August 2005.  The amendment served to revise this facilityfrom a $250.0 million three-year facility to a $225.0 million five-yearfacility with a revised expiry date of August 2010. This facility issubject to an annual commitment fee of 0.275% on drawn balances and 0.075% onundrawn balances.

 

Montpelier Re amended its syndicated secured facility (I) in June 2006.The amendment served to revise this facility from a one-year $1.0 billionfacility, which expired in June 2007, to a five-year $500.0 millionfacility.  This facility is subject to anannual commitment fee of 0.325% on drawn balances and 0.075% on undrawnbalances.

 

Montpelier Re entered into its five-year syndicated secured facility (II) inJune 2007 which was subsequently reduced from $250.0 million to $215.0million.  This facility is subject to anannual commitment fee of 0.275% on drawn balances and 0.08% on undrawnbalances.

 

Montpelier Re entered into its Bilateral facility in November 2005.This facility has no stated expiration date and is subject to an annualcommitment fee of 0.20% on drawn balances only.

 

In June 2007 the Company, Montpelier Re and MCL entered into theLloyd’s Standby Facility to support business written by Syndicate 5151. TheLloyd’s Standby Facility provided Montpelier with a secured £74.0 millionstandby letter of credit facility through December 31, 2012.

 

In October 2008 the Lloyd’s Standby Facility was amended andrestated to provide Montpelier with a secured £110.0 million standby letter ofcredit facility through December 31, 2013.

 

In March 2009 the Lloyd’s Standby Facility was further amended, sothat it now provides Montpelier with a secured $230.0 million standby letter ofcredit facility through December 31, 2013. The current facility is subject to an annual commitment fee of 0.60% ondrawn balances and 0.21% on undrawn balances.

 

The agreements governing these facilities contain covenants that limitMontpelier’s ability, among other things, to grant liens on its assets, sellassets, merge or consolidate, incur debt and enter into certain burdensomeagreements.  In addition, the syndicatedsecured facilities and the Lloyd’s Standby Facility each require the Company tomaintain debt leverage of no greater than 30% and Montpelier Re to maintain an A.M.Best financial strength rating of no less than B++.  If the Company or Montpelier Re were to failto comply with these covenants or fail to meet these financial ratios, thelenders could revoke the facilities and exercise remedies against thecollateral. As of December 31, 2009 and 2008, the Company and MontpelierRe were in compliance with all covenants.

 

**NOTE 7.****            ****DerivativeContracts**

 

Montpelier enters into derivative instruments from time to time inorder to manage certain of its business risks and to supplement its investingand underwriting activities.

 

The primary risks Montpelier seeks to manage through its use ofderivative instruments are underwriting risk and foreign exchange risk.  Derivative instruments designed to manageMontpelier’s underwriting risk include: (i) an option on hurricaneseasonal futures (the “Hurricane Option”), (ii) an Industry Loss Warranty (“ILW”) swap contract (the “ILW Swap”)and (iii) catastrophe bond protection (the “CAT Bond Protection”). Thesederivative instruments provide reinsurance-like protection to Montpelier forspecific loss events associated with certain lines of its business.  Additionally, the Company had entered intotwo equity forward sale agreements and a related share issuance agreement (the

 

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“Forward Sale Agreements and Share Issuance Agreement”) in order tomanage the risks associated with a significant loss of capital, which couldmost likely occur as a result of significant underwriting losses. The firstForward Sale Agreement was settled in March 2007 and the second ForwardSale Agreement and the Share Issuance Agreement were terminated in February 2009.

 

Foreign exchange risk, specifically Montpelier’s risk associated withmaking claim payments in foreign currencies, is managed through the use offoreign currency exchange agreements (the “Foreign Exchange Contracts”).

 

As an extension of Montpelier’s investing activities, certain of itsinvestment managers have entered into investment option and futures contracts (“InvestmentOptions and Futures”).

 

As an extension of its underwriting activities, Montpelier hasparticipated in a CAT bond facility (the “CAT Bond Facility”) and has sold ILWprotection (the “ILW Contract”).  Thesederivative instruments provide reinsurance-like protection to third parties forspecific loss events associated with certain lines of business.

 

None of Montpelier’s derivatives are designated as hedging instruments.

 

The following table presents the fair values of Montpelier’s derivativeinstruments at December 31, 2009 and December 31, 2008:

 

| ** **                                                | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Derivative  contracts recorded as other investments:      |       |                        |       |                        |       |
| Foreign  Exchange Contracts                               | ** ** | **$**                       | **(0.7**   | **)**                       | $          | 0.7 |   |
| Investment  Options and Futures                           | ** ** | **1.8**                     |       | 0.1                         |       |
|                                                      |       |                        |       |                        |       |
| Total  derivative contracts recorded as other investments | ** ** | **$**                       | **1.1**    |                        | $          | 0.8 |   |

 

The following table presents the net income (expense) from Montpelier’sderivative instruments during the years ended December 31, 2009, 2008 and2007:

 

| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Hurricane  Option                                 | ** ** | **$**                            | **—** |   | $ | (1.0 | ) | $ | — |   |
| ILW  Swap                                         | ** ** | **—**                       |       | (0.7 | ) | — |   |
| CAT  Bond Protection                              | ** ** | **(0.2**                         | **)**      | (11.9 | ) | (11.9 | ) |
| Foreign  Exchange Contracts                       | ** ** | **(0.6**                         | **)**      | (4.1 | ) | 3.2 |   |
| Investment  Options and Futures                   | ** ** | **8.1**                          |       | 1.8 |   | — |   |
| CAT  Bond Facility                                | ** ** | **—**                       |       | 1.0 |   | 5.3 |   |
| ILW  Contract                                     | ** ** | **—**                       |       | 0.6 |   | 3.1 |   |
|                                              |       |                             |       |   |   |   |   |
| Net  income (expense) from derivative instruments | ** ** | **$**                            | **7.3**    |   | $ | (14.3 | ) | $ | (0.3 | ) |

 

A description of each of Montpelier’s derivative instrument activitiesfollows:

 

***Hurricane Option***

 

In March 2008, Montpelier purchased the Hurricane Option, anoption on hurricane seasonal futures traded on the Chicago Mercantile Exchange,in order to provide protection against Montpelier’s eastern U.S. hurricaneexposure.  The maximum possible recoveryto Montpelier under the Hurricane Option was $5.0 million.  The Hurricane Option expired without value inNovember 2008.

 

While outstanding, the fair value of the Hurricane Option was derivedbased on other observable (Level 2) inputs.

 

***ILW Swap***

 

In April 2008, Montpelier entered into the ILW Swap with athird-party in order to provide protection against Montpelier’s U.S. hurricaneexposure.  In return for a fixed-ratepayment of $0.7 million, the Company received a floating-rate payment which wastriggered on the basis of losses incurred by the insurance industry as a whole.The maximum recovery to Montpelier under the ILW Swap was $5.0 million. The ILWSwap expired without value in April 2009.

 

While outstanding, the fair value of the ILW Swap was derived based onunobservable (Level 3) inputs.

 

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***CAT Bond Protection***

 

In December 2005, Montpelier purchased fully-collateralizedcoverage for losses sustained from qualifying hurricane and earthquake lossevents from a third-party, Champlain, which financed this coverage through theissuance of $90.0 million in catastrophe bonds to investors under two separatebond tranches, each of which matured in January 2009. Both tranches respondedto parametric triggers, whereby payment amounts were determined on the basis ofmodeled losses incurred by a notional portfolio rather than by actual lossesincurred by Montpelier. For that reason, this transaction was accounted for asa derivative, rather than as a reinsurance transaction, and was carried at fairvalue.

 

Contract payments expensed in connection with the CAT Bond Protectionwere calculated at 12.83% per annum on the first tranche and 13.58% per annumon the second tranche.

 

Through the date of maturity of the CAT Bond Protection, no industryloss event occurred which would have triggered a recovery by Montpelier.

 

***Foreign Exchange Contracts***

 

From time to time Montpelier has entered into foreign currency exchangeagreements which constitute an obligation to purchase or sell a specifiedcurrency at a future date at a price set at the inception of the contract.These agreements do not eliminate fluctuations in the value of Montpelier’sassets and liabilities denominated in foreign currencies; rather, they aredesigned to protect Montpelier against adverse movements in foreign exchangerates. Montpelier’s open foreign currency agreements at December 31, 2009were denominated in European Union euros and Canadian dollars.

 

The fair value of the Foreign Exchange Contracts is derived based onother observable (Level 2) inputs.  At December 31,2009 and 2008, Montpelier was party to outstanding foreign currency exchangeagreements with gross notional exposures of $30.5 million and $33.0 million,respectively.

 

***Investment Options and Futures***

 

From time to time Montpelier enters into various exchange-tradedinvestment options and futures as part of its investing strategy, and to reduceits exposure to interest rate fluctuations. As of December 31, 2009, Montpelier had open long option positionswith a fair value of $1.8 million.

 

The fair value of the open options is derived based on other observable(Level 2) inputs.

 

***CAT Bond Facility***

 

In June 2006, Montpelier entered into the CAT Bond Facility underwhich Montpelier was entitled to receive contract payments from a third-partyin return for assuming mark-to-market risk on a portfolio of securitizedcatastrophe risks. The difference between the notional capital amounts of thecatastrophe bonds and their market value was marked to market over the terms ofthe bonds; the difference was settled on a monthly basis. Thesemarked-to-market adjustments, in addition to any interest earned on the bonds,were included as a component of net income (expense) from derivativeinstruments.

 

In June 2008 the CAT Bond Facility was terminated and Montpelierpurchased the underlying CAT Bonds from the counterparty at their fairvalue.  As a result, subsequent to thetermination of the Cat Bond Facility, the CAT Bonds were recorded on theCompany’s consolidated balance sheets as other investments.  See Note 5.

 

The fair value of the CAT Bond Facility was derived based on otherobservable (Level 2) inputs.

 

***ILW Contract***

 

In August 2007, Montpelier entered into the ILW Contract with athird-party under which qualifying loss payments were triggered exclusively byreference to the level of losses incurred by the insurance industry as a wholerather than by losses incurred by the insured. The ILW Contract provided the insured with $15.0 million of second-eventprotection resulting from industry losses of a stated amount and expired in August 2008without any payment required by Montpelier.

 

The ILW Contract covered losses resulting from all natural perilswithin the U.S. and was carried at fair value. The fair value of the ILW Contract was derived based on unobservable (Level3) inputs.

 

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***Forward Sale Agreements and ShareIssuance Agreement***

 

In 2006 the Company entered into two Forward Sale Agreements underwhich it was entitled to sell Common Shares to an affiliate of Credit SuisseSecurities (USA) LLC (the “Forward Counterparty”) at minimum floor pricesspecified in each Forward Sale Agreement. In March 2007, the Company notified the Forward Counterparty of itselection of net share settlement for the entire first Forward Sale Agreement.In the course of the settlement, as the valuation price for each component wasgreater than the $11.75 forward floor price and less than the $18.465 forwardcap price, no payments or deliveries of cash or Common Shares were required tobe made by the Company or the Forward Counterparty.  In December 2007, the Company and theForward Counterparty amended the remaining Forward Sale Agreement which relatedto up to 7,920,000 Common Shares and the remaining Forward Sale Agreement wasbifurcated into two tranches, each relating to 3,960,000 Common Shares.  The first tranche, which was scheduled tosettle over a twenty business day period beginning in October 2009, wassubject to an $11.25 forward floor price and a $22.00 forward cap price.  The second tranche, which was scheduled tosettle over a twenty business day period beginning in November 2009, wassubject to an $11.25 forward floor price and a $23.00 forward cap price.

 

In connection with the Forward Sale Agreements, in 2006 the Companyalso entered into the Share Issuance Agreement with the Forward Counterparty.Under the terms of the Share Issuance Agreement, the Company issued CommonShares to the Forward Counterparty for an amount equal to the par value of suchCommon Shares. Subsequent to the settlement of the first forward sale agreementin March 2007, the Company had 7,920,000 Common Shares issued andoutstanding under the Share Issuance Agreement.

 

In February 2009, the Company and the Forward Counterparty agreedto the early termination of the second Forward Sale Agreement and the ShareIssuance Agreement.  In connection withthe termination of these agreements, in March 2009, the Forward Counterparty:(i) made a $32.0 million cash payment to the Company; and (ii) deliveredto the Company, in exchange for a cash payment of $0.01, 5,920,000 of the7,920,000 Common Shares previously issued to them under the Share IssuanceAgreement.  See Note 9. The earlysettlement of these agreements had the same economic effect as the Companyissuing 2,000,000 Common Shares for $32.0 million.

 

In view of the contractual undertakings of the Forward Counterpartyunder the Forward Sale Agreements and the Share Issuance Agreement, the CommonShares issued and outstanding under the Share Issuance Agreement prior to itstermination were not considered outstanding for the purposes of computing andreporting the Company’s earnings per share or fully converted tangible bookvalue per share.

 

The Forward Sale Agreements and Share Issuance Agreement had no impacton the Company’s consolidated statements of operations or balance sheets whilethey were in force.

 

**NOTE 8.****            ****NoncontrollingInterest**

 

The Company acquired all the outstanding share capital of Blue Ocean inJune 2008 pursuant to the Blue Ocean Transaction and no longer has anynoncontrolling interests.  Prior to theBlue Ocean Transaction, the Company owned 42.2% of Blue Ocean’s outstandingcommon shares and, prior to Blue Ocean’s repurchase of all its outstandingpreferred shares in January 2008, the Company owned 33.6% of Blue Ocean’spreferred shares.  While it was awholly-owned subsidiary and during the periods in which the Company owned lessthan 100% of the share capital of Blue Ocean, the Company consolidated BlueOcean into its financial statements. The portion of Blue Ocean’s equity notowned by the Company had historically been reported as minority interest, andis now reported as a noncontrolling interest.

 

As of December 31, 2007, the Company had noncontrolling interestsin Blue Ocean’s common equity of $68.1 million and Blue Ocean’s preferredequity of $20.6 million.  During 2008,through distributions and dividends to common and preferred shareholders andultimately through the Blue Ocean Transaction, the Company eliminated thisnoncontrolling interest in Blue Ocean.

 

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**NOTE 9.    CommonShareholders’ Equity**

 

**Common Shares**

 

The following table summarizes the Company’s Common Share activityduring the years ending December 31, 2009, 2008 and 2007:

 

| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in  Common Shares)**                                                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Beginning  Common Shares outstanding                                   | ** ** | **91,826,704**                   |       | 99,290,078 |   | 111,775,682 |   |
| Acquisitions  of Common Shares:                                        | ** ** | ** **                       |       |   |   |   |   |
| Common  Shares repurchased and retired                                 | ** ** | **(5,420,941**                   | **)**      | (5,921,644 | ) | (4,719,344 | ) |
| Common  Shares repurchased and placed in treasury                      | ** ** | **(1,178,097**                   | **)**      | (1,877,375 | ) | — |   |
| Common  Shares retired in connection with the Share Issuance Agreement | ** ** | **(5,920,000**                   | **)**      | — |   | (7,774,800 | ) |
| Issuances  of Common Shares:                                           | ** ** | ** **                       |       |   |   |   |   |
| Issuances  in satisfaction of vested RSU obligations                   | ** ** | **664,426**                      |       | 335,645 |   | — |   |
| Issuances  in satisfaction of DSU obligations                          | ** ** | **26,703**                       |       | — |   | 8,540 |   |
|                                                                   | ** ** | ** **                       |       |   |   |   |   |
| Ending  Common Shares outstanding                                      | ** ** | **79,998,795**                   |       | 91,826,704 |   | 99,290,078 |   |

 

*2009 common share activity*

 

During 2009 the Company repurchased a total of 6,599,038 Common Sharesat an average price of $17.07 per share.  Of the total Common Shares repurchased during2009, 5,420,941 shares were retired and 1,178,097 shares were placed in theCompany’s treasury for re-issuance to employees and directors in satisfactionof existing and future share based obligations.

 

In March 2009, in connection with the final settlement of theCompany’s Share Issuance Agreement, the Forward Counterparty delivered to theCompany 5,920,000 Common Shares previously issued to it in exchange for a cashpayment of $0.01.  See Note 7.  These Common Shares were subsequentlyretired.

 

During 2009 the Company issued a total of 691,129 Common Shares toemployees and directors in satisfaction of vested RSU and DSU obligations. SeeNote 10. The Common Shares were issued from the Company’s treasury resulting ina gain on issuance of $1.7 million, which was recorded as additional paid-incapital.

 

In November 2009 the Board of Directors increased the Company’sexisting share repurchase authorization by $150.0 million to a total of $203.5million.  As of December 31, 2009,$148.0 million of such authorization remained. The authorization was canceledon February 24, 2010.

 

*2008 common share activity*

 

During 2008 the Company repurchased a total of 7,799,019 Common Sharesat an average price of $16.12 per share. Of the total shares repurchased during 2008, 5,921,644 shares wereretired and 1,877,375 shares were placed in the Company’s treasury forre-issuance to employees and directors in satisfaction of existing and futureshare based obligations.

 

During 2008 the Company issued a total of 335,645 Common Shares toemployees in satisfaction of vested RSU obligations. The Common Shares wereissued from the Company’s treasury resulting in a gain on issuance of $1.2million, which was recorded as additional paid-in capital.

 

*2007 common share activity*

 

During 2007 the Company repurchased and retired a total of 4,719,344Common Shares at an average price of $17.17 per share.  Of the total shares repurchased during 2007,939,039 Common Shares were acquired from White Mountains Insurance Group, Ltd.(“White Mountains”), a former affiliate, at a price of $18.40 per share.

 

During 2007, in connection with a partial settlement of the Company’sShare Issuance Agreement, the Forward Counterparty delivered to the Company7,774,800 Common Shares previously issued to it in exchange for a cash paymentof $0.01.  See Note 7.  These Common Shares were subsequentlyretired.

 

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During 2007 the Company issued a total of 8,540 Common Shares to formerdirectors in satisfaction of vested DSU obligations.

 

***Warrants to Acquire Common Shares***

 

During 2007 the Company repurchased 7,172,375.5 outstanding warrantsfrom White Mountains for $47.7 million. The warrants were issued in December 2001,had a term of ten years and an exercise price of $16.67 per Common Share.  The warrants were subsequently retired.

 

***Dividends***

 

The Company declared, on a quarterly basis, regular cash dividends perCommon Share totaling $0.315 in 2009, $0.30 in 2008 and $0.30 in 2007.  The Company also declared cash dividends onwarrants, during the period in which they were outstanding, on the same basisas that of Common Shares.

 

The total amount of dividends paid to holders of Common Shares andwarrants during the years ended December 31, 2009, 2008 and 2007, was$26.2 million, $28.4 million and $29.9 million, respectively.  As of December 31, 2009 and 2008, theCompany had $7.2 million and $6.9 million, respectively, of dividends payableto shareholders.

 

**NOTE 10.  ShareBased Compensation**

 

***LTIP***

 

The Montpelier Re Holdings Ltd. Long-Term Incentive Plan (the “LTIP”)is the Company’s primary long-term incentive plan. At the discretion of theBoard’s Compensation and Nominating Committee (the “CN Committee”), incentiveawards, the value of which is based on Common Shares, may be made to planparticipants. Currently, Montpelier’s share based incentive awards under theLTIP consist of awards of performance shares and RSUs.

 

As of December 31, 2009, the Company had remaining authority toissue up to 3,259,160 common share awards under the LTIP.  The LTIP was last approved by the Company’sshareholders on May 23, 2007.

 

*Performance Shares*

 

From 2002 to 2007, performance shares were a significant element of theCompany’s LTIP awards in terms of prospective value.  At target payout, each performance sharerepresents the fair value of a common share. At the end of a performanceperiod, which is generally the three-year period following the date of grant, aplan participant may receive a harvest of between zero and 200% of theperformance shares granted depending on the achievement of specific performancecriteria relating to the operating and financial performance of the Companyover the period. At the discretion of the CN Committee, any final payment inrespect of such a grant may take the form of cash, Common Shares or acombination of both.

 

For all outstanding performance share awards, the primary performancetarget for a 100% harvest ratio is the achievement of an underwriting return onan internally generated risk-based capital measure of 16% over the period.Additionally, at the sole discretion of the CN Committee, the performance ofcertain members of senior management may be further measured by reference tothe ratio of the actual return on equity to the return on risk-based capitaland may result in an adjustment to the harvest of + / - 25%.

 

The following table summarizes the Company’s performance shareactivities during the years ended December 31, 2009, 2008 and 2007:

 

| ** **                     | ** ** | **Year Ended December 31,**                               | ** ** |
|--------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                     | ** ** | **2009**                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **Target********Performance********Shares********Outstanding** | ** ** | **Accrued********Expense** | ** ** | **Target********Performance********Shares********Outstanding** | ** ** | **Accrued********Expense** | ** ** | **Target********Performance********Shares********Outstanding** | ** ** | **Accrued********Expense** | ** ** |
| Beginning  of period           | ** ** | **325,000**                                                    | ** ** | **$** | **4.0** |   | 335,000 |   | $ | 4.9 |   | 561,000 |   | $ | 1.2 |   |
| Payments                       | ** ** | **(153,000**                                                   | **)**      | **(2.5** | **)** | — |   | — |   | — |   | — |   |
| New  awards                    | ** ** | **—**                                                     |       | — |   | — |   | — |   | 180,000 |   | — |   |
| Cancellations  and forfeitures | ** ** | **—**                                                     |       | — |   | (10,000 | ) | — |   | (406,000 | ) | (0.1 | ) |
| Expense  (income) recognized   | ** ** | **—**                                                     | ** ** | **1.5** |   | — |   | (0.9 | ) | — |   | 3.8 |   |
| End  of period                 | ** ** | **172,000**                                                    | ** ** | **$** | **3.0** |   | 325,000 |   | $ | 4.0 |   | 335,000 |   | $ | 4.9 |   |

 

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In April 2007, 400,000 performance shares issued for the 2005-2007performance cycle were cancelled without payment as there was no expectedpayout due to the adverse financial effects of the severe hurricanes thatoccurred during 2005.

 

All of the performance shares outstanding at December 31, 2009relate to the 2007-2009 performance cycle, were fully vested and will be paidto participants in March 2010.

 

*RSUs*

 

RSUs are phantom restricted shares which, depending on the individual award,vest in equal tranches over three, four or five-year periods, subject to therecipient maintaining a continuous relationship with Montpelier (either as anemployee,  a director or a consultant)through the applicable vesting date. Holders of RSUs are not entitled to votingrights but are entitled to receive cash dividends and distributions.

 

The Emergency Economic Stabilization Act of 2008, enacted on October 3,2008 (the “EES Act”), added Section 457A to the U.S. Internal RevenueCode.  The Company believes that this taxlegislation may have caused certain LTIP participants (those who are U.S.taxpayers) to be taxed on the fair value of RSUs upon vesting, rather than uponreceipt of the underlying Common Shares, effective for periods after December 31,2008.

 

In order to alleviate this potential mismatch between taxation andreceipt of the Common Shares, the Company formally decided, in December 2008,to amend certain outstanding RSU awards to accelerate the distribution of theunderlying Common Shares to coincide more closely to the vesting date.  The amendment to the award agreements willnot change the applicable vesting date, but will allow participants to receivetheir Common Shares during the same period in which they will be taxable.

 

Throughout 2006 and 2007, RSU awards consisted solely of: (i) grantsmade to induce individuals to join Montpelier; (ii) grants made to retaincertain key employees; (iii) grants made to reward employees exhibitingoutstanding individual performance; and (iv) grants made to non-managementmembers of the Board of Directors of the Company and MUAL as part of theirtotal remuneration.  In each of thesecases, the number of RSUs granted to the recipient were fixed and determinableon the grant date (“Fixed RSUs”).

 

During 2008 Montpelier began using a new form of RSU award, in additionto Fixed RSUs, as the principal component of its ongoing long-term incentivecompensation for employees (“Variable RSUs”) instead of performance shareawards. Variable RSU awards are contingent awards in which the actual number ofRSUs to be awarded is dependent on Company performance during the initial yearof the award cycle (the “Initial RSU Period”) meaning that the number of RSUsexpected to be awarded for that cycle may fluctuate during the period.  The actual number of Variable RSUs to beawarded is based on a targeted return on equity (“ROE”) assuming a standardizedinvestment return. ROE is computed by dividing the sum of the Company’s actualunderwriting result and standard investment result by the Company’s actualaverage shareholders’ equity for the period.

 

For the Variable RSU award cycle from 2008 to 2011, the targetedperformance metric was based on a 2008 ROE of 11.22%.  At a target achieved ROE of 11.22% theCompany expected to grant approximately 600,000 Variable RSUs to participants,at a threshold ROE of 5.22% the Company expected to grant no Variable RSUs toparticipants and at a maximum ROE of 21.22% the Company expected to grantapproximately 1,200,000 Variable RSUs to participants. Based on the actual ROEachieved for 2008 of 8.11%, the final number of Variable RSUs granted for the2008-2011 award cycle was determined to be 296,374 by the CN Committee andthese awards have been converted to Fixed RSUs.

 

For the Variable RSU award cycle from 2009 to 2012, the targetedperformance metric was based on a 2009 ROE of 9.77%.  At a target achieved ROE of 9.77% the Companyexpected to grant approximately 650,000 Variable RSUs to participants, at athreshold ROE of 3.77% the Company expected to grant no Variable RSUs toparticipants and at a maximum ROE of 19.77% the Company expected to grantapproximately 1,300,000 Variable RSUs to participants. Based on the estimatedROE achieved for 2009 of 19.11%, the final number of Variable RSUs to begranted for the 2009-2012 award cycle is currently estimated to beapproximately 1,260,327.  The final ROEand number of Variable RSUs to be converted to Fixed RSUs will be determined bythe CN Committee in March 2010.

 

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The following table summarizes Montpelier’s RSU activity for the yearsended December 31, 2009, 2008 and 2007:

 

| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                              | ** ** | **RSUs********Outstanding**      | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** | **RSUs********Outstanding** | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** | **RSUs********Outstanding** | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** |
| Beginning  of period                                    | ** ** | **1,281,619**                    | ** ** | **$** | **7.7** |   | 1,109,083 |   | $ | 7.3 |   | 456,000 |   | $ | 3.1 |   |
| Fixed  RSUs Awarded                                     | ** ** | **32,500**                       | ** ** | **0.5** |   | 252,000 |   | 3.9 |   | 720,750 |   | 12.4 |   |
| Variable  RSUs at target,2009 - 2012 cycle              | ** ** | **656,420**                      | ** ** | **10.5** |   | — |   | — |   | — |   | — |   |
| Changes  in Variable RSUprojections, 2009 - 2012 cycle  | ** ** | **603,907**                      | ** ** | **9.6** |   | — |   | — |   | — |   | — |   |
| Variable  RSUs at target,2008 - 2011 cycle              | ** ** | **—**                       | ** ** | **—** |   | 594,690 |   | 8.3 |   | — |   | — |   |
| Changes  in Variable RSUprojections, 2008 - 2011 cycle  | ** ** | **(19,662**                      | **)**      | **(0.2** | **)** | (278,654 | ) | (3.2 | ) | — |   | — |   |
| Change  in other factors,including expected forfeitures | ** ** | **—**                       | ** ** | **—** |   | — |   | (0.3 | ) | — |   | — |   |
| Payments                                                | ** ** | **(786,015**                     | **)**      | **—** |   | (379,835 | ) | — |   | — |   | — |   |
| Actual  forfeitures                                     | ** ** | **—**                       | ** ** | **—** |   | (15,665 | ) | — |   | (67,667 | ) | — |   |
| Expense  recognized                                     | ** ** | **—**                       | ** ** | **(14.8** | **)** | — |   | (8.3 | ) | — |   | (8.2 | ) |
| End  of period                                          | ** ** | **1,768,769**                    | ** ** | **$** | **13.3** |   | 1,281,619 |   | $ | 7.7 |   | 1,109,083 |   | $ | 7.3 |   |

 

At grant date the Company assumes a 3% to 9% forfeiture rate, dependingon the term of the award.  Actualforfeitures are periodically compared to assumed forfeitures and adjustmentsare made as deemed necessary.

 

In determining the initial grant date fair value of RSUs, the Companyhistorically applied up to a 5% discount to the then market value of the CommonShares as sale restrictions remained after RSUs vested.

 

During 2008 the Company revised its expected RSU forfeiture assumptionsand, in light of the changes made to certain outstanding RSU awards in 2008resulting from the EES Act, eliminated or reduced its sale restrictiondiscount. The net financial impact of these revisions totaled $0.3 million.

 

On the basis of results achieved during 2009, the Company anticipatesissuing a total of 1,260,327 Variable RSUs for the 2009-2012 award cycle. Theactual number of Variable RSUs to be awarded for this cycle will not be fixedand determinable until they are formally approved by the CN Committee in March 2010.

 

During 2009 the Company paid out 786,015 vested RSUs and withheld, atthe recipient’s election, 121,589 RSUs to provide for statutory income taxliabilities.  As a result, the Companyissued 664,426 Common Shares from its treasury. See Note 9. The fair value ofthe RSUs paid out during 2009 was $12.6 million.

 

During 2008 the Company paid out 379,835 vested RSUs and withheld, atthe recipient’s election, 44,190 RSUs to provide for statutory income taxliabilities.  As a result, the Companyissued 335,645 Common Shares from its treasury. See Note 9. The fair value ofthe RSUs paid out during 2008 was $6.2 million.

 

The following table summarizes all Fixed and Variable RSUs outstandingand the unamortized grant date fair value of such RSUs at December 31,2009, for each award cycle:

 

| **Award Date and Cycle**                                                         | ** ** | **RSUs  Outstanding** | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------------|------------|
| Three-year  RSU awards granted in 2007                                           | ** ** | **16,666**            | ** ** | **$**                                   | **0.2**    | ** ** |
| Five-year  RSU awards granted in 2007                                            | ** ** | **131,850**           | ** ** | **0.9**                                 | ** ** |
| Four-year  RSU awards granted in 2008                                            | ** ** | **193,826**           | ** ** | **1.3**                                 | ** ** |
| Five-year  RSU awards granted in 2008                                            | ** ** | **133,600**           | ** ** | **0.8**                                 | ** ** |
| Four-year  RSU awards granted in 2009 (those awards in their Initial RSU Period) | ** ** | **1,260,327**         | ** ** | **9.6**                                 | ** ** |
| Four  year RSU awards granted in 2009                                            | ** ** | **25,000**            | ** ** | **0.4**                                 | ** ** |
| Five-year  RSU awards granted in 2009                                            | ** ** | **7,500**             | ** ** | **0.1**                                 | ** ** |
| **Total RSUs outstanding at December 31, 2009**                             | ** ** | **1,768,769**         | ** ** | **$**                                   | **13.3**   | ** ** |

 

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The Company expects to incur future RSU expense associated with itscurrently outstanding RSUs of $7.7 million, $4.0 million and $1.6 millionduring 2010, 2011 and 2012 & beyond, respectively.

 

***Directors Share Plan***

 

All non-management directors are eligible to participate voluntarily inthe Directors Share Plan.  Eligibledirectors who elect to participate receive, in lieu of a portion of theirannual cash retainer, a number of DSUs of the same dollar value based on thevalue of Common Shares at that date. DSUs comprise a contractual right to receive Common Shares or an equivalentamount of cash upon termination of service as a director. In addition, whilethe DSUs are outstanding, they are credited with common share dividendequivalents.

 

In July 2007, the Board of Directors of the Company approved anamendment to the Directors Share Plan to provide directors with the option ofreceiving cash, in lieu of Common Shares, upon the payment of outstandingDSUs.  Previously DSUs were payable onlyin Common Shares.  As a result of thisamendment, during 2007 the Company reclassed its existing $0.5 millionobligation for outstanding DSUs at June 30, 2007, from additional paid-incapital to other liabilities and has recorded all future changes in its DSUobligations as a change in other liabilities.

 

In light of the EES Act, the Company resolved to permit directors whoparticipate in the Directors Share Plan to elect to receive their Common Sharesprior to December 31, 2017.  Allparticipating directors elected to receive payment for their outstanding DSUsin January 2009, which resulted in the issuance of 26,703 Common Sharesand the payment of $237,549.  See Note9.  The fair value of the DSUs paid outduring 2009 was $0.7 million.

 

During 2008 the Company did not pay out any DSUs. During 2007 theCompany issued 8,540 Common Shares to former directors in satisfaction of outstandingDSUs obligations.  See Note 9.  The fair value of the DSUs paid out during2007 was $0.2 million.

 

As of December 31, 2008, the Company’s liability for outstandingDSUs was $0.7 million.

 

**NOTE 11.****     ****IncomeTaxes**

 

The Company is domiciled in Bermuda and has subsidiaries domiciled inseveral countries, including the U.S. The Company and Montpelier Re intend to conduct substantially all oftheir operations in Bermuda in a manner such that it is improbable that theywould be viewed as being engaged in a trade or business in the U.S. However,because there is no definitive authority regarding activities that constitutebeing engaged in a trade or business in the U.S., there can be no assurancethat the U.S. Internal Revenue Service will not contend, perhaps successfully,that the Company or Montpelier Re is engaged in a trade or business in theU.S.  In that event, those entities wouldbe subject to U.S. income tax, as well as a branch profits tax, on income thatis treated as effectively connected with the conduct of that trade or businessunless the corporation is entitled to relief under a tax treaty.

 

The Company and its Bermuda-domiciled subsidiaries have received anassurance from the Bermuda Minister of Finance exempting them from allBermuda-imposed income, withholding and capital gains taxes until March 2016.  At the present time, no such taxes are leviedin Bermuda.

 

The Company’s U.S.-domiciled subsidiaries are subject to federal, stateand local corporate income taxes and other taxes applicable to U.S.corporations.  The provision for U.S.federal income taxes has been determined under the principles of a consolidatedtax provision within the U.S. Internal Revenue Code and Regulations. The taxyears open to examination by the Internal Revenue Service for thesesubsidiaries are from 2007 to present.

 

The Company’s U.K. and Switzerland-domiciled subsidiaries are subjectto income taxes in those jurisdictions. The tax years open to examination by the HM Revenue & Customsfor our U.K. subsidiaries and the Swiss Federal Department of Finance for MEAG,are from 2007 to present.

 

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Montpelier’sconsolidated income tax provision for the years ended December 31, 2009,2008 and 2007 consisted of the following:

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Current  tax provision:**       |       |                             |       |   |   |   |   |
| U.S. Federal                      | ** ** | **$**                            | **—** |   | $ | **—** |   | $ | **—** |   |
| U.S. state                        | ** ** | **0.1**                          |       | 0.1 | ** ** | **—** | ** ** |
| Non-U.S.                          | ** ** | **(1.3**                         | **)**      | 1.2 |   | 0.1 |   |
| Current tax  provision (benefit)  | ** ** | **$**                            | **(1.2**   | **)** | $ | 1.3 |   | $ | 0.1 |   |
| ** **                        |       |                             |       |   |   |   |   |
| **Deferred  tax provision:**      |       |                             |       |   |   |   |   |
| U.S. Federal                      | ** ** | **$**                            | **—** |   | $ | — |   | $ | **—** |   |
| U.S. state                        | ** ** | **—**                       | ** ** | **—** | ** ** | **—** | ** ** |
| Non-U.S.                          | ** ** | **2.3**                          |       | (0.2 | ) | **—** | ** ** |
| Deferred tax  provision (benefit) | ** ** | **2.3**                          |       | (0.2 | ) | **—** | ** ** |
| Income tax  provision             | ** ** | **$**                            | **1.1**    |   | $ | 1.1 |   | $ | 0.1 |   |

 

Asof December 31, 2009 and 2008, Montpelier had a current income tax asset(liability) of $0.6 million and $(1.1) million, respectively.

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts for tax purposes. An outline of the significant components of theCompany’s deferred tax assets and liabilities follows:

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Deferred  tax assets relating to:**                 |       |                  |       |   |   |
| Net unearned  premiums and deferred acquisition costs | ** ** | **$**                 | **0.4**    |   | $ | 0.2 |   |
| U.S. net  operating loss carryforwards                | ** ** | **11.7**              |       | 6.5 |   |
| Non-U.S. net  operating loss carryforwards            | ** ** | **0.3**               |       | 1.1 |   |
| Share based  compensation                             | ** ** | **2.2**               |       | 0.9 |   |
| Other items                                           | ** ** | **1.7**               |       | 1.7 |   |
| Total gross  deferred income tax assets               | ** ** | **$**                 | **16.3**   |   | $ | 10.4 |   |
| ** **                                            |       |                  |       |   |   |
| **Deferred  income tax liabilities related to:**      |       |                  |       |   |   |
| Deferred  acquisition costs                           | ** ** | **—**            |       | 0.1 |   |
| Deferred U.K.  premium income                         | ** ** | **2.6**               |       | — |   |
| Total gross  deferred income tax liabilities          | ** ** | **$**                 | **2.6**    |   | $ | 0.1 |   |
|                                                  | ** ** | ** **            |       |   |   |
| Net deferred tax  asset                               | ** ** | **$**                 | **13.7**   |   | $ | 10.3 |   |
| Less: deferred  income tax valuation allowance        | ** ** | **(15.6**             | **)**      | (10.1 | ) |
| Net deferred tax  asset (liability)                   | ** ** | **$**                 | **(1.9**   | **)** | $ | 0.2 |   |

 

TheCompany carried a deferred income tax valuation allowance for 2009 and 2008 of$15.6 million and $10.1 million, respectively, due mainly to the startup natureof its U.S. operations and the uncertainty at this time of whether suchoperations will generate sufficient taxable income in future periods to utilizeits deferred assets. Net operating losses may be carried forward to offsetfuture taxable income in the jurisdiction to which they relate. The U.S. netoperating losses will begin to expire in 2027, while non-U.S. net operatinglosses may be carried forward indefinitely.

 

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Areconciliation of actual income taxes to the amount calculated using theexpected tax rate of zero under Bermuda law is as follows:

 
| ** **                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income (loss)  before income taxes and extraordinary item | ** ** | **$**                            | **464.6**  |   | $ | (143.5 | ) | $ | 347.8 |   |
| Income taxes at  the expected income tax rate of Bermuda  | ** ** | **$**                            | **—** |   | $ | **—** |   | $ | **—** |   |
| Foreign taxes at  actual rates:                           |       |                             |       |   |   |   |   |
| U.S.                                                      | ** ** | **$**                            | **0.1**    |   | $ | **—** |   | $ | **—** |   |
| Non-U.S.                                                  | ** ** | **1.0**                          |       | 1.1 |   | 0.1 |   |
| Total income tax  provision                               | ** ** | **$**                            | **1.1**    |   | $ | 1.1 |   | $ | 0.1 |   |
| Effective tax  rate                                       | ** ** | **0.2**                          | **%**      | (0.8 | )% | — | % |

 

Withrespect to our U.K. and Swiss entities, the non-U.S. component of income (loss)before income taxes and extraordinary item was $4.8 million, $2.9 million and$(3.0) million for the years ended December 31, 2009, 2008 and 2007,respectively.

 

Duringthe years ended December 31, 2009, 2008 and 2007, Montpelier paid totalincome taxes of $0.5 million, $0.2 million and $0.2 million, respectively.

 

OnJanuary 1, 2007, the Company adopted new accounting guidance on accountingfor uncertainty in income taxes. This guidance prescribes when the benefit of agiven tax position should be recognized and how it should be measured. Theimplementation of this guidance did not result in any unrecognized tax benefitsor expenses for the years ended December 31, 2009, 2008 and 2007.Management believes that all material tax provisions have a greater than 50%likelihood of being sustained on technical merits if challenged.

 

**NOTE 12.Fair Value of Financial Instruments**

 

U.S.GAAP requires disclosure of fair value information for certain financialinstruments.  For those financialinstruments in which quoted market prices are not available, fair values areestimated by discounting future cash flows using current market rates forsimilar obligations or using quoted market prices. Because considerablejudgment is used, these estimates are not necessarily indicative of amountsthat could be realized in a current market exchange. Montpelier carries itsfinancial instruments on its consolidated balance sheets at fair value with theexception of its fixed-rate debt.

 

TheCompany’s fixed-rate debt consists of the Senior Notes and the Junior Notes. AtDecember 31, 2009 and 2008, the fair value of the Senior Notes (based onquoted market prices) was $227.6 million and $193.2 million, respectively,which compared to a carrying value of $228.6 million and $249.4 million,respectively. At December 31, 2009 and 2008, the fair value of the JuniorNotes (based on quoted market prices for similar securities) was $72.2 millionand $61.9 million, respectively, which compared to a carrying value of $103.1million.

 

**NOTE 13.Segment Reporting**

 

TheCompany currently operates through three reportable segments: MontpelierBermuda, Montpelier Syndicate 5151 and MUSIC. Prior to its liquidation anddissolution in 2009, Blue Ocean constituted a fourth reportable segment. TheMontpelier Bermuda segment includes the assets and operations of Montpelier Reand MMSL; the Montpelier Syndicate 5151 segment includes the assets andoperations of MCL, Syndicate 5151, MUAL, PUAL, MUSL, MEAG and MUI; and theMUSIC segment includes the assets and operations of MUSIC. The Blue Oceansegment included the assets and operations of Blue Ocean and Blue Ocean Re. Thesegment disclosures provided herein present the operations of MontpelierBermuda, Montpelier Syndicate 5151 and MUSIC prior to the effects ofintercompany quota share reinsurance agreements among them. The Company hasmade its segment determination based on consideration of the followingcriteria: (i) the nature of the business activities of each of the Company’ssubsidiaries and affiliates; (ii) the manner in which the Company’ssubsidiaries and affiliates are organized; and (iii) the organization ofinformation provided to the Company’s Board of Directors and senior management.

 

TheCompany, certain intermediate holding and service companies and intercompanyeliminations relating to inter-segment reinsurance and support services arecollectively referred to “Corporate and Other.”

 

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Thefollowing table summarizes Montpelier’s identifiable assets by segment as of December 31,2009 and 2008:

 
| ** **                 | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                 | ** ** | **2009**              | ** **  | **2008**              | ** ** |
| Montpelier  Bermuda        | ** ** | **$**                 | **2,787.3** |                  | $          | 2,584.7 |   |
| Montpelier  Syndicate 5151 | ** ** | **205.1**             |        | 96.3                  |       |
| MUSIC                      | ** ** | **77.2**              |        | 68.8                  |       |
| Blue Ocean                 | ** ** | **—**            |        | 1.2                   |       |
| Corporate and  Other       | ** ** | **32.7**              |        | 46.6                  |       |
|                       | ** ** | ** **            |        |                  |       |
| Total assets               | ** ** | **$**                 | **3,102.3** |                  | $          | 2,797.6 |   |

 

Asummary of Montpelier’s statements of operations by segment for the year ended December 31,2009 follows:

 
| ** **                                         | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                         | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2009**              | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                               |       |           |       |           |       |       |       |           |       | ** ** | ** ** |
| Gross premiums  written                            |       | $              | 452.4      |           | $          | 167.3      |       | $              | 24.3       |       | $          | (9.1 | ) | **$** | **634.9** | ** ** |
| Reinsurance  premiums ceded                        |       | (24.8          | )          | (16.4          | )          | (0.6       | )          | 9.1            | ** ** | **(32.7**  | **)**      |
| Net premiums  written                              |       | 427.6          |       | 150.9          |       | 23.7       | ** ** | **—**     | ** ** | **602.2**  | ** ** |
| Change in  unearned premiums                       |       | (1.6           | )          | (17.8          | )          | (9.6       | )          | **—**     | ** ** | **(29.0**  | **)**      |
| Net premiums  earned                               |       | 426.0          |       | 133.1          |       | 14.1       | ** ** | **—**     | ** ** | **573.2**  | ** ** |
| Loss and LAE                                       |       | (64.4          | )          | (64.6          | )          | (9.7       | )          | **—**     | ** ** | **(138.7** | **)**      |
| Acquisition  costs                                 |       | (54.2          | )          | (22.9          | )          | (3.4       | )          | **—**     | ** ** | **(80.5**  | **)**      |
| General and  administrative expenses               |       | (62.2          | )          | (38.5          | )          | (9.0       | )          | (27.4          | )          | **(137.1** | **)**      |
| Underwriting  income                               |       | 245.2          |       | 7.1            |       | (8.0       | )          | (27.4          | )          | **216.9**  | ** ** |
| Net investment  income                             |       | 77.9           |       | 0.7            |       | 2.2        |       | 0.2            | ** ** | **81.0**   | ** ** |
| Other revenue                                      |       | 0.5            | ** ** | **—**     | ** ** | **—** | ** ** | **—**     | ** ** | **0.5**    | ** ** |
| Investment and  foreign exchange gains             |       | 181.5          |       | (2.4           | )          | 2.2        |       | (2.0           | )          | **179.3**  | ** ** |
| Net income from  derivative instruments            |       | 7.3            | ** ** | **—**     | ** ** | **—** | ** ** | **—**     | ** ** | **7.3**    | ** ** |
| Interest and  other financing expenses             |       | (1.5           | )          | (1.9           | )          | **—** |       | (22.9          | )          | **(26.3**  | **)**      |
| Gain on early  extinguishment of debt              | ** ** | **—**     | ** ** | **—**     | ** ** | **—** |       | 5.9            | ** ** | **5.9**    | ** ** |
| Income before  income taxes and extraordinary item |       | $              | 510.9      |           | $          | 3.5        |       | $              | (3.6       | )          | $          | (46.2 | ) | **$** | **464.6** | ** ** |

 

Supplementalinformation separately presenting Montpelier Syndicate 5151’s U.S.-based andU.K.-based underwriting activities for the year ended December 31, 2009follows:

 
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Montpelier** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Syndicate**  | ** ** |
| **Year Ended December 31, 2009** | ** ** | **U.S.**   | ** ** | **U.K.**   | ** ** | **5151**       | ** ** |
| ** **                            | ** ** |       |       |       |       | ** **     | ** ** |
| Gross premiums written                | ** ** | $          | 48.2       |       | $          | 119.1          |       | **$** | **167.3** | ** ** |
| Reinsurance  premiums ceded           |       | (6.0       | )          | (10.4      | )          | **(16.4**      | **)**      |
| Net premiums  written                 |       | 42.2       |       | 108.7      | ** ** | **150.9**      | ** ** |
| Change in  unearned premiums          |       | 2.1        |       | (19.9      | )          | **(17.8**      | **)**      |
| Net premiums  earned                  |       | 44.3       |       | 88.8       | ** ** | **133.1**      | ** ** |
|                                  |       |       |       |       |       | ** **     | ** ** |
| Loss and LAE                          |       | (31.6      | )          | (33.0      | )          | **(64.6**      | **)**      |
| Acquisition  costs                    |       | (11.0      | )          | (11.9      | )          | **(22.9**      | **)**      |
| General and  administrative expenses  |       | (18.7      | )          | (19.8      | )          | **(38.5**      | **)**      |
| Underwriting  income                  |       | $          | (17.0      | )          | $          | 24.1           | ** ** | **$** | **7.1** | ** ** |

 

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Table of Contents

 

Asummary of Montpelier’s statements of operations by segment for the year ended December 31,2008 follows:

 
| ** **                                      | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                      | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | ** **     | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2008**           | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **Blue Ocean** | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                            |       |           |       |           |       |       |       |           |       |           |       |       |       |
| Gross premiums  written                         |       | $              | 503.5      |           | $          | 116.2      |       | $              | 5.6        |           | $          | 0.1        |       | $ | (5.3 | ) | $ | 620.1 |   |
| Reinsurance  premiums ceded                     |       | (76.7          | )          | (7.5           | )          | —     |       | —         |       | 5.3            |       | (78.9      | )          |
| Net premiums  written                           |       | 426.8          |       | 108.7          |       | 5.6        |       | 0.1            |       | —         |       | 541.2      |       |
| Change in  unearned premiums                    |       | 32.9           |       | (45.1          | )          | (3.5       | )          | 3.0            |       | —         |       | (12.7      | )          |
| Net premiums  earned                            |       | 459.7          |       | 63.6           |       | 2.1        |       | 3.1            |       | —         |       | 528.5      |       |
|                                            |       |           |       |           |       |       |       |           |       |           |       |       |       |
| Loss and LAE                                    |       | (245.9         | )          | (47.4          | )          | (1.8       | )          | —         |       | —         |       | (295.1     | )          |
| Acquisition  costs                              |       | (72.8          | )          | (10.4          | )          | (0.5       | )          | (0.2           | )          | —         |       | (83.9      | )          |
| General and  administrative expenses            |       | (43.3          | )          | (32.7          | )          | (5.0       | )          | (0.9           | )          | (20.1          | )          | (102.0     | )          |
| Underwriting  income                            |       | 97.7           |       | (26.9          | )          | (5.2       | )          | 2.0            |       | (20.1          | )          | 47.5       |       |
| Net investment  income                          |       | 82.0           |       | 0.8            |       | 2.1        |       | 1.3            |       | 0.2            |       | 86.4       |       |
| Other revenue                                   |       | 1.0            |       | —         |       | —     |       | —         |       | —         |       | 1.0        |       |
| Investment and  foreign exchange losses         |       | (249.8         | )          | 7.3            |       | (1.6       | )          | 0.2            |       | 6.6            |       | (237.3     | )          |
| Net expense from  derivative instruments        |       | (14.3          | )          | —         |       | —     |       | —         |       | —         |       | (14.3      | )          |
| Interest and  other financing expenses          |       | (1.8           | )          | (1.3           | )          | —     |       | (0.2           | )          | (23.5          | )          | (26.8      | )          |
| Loss before  income taxes andextraordinary item |       | $              | (85.2      | )              | $          | (20.1      | )          | $              | (4.7       | )              | $          | 3.3        |       | $ | (36.8 | ) | $ | (143.5 | ) |

 

Supplementalinformation separately presenting Montpelier Syndicate 5151’s U.S.-based andU.K.-based underwriting activities for the year ended December 31, 2008follows:

 
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Montpelier** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Syndicate**  | ** ** |
| **Year Ended December 31, 2008** | ** ** | **U.S.**   | ** ** | **U.K.**   | ** ** | **5151**       | ** ** |
|                                  |       |       |       |       |       |           |       |
| Gross premiums  written               |       | $          | 36.3       |       | $          | 79.9           |       | $ | 116.2 |   |
| Reinsurance  premiums ceded           |       | (1.1       | )          | (6.4       | )          | (7.5           | )          |
| Net premiums  written                 |       | 35.2       |       | 73.5       |       | 108.7          |       |
| Change in  unearned premiums          |       | (12.8      | )          | (32.3      | )          | (45.1          | )          |
| Net premiums  earned                  |       | 22.4       |       | 41.2       |       | 63.6           |       |
|                                  |       |       |       |       |       |           |       |
| Loss and LAE                          |       | (23.7      | )          | (23.7      | )          | (47.4          | )          |
| Acquisition  costs                    |       | (5.0       | )          | (5.4       | )          | (10.4          | )          |
| General and  administrative expenses  |       | (16.8      | )          | (15.9      | )          | (32.7          | )          |
| Underwriting  loss                    |       | $          | (23.1      | )          | $          | (3.8           | )          | $ | (26.9 | ) |

 

F-35

----

Table of Contents

 

Asummary of Montpelier’s statements of operations by segment for the year ended December 31,2007 follows:

 
| ** **                                        | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                                        | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | ** **      | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2007**             | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **Blue  Ocean** | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                              |       |           |       |           |       |       |       |            |       |           |       |       |       |
| Gross premiums  written                           |       | $              | 595.7      |           | $          | 15.3       |       | $               | —     |           | $          | 42.8       |       | $ | — |   | $ | 653.8 |   |
| Reinsurance  premiums ceded                       |       | (104.7         | )          | (0.1           | )          | —     |       | —          |       | —         |       | (104.8     | )          |
| Net premiums  written                             |       | 491.0          |       | 15.2           |       | —     |       | 42.8            |       | —         |       | 549.0      |       |
| Change in  unearned premiums                      |       | 0.3            |       | (11.0          | )          | —     |       | 18.9            |       | —         |       | 8.2        |       |
| Net premiums  earned                              |       | 491.3          |       | 4.2            |       | —     |       | 61.7            |       | —         |       | 557.2      |       |
|                                              |       |           |       |           |       |       |       |            |       |           |       |       |       |
| Loss and LAE                                      |       | (173.3         | )          | (4.2           | )          | —     |       | —          |       | —         |       | (177.5     | )          |
| Acquisition  costs                                |       | (72.9          | )          | (1.6           | )          | —     |       | (3.8            | )          | —         |       | (78.3      | )          |
| General and  administrative expenses              |       | (53.6          | )          | (10.8          | )          | (1.2       | )          | (13.9           | )          | (6.4           | )          | (85.9      | )          |
| Underwriting  income                              |       | 191.5          |       | (12.4          | )          | (1.2       | )          | 44.0            |       | (6.4           | )          | 215.5      |       |
| Net investment  income                            |       | 114.2          |       | 0.2            |       | 0.1        |       | 17.2            |       | 0.8            |       | 132.5      |       |
| Other revenue                                     |       | 2.0            |       | —         |       | —     |       | —          |       | —         |       | 2.0        |       |
| Investment and  foreign exchange gains            |       | 31.6           |       | 0.2            |       | —     |       | 0.8             |       | —         |       | 32.6       |       |
| Net expense from  derivative instruments          |       | (0.3           | )          | —         |       | —     |       | —          |       | —         |       | (0.3       | )          |
| Interest and  other financing expenses            |       | (2.0           | )          | (0.6           | )          | —     |       | (7.8            | )          | (24.1          | )          | (34.5      | )          |
| Income before  income taxes andextraordinary item |       | $              | 337.0      |           | $          | (12.6      | )          | $               | (1.1       | )              | $          | 54.2       |       | $ | (29.7 | ) | $ | 347.8 |   |

 

Supplementalinformation separately presenting Montpelier Syndicate 5151’s U.S.-based andU.K.-based underwriting activities for the year ended December 31, 2007follows:

 
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Montpelier** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Syndicate**  | ** ** |
| **Year  Ended December 31, 2007** | ** ** | **U.S.**   | ** ** | **U.K.**   | ** ** | **5151**       | ** ** |
|                                   |       |       |       |       |       |           |       |
| Gross premiums  written                |       | $          | 8.0        |       | $          | 7.3            |       | $ | 15.3 |   |
| Reinsurance  premiums ceded            |       | —     |       | (0.1       | )          | (0.1           | )          |
| Net premiums written                   |       | 8.0        |       | 7.2        |       | 15.2           |       |
| Change in  unearned premiums           |       | (6.2       | )          | (4.8       | )          | (11.0          | )          |
| Net premiums  earned                   |       | 1.8        |       | 2.4        |       | 4.2            |       |
|                                   |       |       |       |       |       |           |       |
| Loss and LAE                           |       | (1.6       | )          | (2.6       | )          | (4.2           | )          |
| Acquisition  costs                     |       | (1.3       | )          | (0.3       | )          | (1.6           | )          |
| General and  administrative expenses   |       | (5.8       | )          | (5.0       | )          | (10.8          | )          |
| Underwriting  loss                     |       | $          | (6.9       | )          | $          | (5.5           | )          | $ | (12.4 | ) |

** **

**Gross Written Premiums By Line of Business andGeography**

 

Beginningin 2009, the Company changed the manner in which it categorized its lines ofbusiness by segregating treaty business from individual risk exposures. As aresult of this re-characterization, the Company renamed its lines of businessto be: (i) Property Catastrophe - Treaty; (ii) Property Specialty -Treaty; (iii) Other Specialty - Treaty; and (iv) Property andSpecialty Individual Risk. All prior periods conform with the currentpresentation.

 

F-36

----

Table of Contents

 

Thefollowing tables present our gross premiums written, by line of business andreportable segment, during the years ended December 31, 2009, 2008 and2007:

 

(Millions)

 
| ** **                              | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2009**   | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                    |       |           |       |           |       |       |       |           |       |       |       |
| Property  Catastrophe - Treaty          | ** ** | **$**          | **262.5**  | ** **     | **$**      | **32.9**   | ** ** | **$**          | **—** | ** ** | **$**      | **—** | ** ** | **$** | **295.4** | ** ** |
| Property  Specialty - Treaty            | ** ** | **68.9**       | ** ** | **27.7**       | ** ** | **—** | ** ** | **—**     | ** ** | **96.6**   | ** ** |
| Other Specialty  - Treaty               | ** ** | **71.2**       | ** ** | **49.7**       | ** ** | **—** | ** ** | **—**     | ** ** | **120.9**  | ** ** |
| Property and  Specialty Individual Risk | ** ** | **41.2**       | ** ** | **56.5**       | ** ** | **24.3**   | ** ** | **—**     | ** ** | **122.0**  | ** ** |
| Inter-segment  reinsurance (1)          | ** ** | **8.6**        | ** ** | **0.5**        | ** ** | **—** | ** ** | **(9.1**       | **)**      | **—** | ** ** |
| Total gross  premiums written           | ** ** | **$**          | **452.4**  | ** **     | **$**      | **167.3**  | ** ** | **$**          | **24.3**   | ** ** | **$**      | **(9.1** | **)** | **$** | **634.9** | ** ** |

 
| ** **                              | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | ** **      | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2008**   | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **Blue  Ocean** | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                    |       |           |       |           |       |       |       |            |       |           |       |       |       |
| Property  Catastrophe - Treaty          |       | $              | 305.9      |           | $          | 30.6       |       | $               | —     |           | $          | 0.1        |       | $ | — |   | $ | 336.6 |   |
| Property  Specialty - Treaty            |       | 86.4           |       | 15.8           |       | —     |       | —          |       | —         |       | 102.2      |       |
| Other Specialty  - Treaty               |       | 66.1           |       | 30.3           |       | —     |       | —          |       | —         |       | 96.4       |       |
| Property and  Specialty Individual Risk |       | 39.8           |       | 39.5           |       | 5.6        |       | —          |       | —         |       | 84.9       |       |
| Inter-segment  reinsurance (1)          |       | 5.3            |       | —         |       | —     |       | —          |       | (5.3           | )          | —     |       |
| Total gross premiums  written           |       | $              | 503.5      |           | $          | 116.2      |       | $               | 5.6        |           | $          | 0.1        |       | $ | (5.3 | ) | $ | 620.1 |   |

 
| ** **                              | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | ** **      | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2007**   | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **Blue  Ocean** | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                    |       |           |       |           |       |       |       |            |       |           |       |       |       |
| Property  Catastrophe - Treaty          |       | $              | 329.7      |           | $          | 1.0        |       | $               | —     |           | $          | 42.8       |       | $ | — |   | $ | 373.5 |   |
| Property  Specialty - Treaty            |       | 101.9          |       | 3.5            |       | —     |       | —          |       | —         |       | 105.4      |       |
| Other Specialty  - Treaty               |       | 98.9           |       | 0.3            |       | —     |       | —          |       | —         |       | 99.2       |       |
| Property and  Specialty Individual Risk |       | 65.2           |       | 10.5           |       | —     |       | —          |       | —         |       | 75.7       |       |
| Total gross  premiums written           |       | $              | 595.7      |           | $          | 15.3       |       | $               | —     |           | $          | 42.8       |       | $ | — |   | $ | 653.8 |   |

 

----

(1) Representsinter-segment reinsurance covers which are eliminated in consolidation.

 

Montpelierseeks to diversify its exposures across geographic zones around the world inorder to obtain a prudent spread of risk. The spread of these exposures is alsoa function of market conditions and opportunities.

 

Montpeliermonitors its geographic exposures on a company-wide basis, rather than bysegment. The following table sets forth a breakdown of Montpelier’s grosspremiums written by geographic area of risks insured:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S. and Canada                                 | ** ** | **$**                            | **353.6**  | ** ** | **56** | **%** | $ | 314.2 |   | 50 | % | $ | 338.5 |   | 52 | % |
| Worldwide (1)                                   | ** ** | **118.0**                        | ** ** | **19** |   | 121.2 |   | 19 |   | 133.5 |   | 20 |   |
| Western Europe,  excluding the U.K. and Ireland | ** ** | **37.7**                         | ** ** | **6** |   | 59.7 |   | 10 |   | 51.6 |   | 8 |   |
| Worldwide,  excluding U.S. and Canada (2)       | ** ** | **32.2**                         | ** ** | **5** |   | 41.5 |   | 7 |   | 33.8 |   | 5 |   |
| U.K. and Ireland                                | ** ** | **25.0**                         | ** ** | **4** |   | 24.4 |   | 4 |   | 34.2 |   | 5 |   |
| Japan                                           | ** ** | **22.4**                         | ** ** | **3** |   | 23.1 |   | 4 |   | 25.0 |   | 4 |   |
| Other                                           | ** ** | **46.0**                         | ** ** | **7** |   | 36.0 |   | 6 |   | 37.2 |   | 6 |   |
| Total gross  premiums written                   | ** ** | **$**                            | **634.9**  | ** ** | **100** | **%** | $ | 620.1 |   | 100 | % | $ | 653.8 |   | 100 | % |

 

----

(1)          “Worldwide”comprises insurance and reinsurance contracts that insure or reinsure risks inmore than one geographic area and do not specifically exclude the U.S. andCanada.

 

(2)          “Worldwide,excluding U.S. and Canada” comprises insurance and reinsurance contracts thatinsure or reinsure risks in more than one geographic area but specificallyexclude the U.S. and Canada.

 

F-37

----

Table of Contents

 

**Net Earned Premiums By Line of Business and Geography**

 

Thefollowing tables present Montpelier’s net earned premiums, by line of businessand reportable segment, during the years ended December 31, 2009, 2008 and2007:

 

(Millions)

 
| ** **                              | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2009**   | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                    |       |           |       |           |       |       |       |           |       |       |       |
| Property  Catastrophe - Treaty          | ** ** | **$**          | **249.9**  | ** **     | **$**      | **34.5**   | ** ** | **$**          | **—** | ** ** | **$**      | **—** | ** ** | **$** | **284.4** | ** ** |
| Property  Specialty - Treaty            | ** ** | **68.4**       | ** ** | **29.3**       | ** ** | **—** | ** ** | **—**     | ** ** | **97.7**   | ** ** |
| Other Specialty  - Treaty               | ** ** | **72.6**       | ** ** | **30.9**       | ** ** | **—** | ** ** | **—**     | ** ** | **103.5**  | ** ** |
| Property and  Specialty Individual Risk | ** ** | **35.1**       | ** ** | **38.4**       | ** ** | **14.1**   | ** ** | **—**     | ** ** | **87.6**   | ** ** |
| Total net  premiums earned              | ** ** | **$**          | **426.0**  | ** **     | **$**      | **133.1**  | ** ** | **$**          | **14.1**   | ** ** | **$**      | **—** | ** ** | **$** | **573.2** | ** ** |

 
| ** **                              | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | ** **      | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year  Ended December 31, 2008**  | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **Blue  Ocean** | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                    |       |           |       |           |       |       |       |            |       |           |       |       |       |
| Property  Catastrophe - Treaty          |       | $              | 264.1      |           | $          | 23.1       |       | $               | —     |           | $          | 3.1        |       | $ | — |   | $ | 290.3 |   |
| Property  Specialty - Treaty            |       | 84.9           |       | 8.6            |       | —     |       | —          |       | —         |       | 93.5       |       |
| Other Specialty  - Treaty               |       | 70.9           |       | 7.1            |       | —     |       | —          |       | —         |       | 78.0       |       |
| Property and  Specialty Individual Risk |       | 39.8           |       | 24.8           |       | 2.1        |       | —          |       | —         |       | 66.7       |       |
| Total net  premiums earned              |       | $              | 459.7      |           | $          | 63.6       |       | $               | 2.1        |           | $          | 3.1        |       | $ | — |   | $ | 528.5 |   |

 
| ** **                              | ** ** | ** **     | ** ** | **Montpelier** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|----------------|------------|------------|------------|
| ** **                              | ** ** | **Montpelier** | ** ** | **Syndicate**  | ** ** | ** ** | ** ** | ** **      | ** ** | **Corporate**  | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2007**   | ** ** | **Bermuda**    | ** ** | **5151**       | ** ** | **MUSIC**  | ** ** | **Blue  Ocean** | ** ** | **and  Other** | ** ** | **Total**  | ** ** |
|                                    |       |           |       |           |       |       |       |            |       |           |       |       |       |
| Property  Catastrophe - Treaty          |       | $              | 245.6      |           | $          | 0.5        |       | $               | —     |           | $          | 61.7       |       | $ | — |   | $ | 307.8 |   |
| Property  Specialty - Treaty            |       | 88.3           |       | 1.4            |       | —     |       | —          |       | —         |       | 89.7       |       |
| Other Specialty  - Treaty               |       | 88.4           |       | 0.1            |       | —     |       | —          |       | —         |       | 88.5       |       |
| Property and  Specialty Individual Risk |       | 69.0           |       | 2.2            |       | —     |       | —          |       | —         |       | 71.2       |       |
| Total net  premiums earned              |       | $              | 491.3      |           | $          | 4.2        |       | $               | —     |           | $          | 61.7       |       | $ | — |   | $ | 557.2 |   |

 

Montpeliermonitors its geographic exposures on a company-wide basis, rather than bysegment. The following table sets forth a breakdown of Montpelier’s net earnedpremiums by geographic area of risks insured:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| U.S. and Canada                                 | ** ** | **$**                            | **329.7**  | ** ** | **58** | **%** | $ | 276.8 |   | 52 | % | $ | 336.5 |   | 60 | % |
| Worldwide (1)                                   | ** ** | **90.4**                         | ** ** | **16** |   | 94.7 |   | 18 |   | 54.5 |   | 10 |   |
| Western Europe,  excluding the U.K. and Ireland | ** ** | **31.1**                         | ** ** | **5** |   | 56.3 |   | 11 |   | 51.9 |   | 9 |   |
| Worldwide,  excluding U.S. and Canada (2)       | ** ** | **35.5**                         | ** ** | **6** |   | 38.6 |   | 7 |   | 37.5 |   | 7 |   |
| U.K. and Ireland                                | ** ** | **23.7**                         | ** ** | **4** |   | 29.0 |   | 5 |   | 26.5 |   | 5 |   |
| Japan                                           | ** ** | **22.5**                         | ** ** | **4** |   | 23.4 |   | 4 |   | 25.7 |   | 5 |   |
| Other                                           | ** ** | **40.3**                         | ** ** | **7** |   | 9.7 |   | 2 |   | 24.6 |   | 4 |   |
| Total net earned  premiums                      | ** ** | **$**                            | **573.2**  | ** ** | **100** | **%** | $ | 528.5 |   | 100 | % | $ | 557.2 |   | 100 | % |

 

----

(1)          “Worldwide”comprises insurance and reinsurance contracts that insure or reinsure risks inmore than one geographic area and do not specifically exclude the U.S. andCanada.

(2)          “Worldwide,excluding U.S. and Canada” comprises insurance and reinsurance contracts thatinsure or reinsure risks in more than one geographic area but specificallyexclude the U.S. and Canada.

 

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**NOTE 14.Regulatory Requirements**

 

Insuranceand reinsurance entities are highly regulated in most countries, although thedegree and type of regulation varies significantly from one jurisdiction toanother with reinsurers generally subject to less regulation than primaryinsurers. Montpelier Re is regulated by the Bermuda Monetary Authority (the “BMA”),Syndicate 5151, MUAL, PUAL and MMSL are regulated by the U.K. FinancialServices Authority (the “FSA”) and, in regard to Syndicate 5151, MUAL and MCL,the Council of Lloyd’s, MUI, MEAG and PUAL are approved by Lloyd’s asCoverholders for Syndicate 5151, MUSIC is regulated by individual U.S. stateinsurance commissioners and MEAG is regulated by the Swiss Financial MarketSupervisory Authority (“FINMA”).

 

***Bermuda Regulation***

 

MontpelierRe is registered under The Insurance Act 1978 (Bermuda), Amendments Thereto andRelated Regulations (the “Act”) as a Class 4 insurer. Under the Act,Montpelier Re is required to annually prepare and file statutory and GAAPfinancial statements and a statutory financial return. The Act also requiresMontpelier Re to maintain minimum levels of statutory capital and surplus, tomaintain minimum liquidity ratios and to meet minimum solvency margins. For allperiods presented herein, Montpelier Re satisfied these requirements.

 

EffectiveDecember 31, 2008, the BMA introduced a risk-based capital model, theBermuda Statutory Capital Requirement (“BSCR”) as a tool to measure risk and todetermine an enhanced capital requirement and target capital level (defined as120% of the enhanced capital requirement) for Class 4 insurers. While the requiredstatutory capital and surplus has increased under the BSCR, Montpelier Re hascapital and surplus in excess of the target capital level.

 

TheAct limits the maximum amount of annual dividends and distributions that may bepaid by Class 4 insurers and for this reason Montpelier Re is notpermitted to pay dividends to the Company in any year which would exceed 25% ofits prior year statutory capital and surplus or reduce its prior year statutorycapital by 15% or more, without the prior notification to, and in certain casesthe approval of, the BMA. In addition, as a Class 4 insurer, Montpelier Reis not permitted to declare or pay a dividend, or make a distribution out ofcontributed surplus, if the realisable value of its assets would be less than theaggregate of its liabilities, issued share capital and share premium accounts.

 

TheBermuda Companies Act 1981 (the “Companies Act”) limits the Company’s abilityto pay dividends and distributions to shareholders.

 

***U.K. Regulation***

 

Syndicate5151 is currently managed by MUAL but, through December 31, 2008, wasmanaged by Spectrum. Syndicate 5151, Spectrum and MUAL are subject toregulation by the FSA under the Financial Services and Markets Act 2000, and bythe Council of Lloyd’s.

 

MUAL,as a Lloyd’s Managing Agent, is subject to minimum solvency tests establishedby Lloyd’s. Since its inception in October 2008, MUAL has satisfied theserequirements.

 

Asa corporate member of Lloyd’s, MCL is bound by the rules of the Society ofLloyd’s, which are prescribed by Byelaws and Requirements made by the Councilof Lloyd’s under powers conferred by the Lloyd’s Act 1982. These rules (amongother matters) prescribe MCL’s membership subscription, the level of itscontribution to the Lloyd’s Central Fund and the assets it must deposit withLloyd’s in support of its underwriting. The Council of Lloyd’s has broad powersto sanction breaches of its rules, including the power to restrict or prohibita member’s participation in Lloyd’s syndicates.

 

MCLis required by Lloyd’s to maintain capital requirements based on the premiumcapacity and net liabilities of Syndicate 5151. Syndicate 5151’s net capitalrequirement as of December 31, 2009 was fulfilled through a $230.0 millionsecured letter of credit facility. See Note 6.

 

Premiumsreceived by Syndicate 5151 are received into the Lloyd’s Premiums Trust Funds(the “Trust Funds”). Under the Trust Funds’ deeds, those assets may only beused for the payment of claims and valid expenses. Profits held within theTrust Funds, including investment income earned thereon, may be distributed tothe corporate member annually, subject to meeting Lloyd’s requirements. TrustFund assets not required to meet cash calls and/or loss payments may also beused towards a corporate member’s ongoing capital requirements. Upon theclosing of an open underwriting year, normally after three years, allundistributed profits held within the Trust Funds applicable to the closedunderwriting year may be distributed to the corporate member. As of December 31,2009, Syndicate 5151 held $41.0 million in cash and cash equivalents and $80.3million in investment securities, within the Trust Funds.

 

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***U.S. Regulation***

 

MUSICis domiciled in Oklahoma and is eligible to write surplus lines primaryinsurance in 47 additional states and the District of Columbia. MUSIC issubject to the laws of Oklahoma and the surplus lines regulation and reportingrequirements of the jurisdictions in which it is eligible to write surpluslines insurance. In accordance with certain provisions of the NationalAssociation of Insurance Commissioners Non-Admitted Insurance Model Act, whichhave been adopted by a number of states, MUSIC has established, and is requiredto maintain, specified amounts on deposit as a condition of its status as aneligible, non-admitted insurer in the U.S.

 

Theregulation of surplus lines insurance differs significantly from the licensedor “admitted” market. The regulations governing the surplus lines market havebeen designed to facilitate the procurement of coverage, through speciallylicensed surplus lines brokers, for hard-to-place risks that do not fitstandard underwriting criteria and are otherwise eligible to be written on asurplus lines basis. Particularly, surplus lines regulation generally providesfor more flexible rules relating to insurance rates and forms. However,strict regulations apply to surplus lines placements under the laws of everystate, and certain state insurance regulations require that a risk must bedeclined by up to three admitted carriers before it may be placed in thesurplus lines market. Initial eligibility requirements and annual requalificationstandards apply to insurance carriers writing on a surplus basis and filingobligations must also be met. In most states, surplus lines brokers areresponsible for collecting and remitting the surplus lines tax payable to thestate where the risk is located. Companies such as MUSIC, which conductsbusiness on a surplus lines basis in a particular state, are generally exemptfrom that state’s guaranty fund laws.

 

MUSICand certain holding companies are subject to regulation under the insurance holdingcompany laws of various U.S. jurisdictions. The insurance holding company lawsand regulations vary from jurisdiction to jurisdiction, but generally requirean insurance holding company, and insurers that are subsidiaries of insuranceholding companies, to register with state regulatory authorities and to filewith those authorities certain reports, including information concerning theircapital structure, ownership, financial condition, certain intercompanytransactions and general business operations.

 

Further,in order to protect insurance company solvency, state insurance statutestypically place limitations on the amount of dividends or other distributionspayable by insurance companies. Oklahoma, MUSIC’s state of domicile, currentlyrequires that dividends be paid only out of earned statutory surplus and limitsthe annual amount of dividends payable without the prior approval of theOklahoma Insurance Department to the greater of 10% of statutory capital andsurplus at the end of the previous calendar year or 100% of statutory netincome from operations for the previous calendar year. These insurance holdingcompany laws also impose prior approval requirements for certain transactionswith affiliates. In addition, as a result of the Company’s ownership of MUSICunder the terms of applicable state statutes, any person or entity desiring topurchase more than 10% of the Company’s outstanding voting securities isrequired to obtain prior regulatory approval for the purchase.

 

***Swiss Regulation***

 

MEAGis subject to registration and supervision by FINMA as an insuranceintermediary.

 

**NOTE 15.Related Party Transactions**

 

OnApril 1, 2008, the Company entered into a Letter Agreement with Kernan V.Oberting, the Company’s former Chief Financial Officer, setting forth the termsof his departure as a full-time employee, effective May 1, 2008, in orderto establish an investment advisory company, KVO Capital Management, LLC (“KVO”).Among other things, the Letter Agreement provided that Mr. Obertingcontinues to vest in all in force awards previously granted to him under theCompany’s Long-Term Incentive Plan prior to 2008 and entitled him to receive apro-rated annual bonus with respect to 2008. The Letter Agreement also providedfor the Company to enter into a Consulting Agreement with Mr. Oberting andKVO and an Investment Management Agreement with KVO (the “Consulting Agreement”and “IMA”, respectively).

 

Pursuantto the Consulting Agreement, KVO provides capital management and consultingservices to the Company and, pursuant to the IMA, KVO will provide the Companywith discretionary investment management services, in each case for an initialterm beginning May 1, 2008 and ending December 31, 2010, subject torenewal for additional successive one-year periods.

 

Pursuantto the Consulting Agreement, the Company pays KVO a monthly consulting feeequal to 0.0025% of the Company’s consolidated total assets at the end of eachmonth. In addition, if certain performance criteria with respect to the Company’sconsolidated investment portfolio are satisfied, the Company will pay KVO aone-time fee of $250,000 after the end of its initial term ending in 2010. Asof December 31, 2009, KVO had not met the performance criteria.

 

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Pursuantto the IMA, KVO is entitled to receive a monthly management fee equal to0.0833% of the net asset value of the Company’s investment account, which initiallyconsisted of cash and securities in an aggregate amount equal to $100.0 million(the “Investment Account”). As of December 31, 2009, the value of theInvestment Account, net of IMA fees paid and accrued to date, totaled $165.0million.

 

For2009 and 2008, Montpelier paid KVO an aggregate of $2.0 million and $1.0million, respectively, for services provided under the Consulting Agreement andthe IMA. At December 31, 2009 and 2008, Montpelier owed KVO an additional$0.2 million and $0.1 million for such services provided, respectively.

 

Alsopursuant to the IMA, KVO is entitled to an annual incentive fee equal to 15% ofthe Net Profits of the Investment Account (as defined in the ConsultingAgreement). With respect to the initial incentive fee period from May 1,2008 to December 31, 2009, KVO earned an incentive fee of $9.7 millionwhich was paid in January 2010.

 

Amountsdue to KVO are incorporated in accounts payable, accrued expenses and otherliabilities in the Company’s consolidated balance sheets.

 

WilburL. Ross, Jr., a Director of the Company and a former director of BlueOcean, is Chairman and CEO of WL Ross & Co. LLC. Investment fundsmanaged by WL Ross & Co. LLC collectively owned 8.6% of the Company’sCommon Shares outstanding at December 31, 2009. See Note 17.

 

Inconnection with the Blue Ocean Transaction, in June 2008 the Companypurchased 248,756.2 Blue Ocean common shares (representing 9.8% of the totalcommon shares outstanding at that date) from funds managed by WL Ross &Co. LLC for $5.1 million and Mr. Ross resigned as a director of BlueOcean. The Blue Ocean Transaction received the unanimous approval of Blue Ocean’snoncontrolling shareholders.

 

Inanticipation of the Blue Ocean Transaction, Montpelier cancelled itsunderwriting agreement with Blue Ocean Re (the “Underwriting Agreement”).During the years ended December 31, 2008 and 2007, Blue Ocean Re incurred$0.4 million and $12.6 million in total fees (consisting of underwriting andperformance fees), respectively, related to the Underwriting Agreement.

 

**NOTE 16.Commitments and Contingent Liabilities**

 

***Commitments***

 

Asof December 31, 2009, Montpelier had unfunded commitments to invest $23.5million into three separate private investment funds.

 

Montpelierleases office space and computer equipment under noncancellable operatingleases that expire on various dates. Montpelier also has various otheroperating lease obligations that are immaterial in the aggregate.

 

Futureannual minimum commitments under existing noncancellable leases for officespace are $5.2 million, $5.2 million, $5.2 million, $4.3 million, $3.8 millionand $5.9 million for 2010, 2011, 2012, 2013, 2014, and 2015 & beyond,respectively.

 

Futureannual minimum commitments under existing noncancellable leases for computerequipment are $2.3 million, $1.8 million, $1.3 million, and $0.5 million for2010, 2011, 2012, and 2013 & beyond, respectively.

 

***Lloyd’s Central Fund (the “Central Fund”)***

 

TheCentral Fund is available to satisfy claims if a member of Lloyd’s is unable tomeet its obligations to policyholders. The Central Fund is funded by an annuallevy imposed on members which is determined annually by Lloyd’s as a percentageof each member’s written premiums (0.5% with respect to 2010). In addition, theCouncil of Lloyd’s has power to call on members to make an additionalcontribution to the Central Fund of up to 3.0% of their underwriting capacityeach year should it decide that such additional contributions are necessary.Montpelier estimates that its 2010 obligation to the Central Fund will beapproximately $1.2 million.

 

Lloyd’salso imposes other charges on its members and the syndicates on which theyparticipate, including an annual subscription charge (0.5% of written premiumswith respect to 2010) and an overseas business charge, levied as a percentageof gross international premiums (that is, premiums on business outside the U.K.and the Channel Islands), with the percentage depending on the type of businesswritten. Lloyd’s also has power to impose additional charges under Lloyd’sPowers of Charging Byelaw. Montpelier estimates that its 2010 obligation toLloyd’s for such charges will be approximately $1.1 million.

 

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***Litigation***

 

Montpelieris subject to litigation and arbitration proceedings in the normal course ofits business. Such proceedings generally involve reinsurance contract disputeswhich are typical for the property and casualty insurance and reinsuranceindustry in general and are considered in connection with the Company’s netloss and loss expense reserves. See Note 4 for a description of the Company’sdispute with MPCL.

 

***Concentrations of Credit and Counterparty Risk***

 

Financialinstruments, which potentially subject Montpelier to significant concentrationsof credit risk, consist principally of investment securities, insurance andreinsurance balances receivable and reinsurance recoverables as described below.

 

Montpelierbelieves that there are no significant concentrations of credit risk from asingle issue or issuer within its investment portfolio other thanconcentrations in U.S. government and U.S. government-sponsored enterprises.Montpelier did not own an aggregate investment in a single entity, other thanU.S. government and U.S. government-sponsored enterprises, in excess of 10% ofthe Company’s common shareholders’ equity at December 31, 2009.

 

Montpelier’sportfolio of corporate and structured investments, such as asset andmortgage-backed securities, are subject to individual and aggregate creditrisk. Montpelier monitors the credit quality of its fixed maturity investmentswith exposure to subprime and Alternative A markets as well as those fixedmaturity investments that benefit from credit enhancements provided bythird-party financial guarantors.

 

Certainof Montpelier’s derivative securities are subject to counterparty risk.Montpelier routinely monitors this risk. 

 

Montpelierunderwrites the majority of its business through insurance and reinsurancebrokers. Credit risk exists should any of these brokers be unable to fulfilltheir contractual obligations to Montpelier. For example, Montpelier isfrequently required to pay amounts owed on claims under policies to brokers,and these brokers, in turn, pay these amounts to the ceding companies that havereinsured a portion of their liabilities with Montpelier. In somejurisdictions, if a broker fails to make such a payment, Montpelier might remainliable to the ceding company for the deficiency. In addition, in certainjurisdictions, when the ceding company pays premiums for these policies tobrokers, these premiums are considered to have been paid and the ceding insureris no longer liable to Montpelier for those amounts, whether or not thepremiums have actually been received.

 

Montpelierremains liable to the extent that any third-party reinsurer or other obligorfails to meet its reinsurance obligations and, with respect to certaincontracts that carry underlying reinsurance protection, Montpelier would beliable in the event that the ceding companies are unable to collect amounts duefrom underlying third-party reinsurers.

 

UnderMontpelier’s reinsurance security policy, reinsurers are generally required tobe rated “A-” (Excellent) or better by A.M. Best (or an equivalent ratingwith another recognized rating agency) at the time the policy is written.Montpelier considers reinsurers that are not rated or do not fall within theabove rating threshold on a case-by-case basis when collateralized up to policylimits, net of any premiums owed. Montpelier monitors the financial conditionand ratings of its reinsurers on an ongoing basis. See Note 4.

 

**NOTE 17.Subsequent Events**

 

Duringthe period from January 1, 2010 to February 23, 2010, the Company repurchased2,297,598 Common Shares at an average purchase price of $17.61 per share.

 

OnFebruary 26, 2010, the Company purchased the entirety of the 6,897,802Common Shares previously owned by Wilbur L. Ross, Jr. and investment fundsmanaged by WL Ross & Co LLC at a price of $19.00 per share in aprivate transaction. The Common Shares acquired by the Company represented 8.9%of its common shares outstanding immediately prior to the transaction.

 

Pursuantto the transaction, Mr. Ross will resign from the Board of Directors ofthe Company on March 1, 2010.

 

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**MANAGEMENT’S RESPONSIBILITY FORFINANCIAL STATEMENTS**

 

Managementis responsible for the preparation and fair presentation of the financialstatements included in this report. The financial statements have been preparedin conformity with GAAP. The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities as of the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

TheAudit Committee of the Board, which is comprised entirely of independent, qualifieddirectors, is responsible for the oversight of our accounting policies,financial reporting and internal control including the appointment andcompensation of our independent registered public accounting firm. The AuditCommittee meets periodically with management, our independent registered publicaccounting firm and our internal auditors to ensure they are carrying out theirresponsibilities. The Audit Committee is also responsible for performing anoversight role by reviewing our financial reports. Our independent registeredpublic accounting firm and internal auditors have full and unlimited access tothe Audit Committee, with or without management present, to discuss theadequacy of internal control over financial reporting and any other matterswhich they believe should be brought to their attention.

 

**MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING**

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. There are inherent limitations in theeffectiveness of any internal control over financial reporting, including thepossibility of human error and the circumvention or overriding of internalcontrol. Accordingly, because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Alsoprojections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Weassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2009. In making our assessment, we used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control-Integrated Framework. Based on thisassessment, we have concluded that the Company maintained effective internalcontrol over financial reporting as of December 31, 2009. Management hasreviewed the results of its assessment with the Audit Committee.

 

PricewaterhouseCoopers,the Company’s independent registered public accounting firm, has audited theeffectiveness of the Company’s internal control over financial reporting as of December 31,2009 as stated in their report which appears on page F-44.

 

February 26, 2010

 

 
| /s/ Christopher L. Harris              |   | /s/ Michael S. Paquette                                                |
|----------------------------------------|--------|------------------------------------------------------------------------|
| President and Chief  Executive Officer |   | Executive Vice President  and Chief Financial Officer                  |
| (Principal Executive  Officer)         |   | (Principal Financial  Officer & Principal Accounting Officer) |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To The Board of Directorsand Shareholders of Montpelier Re Holdings Ltd:

 

In our opinion, theconsolidated financial statements listed in the index appearing under Item 15(a) presentfairly, in all material respects, the financial position of Montpelier ReHoldings Ltd. and its subsidiaries at December 31, 2009 and December 31,2008, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2009 in conformity withaccounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedules listed in the indexappearing under Item 15(a) present fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. Also in our opinion, the Company maintained,in all material respects, effective internal control over financial reportingas of December 31, 2009, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). The Company’s management is responsible forthese financial statements and financial statement schedules, for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting included underItem 9A. Our responsibility is to express opinions on these financialstatements, on the financial statement schedules, and on the Company’s internalcontrol over financial reporting based on our integrated audits. We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects. Ouraudits of the financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

/s/ PRICEWATERHOUSECOOPERS

 

Hamilton, Bermuda

February 26, 2010

 

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**SELECTED QUARTERLY FINANCIAL DATA**

 

**(Unaudited)**

 

Selectedquarterly financial data for 2009 and 2008 is shown in the following table. Thequarterly financial data includes, in the opinion of management, all recurringadjustments necessary for a fair presentation of the results of operations forthe interim periods.

 
| ** **                                                              | ** ** | **2009 Three Months Ended** | ** ** | **2008 Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Millions, except per  share amounts**                                 | ** ** | **Dec. 31**            | ** ** | **Sept. 30**                | ** ** | **June 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sept. 30** | ** ** | **June 30** | ** ** | **Mar. 31** | ** ** |
| Net premiums  earned                                                    | ** ** | **$**                       | **154.8**  | ** **                  | **$**      | **143.6** | ** ** | **$** | **141.4** | ** ** | **$** | **133.4** |   | $ | 134.8 |   | $ | 134.2 |   | $ | 119.2 |   | $ | 140.3 |   |
| Net investment  income                                                  | ** ** | **21.3**                    | ** ** | **20.2**                    | ** ** | **20.5** | ** ** | **19.0** |   | 18.6 |   | 21.4 |   | 21.9 |   | 24.5 |   |
| Net investment  gains (losses)                                          | ** ** | **8.3**                     | ** ** | **87.1**                    | ** ** | **89.3** | ** ** | **(2.9** | **)** | (108.6 | ) | (80.1 | ) | (16.5 | ) | (39.7 | ) |
| Net foreign  exchange gains (losses)                                    | ** ** | **(1.1**                    | **)**      | **5.8**                     | ** ** | **(3.3** | **)** | **(3.9** | **)** | 10.3 |   | (7.7 | ) | (3.9 | ) | 8.9 |   |
| Net income  (expense) from derivatives                                  | ** ** | **3.4**                     | ** ** | **(5.5**                    | **)**      | **4.5** | ** ** | **4.9** |   | (9.9 | ) | (3.0 | ) | (2.3 | ) | 0.9 |   |
| Gain on early  extinguishment of debt                                   | ** ** | **—**                  | ** ** | **—**                  | ** ** | **—** | ** ** | **5.9** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Other revenue                                                           | ** ** | **—**                  | ** ** | **—**                  | ** ** | **0.3** | ** ** | **0.2** |   | 0.2 |   | 0.2 |   | 0.2 |   | 0.4 |   |
| Total revenues                                                          | ** ** | **186.7**                   | ** ** | **251.2**                   | ** ** | **252.7** | ** ** | **156.6** |   | 45.4 |   | 65.0 |   | 118.6 |   | 135.3 |   |
| Underwriting  expenses                                                  | ** ** | **75.4**                    | ** ** | **95.1**                    | ** ** | **87.0** | ** ** | **98.8** |   | 85.5 |   | 200.8 |   | 68.8 |   | 125.9 |   |
| Interest and  other financing charges                                   | ** ** | **6.5**                     | ** ** | **6.6**                     | ** ** | **6.7** | ** ** | **6.5** |   | 6.6 |   | 6.4 |   | 6.6 |   | 7.2 |   |
| Total expenses                                                          | ** ** | **81.9**                    | ** ** | **101.7**                   | ** ** | **93.7** | ** ** | **105.3** |   | 92.1 |   | 207.2 |   | 75.4 |   | 133.1 |   |
| Income (loss)  before income taxes andextraordinary item                |       | **104.8**                   |       | **149.5**                   |       | **159.0** |   | **51.3** |   | (46.7 | ) | (142.2 | ) | 43.2 |   | 2.2 |   |
| Income tax  benefit (provision)                                         | ** ** | **(0.1**                    | **)**      | **(2.0**                    | **)**      | **—** | ** ** | **1.0** |   | (1.0 | ) | **—** |   | (0.1 | ) | **—** | ** ** |
| Net income  (loss) before extraordinary item                            | ** ** | **104.7**                   | ** ** | **147.5**                   | ** ** | **159.0** | ** ** | **52.3** |   | (47.7 | ) | (142.2 | ) | 43.1 |   | 2.2 |   |
| Excess of fair  value of acquired net assetsover cost - Blue Ocean      |       | **—**                  |       | **—**                  |       | **—** |   | **—** |   | **—** |   | **—** |   | 1.0 |   | **—** |   |
| Net income  (loss)                                                      | ** ** | **104.7**                   | ** ** | **147.5**                   | ** ** | **159.0** | ** ** | **52.3** |   | (47.7 | ) | (142.2 | ) | 44.1 |   | 2.2 |   |
| Net income  attributable to noncontrollinginterest in Blue Ocean        |       | **—**                  |       | **—**                  |       | **—** |   | **—** |   | **—** |   | **—** |   | **—** |   | (1.9 | ) |
| Net income  (loss) attributable to the Company                          | ** ** | **$**                       | **104.7**  | ** **                  | **$**      | **147.5** | ** ** | **$** | **159.0** | ** ** | **$** | **52.3** |   | $ | (47.7 | ) | $ | (142.2 | ) | $ | 44.1 |   | $ | 0.3 |   |
|                                                                    |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Per share data:                                                         |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) attributable to the Companybefore extraordinary item |       | **$**                       | **1.25**   |                        | **$**      | **1.68** |   | **$** | **1.81** |   | **$** | **.61** |   | $ | (.57 | ) | $ | (1.69 | ) | $ | .50 |   | $ | **—** |   |
| Net income  (loss) attributable to commonshareholders                   |       | **$**                       | **1.25**   |                        | **$**      | **1.68** |   | **$** | **1.81** |   | **$** | **.61** |   | $ | (.57 | ) | $ | (1.69 | ) | $ | .51 |   | $ | **—** |   |
| Fully converted  book value per share                                   | ** ** | **$**                       | **21.14**  | ** **                  | **$**      | **19.78** | ** ** | **$** | **18.12** | ** ** | **$** | **16.37** |   | $ | 15.94 |   | $ | 16.61 |   | $ | 18.24 |   | $ | 17.76 |   |
| Fully converted  tangible book value per share                          | ** ** | **$**                       | **21.08**  | ** **                  | **$**      | **19.73** | ** ** | **$** | **18.06** | ** ** | **$** | **16.31** |   | $ | 15.88 |   | $ | 16.56 |   | $ | 18.19 |   | $ | 17.71 |   |

 

F-45

----

Table of Contents

 

**SCHEDULE I**

 

**MONTPELIER RE HOLDINGS LTD.**

 

**SUMMARY OF INVESTMENTS — OTHER THAN**

**INVESTMENTS IN RELATED PARTIES**

**At December 31, 2009**

 
| ** **                                                   | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Fair**    | ** ** |
|--------------------------------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|
| **Millions**                                                 | ** ** | **Cost**   | ** ** | **Value**    | ** ** | **Value**   | ** ** |
| Fixed maturity  investments:                                 |       |       |       |         |       |        |       |
| Bonds:                                                       |       |       |       |         |       |        |       |
| Corporate bonds  and asset-backed securities                 |       | $          | 1,333.9    | ** **   | **$**      | **1,362.4** |       | $ | 1,362.4 |   |
| U.S. Government  and government agencies and authorities (1) |       | 821.6      | ** ** | **820.8**    |       | 820.8       |       |
| Convertibles and  bonds with warrants attached               |       | 22.3       | ** ** | **24.3**     |       | 24.3        |       |
| Total fixed  maturities                                      |       | 2,177.8    | ** ** | **2,207.5**  |       | 2,207.5     |       |
| Equity  securities:                                          |       |       |       |         |       |        |       |
| Public utilities                                             |       | 46.9       | ** ** | **53.5**     |       | 53.5        |       |
| Banks, trust and  insurance companies                        |       | 36.9       | ** ** | **41.3**     |       | 41.3        |       |
| Industrial,  miscellaneous and other                         |       | 66.5       | ** ** | **72.4**     |       | 72.4        |       |
| Total equity  securities                                     |       | 150.3      | ** ** | **167.2**    |       | 167.2       |       |
| Other  investments                                           |       | 95.1       | ** ** | **94.1**     |       | 94.1        |       |
| Total  investments                                           |       | $          | 2,423.2    | ** **   | **$**      | **2,468.8** |       | $ | 2,468.8 |   |

 

----

(1) Includes mortgage-backedsecurities issued by GNMA, FNMA and FHLMC.

 

FS-1

----

Table of Contents

 

**SCHEDULE II**

 

**MONTPELIER RE HOLDINGS LTD.**

**(Parent Only)**

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                      | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **Millions**                                                                    | ** ** | **2009**              | ** **  | **2008** | ** ** |
| Assets:                                                                         |       |                  |        |   |   |
| Cash and cash  equivalents                                                      | ** ** | **$**                 | **10.4**    |   | $ | 20.0 |   |
| Other  investments                                                              | ** ** | **3.1**               |        | 3.1 |   |
| Intercompany  receivables                                                       | ** ** | **8.2**               |        | 13.9 |   |
| Other assets                                                                    | ** ** | **2.5**               |        | 3.4 |   |
| Investments in  subsidiaries and affiliates, on the equity method of accounting | ** ** | **2,099.3**           |        | 1,701.7 |   |
| Total assets                                                                    | ** ** | **$**                 | **2,123.5** |   | $ | 1,742.1 |   |
| Liabilities:                                                                    |       |                  |        |   |   |
| Debt                                                                            | ** ** | **$**                 | **331.7**   |   | $ | 352.5 |   |
| Intercompany  payables                                                          | ** ** | **43.9**              |        | 14.4 |   |
| Accounts payable  and other liabilities                                         | ** ** | **19.4**              |        | 17.6 |   |
| Total  liabilities                                                              | ** ** | **395.0**             |        | 384.5 |   |
| Common  shareholders’ equity                                               | ** ** | **1,728.5**           |        | 1,357.6 |   |
| Total  liabilities and common shareholders’ equity                         | ** ** | **$**                 | **2,123.5** |   | $ | 1,742.1 |   |

 

**CONDENSEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| **Millions**                                                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                                            | ** ** | **$**                            | **5.9**    |   | $ | 0.5 |   | $ | 3.1 |   |
| Expenses                                                            | ** ** | **(50.5**                        | **)**      | (51.9 | ) | (32.6 | ) |
| Net loss                                                            | ** ** | **(44.6**                        | **)**      | (51.4 | ) | (29.5 | ) |
| Excess of fair  value of acquired net assets over cost - Blue Ocean | ** ** | **—**                       |       | 1.0 | ** ** | **—** | ** ** |
| Equity in  earnings (losses) of subsidiaries and affiliates         | ** ** | **508.1**                        |       | (95.1 | ) | 345.3 |   |
| Consolidated net  income (loss)                                     | ** ** | **463.5**                        |       | (145.5 | ) | 315.8 |   |
| Other  comprehensive income (loss) items                            | ** ** | **0.3**                          |       | (5.4 | ) | (1.8 | ) |
| Consolidated  comprehensive income (loss)                           | ** ** | **$**                            | **463.8**  |   | $ | (150.9 | ) | $ | 314.0 |   |

 

FS-2

----

Table of Contents

 

**SCHEDULE II**

**(continued)**

 

**MONTPELIER RE HOLDINGS LTD.**

**(Parent Only)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Millions**                                                                  | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Cash  flows from operations:**                                              |       |                             |       |   |   |   |   |
| Net income  (loss)                                                            | ** ** | **$**                            | **463.5**  |   | $ | (145.5 | ) | $ | 315.8 |   |
| Charges  (credits) to reconcile net income(loss) to net cash from operations: |       |                             |       |   |   |   |   |
| Excess of fair  value of acquired net assets over cost - Blue Ocean           | ** ** | **—**                       |       | (1.0 | ) | **—** | ** ** |
| Gain on early  extinguishment of debt                                         | ** ** | **(5.9**                         | **)**      | **—** | ** ** | **—** | ** ** |
| Undistributed  net (income) loss of subsidiaries and affiliates               | ** ** | **(507.0**                       | **)**      | 137.3 |   | (303.3 | ) |
| Expense  recognized for RSUs and DSUs                                         | ** ** | **14.8**                         | ** ** | 8.3 |   | 8.2 |   |
| Net amortization  and depreciation of assets and liabilities                  | ** ** | **1.2**                          | ** ** | 0.7 |   | 0.1 |   |
| Net change in  other assets and other liabilities                             | ** ** | **36.6**                         | ** ** | (5.0 | ) | (114.2 | ) |
| **Net  cash provided from (used for) operations**                             | ** ** | **3.2**                          | ** ** | (5.2 | ) | (93.4 | ) |
| **Cash  flows from investing activities:**                                    |       |                             | ** ** |   |   |   |   |
| Contributions of  capital made to subsidiaries                                | ** ** | **(10.8**                        | **)**      | (27.5 | ) | (85.4 | ) |
| Returns of  capital received from subsidiaries and affiliates                 | ** ** | **120.5**                        | ** ** | 236.5 |   | 339.9 |   |
| Purchase of Blue  Ocean noncontrolling interest                               | ** ** | **—**                       | ** ** | (30.5 | ) | **—** | ** ** |
| Net acquisitions  of capitalized assets                                       | ** ** | **(0.6**                         | **)**      | (2.3 | ) | **—** | ** ** |
| **Net  cash provided from investing activities**                              | ** ** | **109.1**                        | ** ** | 176.2 |   | 254.5 |   |
| **Cash  flows from financing activities:**                                    |       |                             | ** ** |   |   |   |   |
| Repurchase of  debt                                                           | ** ** | **(15.1**                        | **)**      | **—** | ** ** | **—** | ** ** |
| Repurchases of  Common Shares and warrants                                    | ** ** | **(112.6**                       | **)**      | (129.8 | ) | (124.7 | ) |
| Settlement of  Forward Sale Agreements                                        | ** ** | **32.0**                         | ** ** | **—** | ** ** | **—** | ** ** |
| Amendment of  Forward Sale Agreements                                         | ** ** | **—**                       | ** ** | **—** |   | (3.9 | ) |
| Dividends paid  on Common Shares and warrants                                 | ** ** | **(26.2**                        | **)**      | (28.4 | ) | (29.9 | ) |
| **Net  cash used for financing activities**                                   | ** ** | **(121.9**                       | **)**      | (158.2 | ) | (158.5 | ) |
| **Net  (decrease) increase in cash and cash equivalents during the year**     | ** ** | **(9.6**                         | **)**      | 12.8 |   | 2.6 |   |
| Cash and cash  equivalents - beginning of year                                | ** ** | **20.0**                         | ** ** | 7.2 |   | 4.6 |   |
| **Cash  and cash equivalents - end of year**                                  | ** ** | **$**                            | **10.4**   | ** ** | $ | 20.0 |   | $ | 7.2 |   |

 

FS-3

----

Table of Contents

 

**SCHEDULEIII**

 

**MONTPELIER RE HOLDINGS LTD.**

 

**SUPPLEMENTARY INSURANCE INFORMATION**

**(Millions)**

 
| **Column A**                 | ** ** | **Column B**         | ** ** | **Column C**      | ** ** | **Column D**     | ** ** | **Column E**     | ** ** | **Column F** | ** ** | **Column G**   | ** ** | **Column H**   | ** ** | **Column I**     | ** ** | **Column J**     | ** ** | **Column K** | ** ** |
|------------------------------|------------|----------------------|------------|-------------------|------------|------------------|------------|------------------|------------|--------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|--------------|------------|
| ** **                   | ** ** | ** **           | ** ** | **Reserves for**  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** |
| ** **                   | ** ** | **Deferred**         | ** ** | **unpaid claims** | ** ** | ** **       | ** ** | **Other policy** | ** ** | ** **   | ** ** | ** **     | ** ** | **Claims and** | ** ** | **Amortization** | ** ** | ** **       | ** ** | ** **   | ** ** |
| ** **                   | ** ** | **policy**           | ** ** | **and claim**     | ** ** | ** **       | ** ** | **claims and**   | ** ** | **Net**      | ** ** | **Net**        | ** ** | **claims**     | ** ** | **of policy**    | ** ** | **Other**        | ** ** | **Net**      | ** ** |
| ** **                   | ** ** | **acquisition**      | ** ** | **adjustment**    | ** ** | **Unearned**     | ** ** | **benefits**     | ** ** | **premiums** | ** ** | **investment** | ** ** | **adjustment** | ** ** | **acquisition**  | ** ** | **underwriting** | ** ** | **premiums** | ** ** |
| ** **                   | ** ** | **costs********(1)** | ** ** | **expenses**      | ** ** | **premiums (1)** | ** ** | **payable**      | ** ** | **earned**   | ** ** | **income (2)** | ** ** | **expenses**   | ** ** | **costs**        | ** ** | **expenses (3)** | ** ** | **written**  | ** ** |
| **December 31,  2009:** |       |                 |       |              |       |             |       |             |       |         |       |           |       |           |       |             |       |             |       |         |       |
| Montpelier Bermuda           | ** ** | **$**                | **19.8**   | ** **        | **$**      | **569.4**        | ** ** | **$**            | **131.9**  | ** **   | **$**      | **—**     | ** ** | **$**          | **426.0**  | ** **       | **$**      | **77.9**         | ** ** | **$**        | **64.4**   | ** ** | **$** | **54.2** | ** ** | **$** | **62.2** |   | **$** | **427.6** |   |
| Montpelier  Syndicate 5151   | ** ** | **15.8**             | ** ** | **96.0**          | ** ** | **73.0**         | ** ** | **—**       | ** ** | **133.1**    | ** ** | **0.7**        | ** ** | **64.6**       | ** ** | **22.9**         | ** ** | **38.5**         | ** ** | **150.9**    | ** ** |
| MUSIC                        | ** ** | **2.6**              | ** ** | **15.4**          | ** ** | **13.4**         | ** ** | **—**       | ** ** | **14.1**     | ** ** | **2.2**        | ** ** | **9.7**        | ** ** | **3.4**          | ** ** | **9.0**          | ** ** | **23.7**     | ** ** |
|                         |       |                 |       |              |       |             |       |             |       |         |       |           |       |           |       |             |       |             |       |         |       |
| December 31,  2008:     |       |                 |       |              |       |             |       |             |       |         |       |           |       |           |       |             |       |             |       |         |       |
| Montpelier  Bermuda          |       | $                    | 19.5       |              | $          | 750.0            |       | $                | 140.7      |         | $          | —         |       | $              | 459.7      |             | $          | 82.0             |       | $            | 245.9      |   | $ | 72.8 |   | $ | 43.3 |   | $ | 426.8 |   |
| Montpelier  Syndicate 5151   |       | 8.2                  |       | 48.8              |       | 42.2             |       | —           |       | 63.6         |       | 0.8            |       | 47.4           |       | 10.4             |       | 32.7             |       | 108.7        |       |
| MUSIC                        |       | 0.7                  |       | 10.1              |       | 3.5              |       | —           |       | 2.1          |       | 2.1            |       | 1.8            |       | 0.5              |       | 5.0              |       | 5.6          |       |
| Blue Ocean                   |       | —               |       | —            |       | —           |       | —           |       | 3.1          |       | 1.3            |       | —         |       | 0.2              |       | 0.9              |       | 0.1          |       |
|                         |       |                 |       |              |       |             |       |             |       |         |       |           |       |           |       |             |       |             |       |         |       |
| December 31,  2007:     |       |                 |       |              |       |             |       |             |       |         |       |           |       |           |       |             |       |             |       |         |       |
| Montpelier  Bermuda          |       | $                    | 26.6       |              | $          | 839.8            |       | $                | 173.6      |         | $          | —         |       | $              | 491.3      |             | $          | 114.2            |       | $            | 173.3      |   | $ | 72.9 |   | $ | 53.6 |   | $ | 491.0 |   |
| Montpelier  Syndicate 5151   |       | 0.9                  |       | 4.2               |       | 10.8             | ** ** | **—**       |       | 4.2          |       | 0.2            |       | 4.2            |       | 1.6              |       | 10.8             |       | 15.2         |       |
| MUSIC                        |       | —               |       | 16.7              |       | —           | ** ** | **—**       |       | —       |       | 0.1            |       | —         |       | —           |       | 1.2              |       | —       |       |
| Blue Ocean                   |       | 0.2                  |       | —            |       | 3.0              |       | —           |       | 61.7         |       | 17.2           |       | —         |       | 3.8              |       | 13.9             |       | 42.8         |       |

 

----

(1)          Excludes inter-segmenteliminations relating to unearned premiums of $2.9 million and $1.2 million for2009 and 2008, respectively.

(2)          Excludes $0.2 million, $0.2million and $0.8 million of net investment income earned within Montpelier’sCorporate and Other operations for 2009, 2008 and 2007, respectively.

(3)          Excludes $27.4 million,$20.1 million and $6.4 million of other underwriting expenses incurred withinMontpelier’s Corporate and Other operations for 2009, 2008 and 2007,respectively.

 

 

FS-4

----

Table of Contents

 

**SCHEDULE IV**

** **

**MONTPELIER RE HOLDINGS LTD.**

 

**REINSURANCE**

**($ in millions)**

 
| **Column A**                         | ** ** | **Column B** | ** ** | **Column C**      | ** ** | **Column D**      | ** ** | **Column E** | ** ** | **Column F**       | ** ** |
|--------------------------------------|------------|--------------|------------|-------------------|------------|-------------------|------------|--------------|------------|--------------------|------------|
| ** **                           | ** ** | ** **   | ** ** | **Ceded to**      | ** ** | **Assumed**       | ** ** | ** **   | ** ** | **Percentage of**  | ** ** |
| ** **                           | ** ** | **Direct**   | ** ** | **other**         | ** ** | **from other**    | ** ** | **Net**      | ** ** | **amount**         | ** ** |
| **Net premiums written by  segment** | ** ** | **amount**   | ** ** | **companies (1)** | ** ** | **companies (1)** | ** ** | **amount**   | ** ** | **assumed to net** | ** ** |
|                                 |       |         |       |              |       |              |       |         |       |               |       |
| **December 31,  2009:**         |       |         |       |              |       |              |       |         |       |               |       |
| Montpelier  Bermuda                  |       | $            | 26.3       |              | $          | (24.8             | )          | $            | 426.1      |               | $          | 427.6 |   | 100 | % |
| Montpelier  Syndicate 5151           |       | 23.7         |       | (16.4             | )          | 143.6             |       | 150.9        |       | 95                 | %          |
| MUSIC                                |       | 24.3         |       | (0.6              | )          | —            |       | 23.7         |       | —             | %          |
|                                 |       |         |       |              |       |              |       |         |       |               |       |
| December 31,  2008:             |       |         |       |              |       |              |       |         |       |               |       |
| Montpelier  Bermuda                  |       | $            | 19.6       |              | $          | (76.6             | )          | $            | 483.8      |               | $          | 426.8 |   | 113 | % |
| Montpelier  Syndicate 5151           |       | 26.5         |       | (7.6              | )          | 89.8              |       | 108.7        |       | 83                 | %          |
| MUSIC                                |       | 5.6          |       | —            |       | —            |       | 5.6          |       | —             | %          |
| Blue Ocean                           |       | —       |       | —            |       | 0.1               |       | 0.1          |       | 100                | %          |
|                                 |       |         |       |              |       |              |       |         |       |               |       |
| December 31,  2007:             |       |         |       |              |       |              |       |         |       |               |       |
| Montpelier  Bermuda                  |       | $            | 34.4       |              | $          | (104.7            | )          | $            | 561.3      |               | $          | 491.0 |   | 114 | % |
| Montpelier  Syndicate 5151           |       | 7.9          |       | (0.1              | )          | 7.4               |       | 15.2         |       | 49                 | %          |
| MUSIC                                |       | —       |       | —            |       | —            |       | —       |       | —             | %          |
| Blue Ocean                           |       | —       |       | —            |       | 42.8              |       | 42.8         |       | 100                | %          |

 

----

(1) Excludeseliminations relating to inter-segment reinsurance of $9.1 million and $5.3million for 2009 and 2008, respectively.

 

FS-5

----

Table of Contents

 

**SCHEDULE VI**

 

**MONTPELIER RE HOLDINGS LTD.**

 

**SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCEUNDERWRITERS**

**(Millions)**

 
| **Column A**           | ** ** | ** ** | ** ** | **Column B**          | ** ** | **Column C**                         | ** ** | **Column D**     | ** ** | **Column E**     | ** ** | **Column F** | ** ** | **Column G**   | ** ** | **Column H**                                         | ** ** | **Column I**  | ** ** | **Column J**    | ** ** | **Column K** | ** ** |
|-----------------------------|------------|------------|------------|----------------------------|------------|-------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|--------------------|------------|----------------------|------------|-------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Deferred**               | ** ** | **Reserves for  unpaid claims** | ** ** | **Discount, if** | ** ** | ** **            | ** ** | ** **        | ** ** | ** **          | ** ** | **Claims and claims  adjustment expenses** | ** ** | **Amortization**   | ** ** | **Paid claims** | ** ** | ** **        | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **policy**                 | ** ** | **and claims**                       | ** ** | **any,**              | ** ** | ** **            | ** ** | **Net**           | ** ** | **Net**             | ** ** | **incurred related to**                         | ** ** | **of policy** | ** ** | **and claims**  | ** ** | **Net**           | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **acquisition**            | ** ** | **adjustment**                            | ** ** | **deducted in**  | ** ** | **Unearned**          | ** ** | **premiums**      | ** ** | **investment**      | ** ** | **current**                                               | ** ** | **prior**          | ** ** | **acquisition**      | ** ** | **adjustment**    | ** ** | **premiums** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **costs**** ****(1)** | ** ** | **expenses**                              | ** ** | **Column C**     | ** ** | **premiums (1)** | ** ** | **earned**        | ** ** | **income (2)** | ** ** | **year**                                                  | ** ** | **year**           | ** ** | **costs**            | ** ** | **expenses**      | ** ** | **written** | ** ** |
| Montpelier  Bermuda:        |       |       |       |                       |       |                                      |       |                  |       |                  |       |              |       |                |       |                                                      |       |               |       |                 |       |              |       |   |   |
|                        | ** ** | **2009**   | ** ** | **$**                      | **19.8**   | ** **                                | **$**      | **569.4**             | ** ** | **$**                 | **—** | ** **        | **$**      | **131.9**           | ** ** | **$**                                                     | **426.0**  | ** **         | **$**      | **77.9**             | ** ** | **$**             | **133.0**  | ** ** | **$** | **(68.6** | **)** | **$** | **54.2** | ** ** | **$** | **194.0** | ** ** | **$** | **427.6** | ** ** |
|                        |       | 2008       |       | 19.5                       |       | 750.0                                     |       | —                |       | 140.7                 |       | 459.7             |       | 82.0                |       | 350.7                                                     |       | (104.8             | )          | 72.8                 |       | 314.0             |       | 426.8 |   |
|                        |       | 2007       |       | 26.6                       |       | 839.8                                     |       | —                |       | 173.6                 |       | 491.3             |       | 114.2               |       | 209.7                                                     |       | (36.4              | )          | 72.9                 |       | 361.2             |       | 491.0 |   |
|                        |       |       |       |                       |       |                                      |       |                  |       |                  |       |              |       |                |       |                                                      |       |               |       |                 |       |              |       |   |   |
| Montpelier  Syndicate 5151: |       |       |       |                       |       |                                      |       |                  |       |                  |       |              |       |                |       |                                                      |       |               |       |                 |       |              |       |   |   |
|                        | ** ** | **2009**   | ** ** | **$**                      | **15.8**   | ** **                                | **$**      | **96.0**              | ** ** | **$**                 | **—** | ** **        | **$**      | **73.0**            | ** ** | **$**                                                     | **133.1**  | ** **         | **$**      | **0.7**              | ** ** | **$**             | **72.1**   | ** ** | **$** | **(7.5** | **)** | **$** | **22.9** | ** ** | **$** | **17.4** | ** ** | **$** | **150.9** | ** ** |
|                        |       | 2008       |       | 8.2                        |       | 48.8                                      |       | —                |       | 42.2                  |       | 63.6              |       | 0.8                 |       | 46.7                                                      |       | 0.7                |       | 10.4                 |       | 3.4               |       | 108.7 |   |
|                        |       | 2007       |       | 0.9                        |       | 4.2                                       |       | —                |       | 10.8                  |       | 4.2               |       | 0.2                 |       | 4.2                                                       |       | —             |       | 1.6                  |       | —            |       | 15.2 |   |
|                        |       |       |       |                       |       |                                      |       |                  |       |                  |       |              |       |                |       |                                                      |       |               |       |                 |       |              |       |   |   |
| MUSIC:                      |       |       |       |                       |       |                                      |       |                  |       |                  |       |              |       |                |       |                                                      |       |               |       |                 |       |              |       |   |   |
|                        | ** ** | **2009**   | ** ** | **$**                      | **2.6**    | ** **                                | **$**      | **15.4**              | ** ** | **$**                 | **—** | ** **        | **$**      | **13.4**            | ** ** | **$**                                                     | **14.1**   | ** **         | **$**      | **2.2**              | ** ** | **$**             | **9.3**    | ** ** | **$** | **0.4** | ** ** | **$** | **3.4** | ** ** | **$** | **1.6** | ** ** | **$** | **23.7** | ** ** |
|                        |       | 2008       |       | 0.7                        |       | 10.1                                      |       | —                |       | 3.5                   |       | 2.1               |       | 2.1                 |       | 1.8                                                       |       | —             |       | 0.5                  |       | 0.5               |       | 5.6 |   |
|                        |       | 2007       |       | —                     |       | 16.7                                      |       | —                |       | —                |       | —            |       | 0.1                 |       | —                                                    |       | —             |       | —               |       | —            |       | — |   |
|                        |       |       |       |                       |       |                                      |       |                  |       |                  |       |              |       |                |       |                                                      |       |               |       |                 |       |              |       |   |   |
| Blue Ocean:                 |       |       |       |                       |       |                                      |       |                  |       |                  |       |              |       |                |       |                                                      |       |               |       |                 |       |              |       |   |   |
|                        |       | 2008       |       | —                     |       | —                                    |       | —                |       | —                |       | 3.1               |       | 1.3                 |       | —                                                    |       | —             |       | 0.2                  |       | —            |       | 0.1 |   |
|                        |       | 2007       |       | 0.2                        |       | —                                    |       | —                |       | 3.0                   |       | 61.7              |       | 17.2                |       | —                                                    |       | —             |       | 3.8                  |       | —            |       | 42.8 |   |

 

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(1)          Excludes inter-segmenteliminations relating to unearned premiums of $2.9 million and $1.2 million for2009 and 2008, respectively.

(2)          Excludes $0.2 million, $0.2million and $0.8 million of net investment income earned within Montpelier’sCorporate and Other operations for 2009, 2008 and 2007, respectively.

 

FS-6

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